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Performance Pay, Productivity and Morale

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  • PETER W. KENNEDY

Abstract

This paper incorporates the notion of worker morale into an economic model of pay and performance, and examines its implications for the efficacy and design of performance‐based pay schemes. A worker's morale is determined by his relative pay status. A contract that rewards only individual performance can therefore undermine the morale of the least skilled workers in a firm and thereby adversely affect their productivity. On the other hand, competition for relative pay status tends to boost the productivity of highly skilled workers in the firm. The net effect on productivity depends on the composition of the firm's workforce. If the workforce is sufficiently heterogeneous then the inclusion of a profit‐sharing component in the pay contract, which reduces the pay differential across workers, can sufficiently boost the morale of the least skilled workers as to improve overall productivity and profitability.

Suggested Citation

  • Peter W. Kennedy, 1995. "Performance Pay, Productivity and Morale," The Economic Record, The Economic Society of Australia, vol. 71(3), pages 240-247, September.
    • Handle: RePEc:bla:ecorec:v:71:y:1995:i:3:p:240-247
    DOI: 10.1111/j.1475-4932.1995.tb01891.x
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    1. repec:lan:wpaper:2926 is not listed on IDEAS
    2. Wu, Steven & Roe, Brian & Sporleder, Thomas, 2006. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," MPRA Paper 21, University Library of Munich, Germany.
    3. C Green & J S Heywood, 2007. "Performance pay, sorting and the dimensions of job satisfaction," Working Papers 584041, Lancaster University Management School, Economics Department.
    4. repec:lan:wpaper:2928 is not listed on IDEAS
    5. Colin Green & John S. Heywood, 2008. "Does Performance Pay Increase Job Satisfaction?," Economica, London School of Economics and Political Science, vol. 75(300), pages 710-728, November.
    6. Cornelissen, Thomas & Heywood, John S. & Jirjahn, Uwe, 2011. "Performance pay, risk attitudes and job satisfaction," Labour Economics, Elsevier, vol. 18(2), pages 229-239, April.
    7. Camilleri, Adrian R. & Dankova, Katarina & Ortiz, Jose M. & Neelim, Ananta, 2023. "Increasing worker motivation using a reward scheme with probabilistic elements," Organizational Behavior and Human Decision Processes, Elsevier, vol. 177(C).
    8. repec:lan:wpaper:3175 is not listed on IDEAS
    9. Lily Jiang & Hsi-Cheng Yu, 2014. "Compensation systems and earnings inequality," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(1), pages 99-116, March.
    10. repec:lan:wpaper:3020 is not listed on IDEAS

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