Efficiency and equity considerations in allocating remunerations under uncertainty: the case of Australian universities

By considering the heterogeneity of the labour force, uncertainty about performances, and risk and inequality aversion, and by applying a skill-wise optimal-control method, an efficient rule for allocating salary loadings in a regulated place of employment is derived. This rule indicates that salary loadings may vary monotonically, but not necessarily increase, with skill. Only when the marginal costs of risk-bearing and inequality are smaller than the expected marginal performance, loadings should monotonically increase with skill.