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Who pays for performance?

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Author Info

  • Erling Barth
  • Bernt Bratsberg
  • Torbjørn Hægeland
  • Oddbjørn Raaum

Abstract

Purpose – The purpose of this paper is to improve our understanding of why some firms tie compensation to worker performance as well as the variation in type of performance pay system across firms. Design/methodology/approach – The study first presents a theoretical framework that motivates n empirical study of performance-related pay. The data are based on Norwegian establishment surveys from 1997 and 2003. The empirical analysis addresses determinants of adoption of performance pay systems. Findings – Performance-related pay is more prevalent in firms where workers of the main occupation have a high degree of autonomy in how to organise their work. Performance pay is also more widespread in large firms, but is less common in highly unionised firms and in firms where wages are determined through centralised bargaining. Results show that performance pay is on the rise in Norway, even after accounting for changes in industry structure, bargaining regime, and union density. Finally, it is found that the incidence of performance-related pay relates positively to product-market competition and foreign ownership. Originality/value – The paper provides new empirical evidence on the use of performance-related pay. The results support an interpretation of incentive pay as motivated by agency problems, and provide new evidence on the relationship between payment schemes and institutions such as unions and bargaining framework.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal International Journal of Manpower.

Volume (Year): 29 (2008)
Issue (Month): 1 (May)
Pages: 8-29

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Handle: RePEc:eme:ijmpps:v:29:y:2008:i:1:p:8-29

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Related research

Keywords: Compensation; Norway; Payments; Performance related pay; Profits;

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References

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  1. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 917-962, August.
  2. Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2009. "Performance Pay and Within-Firm Wage Inequality," IZA Discussion Papers 4137, Institute for the Study of Labor (IZA).
  3. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  4. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  5. Lorenzo Cappellari & Stephen P. Jenkins, 2003. "MVPROBIT: Stata module to calculate multivariate probit regression using simulated maximum likelihood," Statistical Software Components S432601, Boston College Department of Economics, revised 25 Jan 2006.
  6. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  7. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics 19894, London School of Economics and Political Science, LSE Library.
  8. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  9. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  10. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
  11. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  12. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
  13. Nicolai J. Foss & Keld Laursen, 2002. "Performance Pay, Delegation, and Multitasking under Uncertainty and Innovativeness An Empirical Investigation," DRUID Working Papers 02-14, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  14. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  15. Pedro Ortín-Ángel & Vicente Salas-fumás, 1998. "Agency-Theory and Internal-Labor-Market Explanations of Bonus Payments: Empirical Evidence from Spanish Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 573-613, December.
  16. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
  17. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
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Citations

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Cited by:
  1. Ola Kvaloy & Trond Olsen, 2007. "The Rise of Individual Performance Pay," CESifo Working Paper Series 2145, CESifo Group Munich.
  2. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.
  3. Hunnes, Arngrim & Kvaløy, Ola & Mohn, Klaus, 2009. "Performance appraisal and career opportunities: A case study," UiS Working Papers in Economics and Finance 2009/11, University of Stavanger.
  4. Kvaløy, Ola & Olsen, Trond E., 2007. "Relative Performance Evaluation, Agent Hold-Up and Firm Organization," Discussion Papers 2007/26, Department of Business and Management Science, Norwegian School of Economics.
  5. Anja Schöttner & Veikko Thiele, 2007. "Promotion Tournaments and Individual Performance Pay," SFB 649 Discussion Papers SFB649DP2007-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Alberto Bayo-Moriones & Jose Enrique Galdon-Sanchez & Sara Martinez-de-Morentin, 2012. "The Diffusion of Pay for Performance Across Occupations," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 1210, Departamento de Economía - Universidad Pública de Navarra.
  7. Kvaløy, Ola & Olsen, Trond, 2012. "Incentive provision when contracting is costly," UiS Working Papers in Economics and Finance 2012/16, University of Stavanger.
  8. Ana-Maria Godeanu, 2012. "The antecedents of satisfaction with pay in teams: do performance-based compensation and autonomy keep team-members satisfied?," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 145-168, June.
  9. Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2009. "Performance Pay and Within-Firm Wage Inequality," IZA Discussion Papers 4137, Institute for the Study of Labor (IZA).
  10. Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers dp1112, Centre for Economic Performance, LSE.
  11. Mahy, Benoît & Rycx, Francois & Volral, Mélanie, 2011. "Does Wage Dispersion Make All Firms Productive?," IZA Discussion Papers 5791, Institute for the Study of Labor (IZA).
  12. Zubanov, N.V., 2012. "Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence," ERIM Report Series Research in Management ERS-2012-005-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  13. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," National Bank of Poland Working Papers 113, National Bank of Poland, Economic Institute.

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