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Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process

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  • Frederiksen, Anders

    (Aarhus University)

  • Hansen, Daniel Baltzer Schjødt

    (Aarhus University)

  • Flaherty Manchester, Colleen

    (University of Minnesota)

Abstract

Group-based incentive pay is attractive in contexts where production is complex and interdependent, yet freeriding is a paramount concern. We assess the introduction of group-based performance pay in a modern industrial production setting using difference-in-difference estimation. Performance increased by 19 percent, with three quarters coming from increased performance of existing workers and the remaining from selection; workers became more efficient and were absent less often. We find little evidence of freeriding; quantile regressions show increased performance throughout the distribution of workers. Features of the design and implementation process created trust, a common goal, and a shared identity, which limited freeriding.

Suggested Citation

  • Frederiksen, Anders & Hansen, Daniel Baltzer Schjødt & Flaherty Manchester, Colleen, 2022. "Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process," IZA Discussion Papers 14986, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14986
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    References listed on IDEAS

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    More about this item

    Keywords

    difference-in-differences; performance pay; group-based incentive; freeriding; incentive effects; selection effects; absenteeism; efficiency; performance; productivity; trust;
    All these keywords.

    JEL classification:

    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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