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Performance Pay and Earnings: Evidence from Personnel Records

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  • Tuomas Pekkarinen
  • Chris Riddell

Abstract

This paper examines the earnings effects of performance pay using linked employee-employer panel data from Finland's metal industry for 1990-2000. The authors estimate the effects of performance pay contracts in the presence of individual and firm unobserved heterogeneity as well as in tasks of different complexity. Unobservable firm characteristics explain about 40% of the variance in the use of performance pay. Performance pay workers earned substantially more than fixed rate workers, a finding that persists even in analyses that use for identification only those workers who changed firms (and contracts) due to an establishment closure. There is also evidence of a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, several "quasi-experiments" show that when one plant underwent a compensation regime change but other highly similar plants in the same firm did not, workers in the "treatment" plant gained substantial earnings premiums.

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Bibliographic Info

Article provided by ILR Review, Cornell University, ILR School in its journal ILR Review.

Volume (Year): 61 (2008)
Issue (Month): 3 (April)
Pages: 297-319

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Handle: RePEc:ilr:articl:v:61:y:2008:i:3:p:297-319

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References

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  1. Daniel Parent, 1999. "Methods of pay and earnings: A longitudinal analysis," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
  2. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  3. Daniel Parent, 2001. "The Effect of Pay-for-Performance Contracts on Wages," CIRANO Working Papers 2001s-05, CIRANO.
  4. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  6. Charles Brown, 1990. "Wage Levels and Method of Pay," NBER Working Papers 3336, National Bureau of Economic Research, Inc.
  7. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  8. Groshen, Erica L, 1991. "Sources of Intra-industry Wage Dispersion: How Much Do Employers Matter?," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 869-84, August.
  9. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
  10. Charles Brown, 1990. "Firms' choice of method of pay," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-182, February.
  11. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
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Cited by:
  1. repec:lan:wpaper:2915 is not listed on IDEAS
  2. Westling, Tatu, 2011. "Incentive pay and gender gaps in the Nordic countries," MPRA Paper 33083, University Library of Munich, Germany.
  3. Böckerman, Petri & Bryson, Alex & Viinikainen, Jutta & Hakulinen, Christian & Pulkki-Raback, Laura & Raitakari, Olli, 2014. "Biomarkers and Long-term Labour Market Outcomes: The Case of Creatine," IZA Discussion Papers 8029, Institute for the Study of Labor (IZA).
  4. Petri Bockerman & Alex Bryson & Christian Hakulinen & Jaakko Pehkonen & Laura Pulkki-Raback & Olli Raitakari & Jutta Viinikainen, 2014. "Biomarkers and Long-term Market Outcomes: The Case of Creatine," CEP Discussion Papers dp1279, Centre for Economic Performance, LSE.
  5. Pekkarinen, Tuomas & Uusitalo, Roope, 2012. "Aging and Productivity: Evidence from Piece Rates," IZA Discussion Papers 6909, Institute for the Study of Labor (IZA).
  6. repec:lan:wpaper:2913 is not listed on IDEAS
  7. Keith Bender & Colin Green & John Heywood, 2012. "Piece rates and workplace injury: Does survey evidence support Adam Smith?," Journal of Population Economics, Springer, vol. 25(2), pages 569-590, January.
  8. repec:lan:wpaper:3007 is not listed on IDEAS
  9. Mudambi, Ram & Swift, Tim, 2009. "Professional guilds, tension and knowledge management," Research Policy, Elsevier, vol. 38(5), pages 736-745, June.
  10. Papps, Kerry L., 2010. "Productivity under Large Pay Increases: Evidence from Professional Baseball," IZA Discussion Papers 5133, Institute for the Study of Labor (IZA).

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