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Who Pays for Performance?

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Author Info

  • Barth, Erling

    ()
    (Institute for Social Research, Oslo)

  • Bratsberg, Bernt

    ()
    (Ragnar Frisch Centre for Economic Research)

  • Haegeland, Torbjørn

    ()
    (Statistics Norway)

  • Raaum, Oddbjørn

    ()
    (Ragnar Frisch Centre for Economic Research)

Abstract

Using Norwegian establishment surveys from 1997 and 2003, we show that performance-related pay is more prevalent in firms where workers of the main occupation have a high degree of autonomy in how to organize their work. This observation supports an interpretation of incentive pay as motivated by agency problems. Performance-related pay is also more widespread in large firms. Traditionally, wage setting in the Norwegian labor market has been dominated by negotiations between trade unions and employer associations at the central and local levels, with a fixed hourly wage as a predominant element of the wage scheme. Our results show that performance-related pay is less common in highly unionized firms and in firms where wages are determined through centralized bargaining. Nevertheless, the evidence presented in this paper reveals that performance pay is on the rise in Norway, even after accounting for changes in industry structure, bargaining regime, and union density. Finally, we find that the incidence of performance-related pay relates positively to product-market competition and foreign ownership.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2142.

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Length: 36 pages
Date of creation: May 2006
Date of revision:
Publication status: published in: International Journal of Manpower, 2008, 20 (1), 8-29
Handle: RePEc:iza:izadps:dp2142

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Keywords: agency problems; performance related pay; compensation methods;

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References

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  1. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  2. Vicente Cuñat & María Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," CEP Discussion Papers, Centre for Economic Performance, LSE dp0687, Centre for Economic Performance, LSE.
  3. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1382, C.E.P.R. Discussion Papers.
  4. 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).
  5. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics, University of Munich, Department of Economics 19772, University of Munich, Department of Economics.
  6. 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, MIT Press, vol. 120(3), pages 917-962, August.
  7. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1425-1436, September.
  8. Foss, Nicolai J. & Laursen, Keld, 2005. "Performance pay, delegation and multitasking under uncertainty and innovativeness: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 58(2), pages 246-276, October.
  9. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 742, Cowles Foundation for Research in Economics, Yale University.
  10. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
  11. 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, Wiley Blackwell, vol. 7(4), pages 573-613, December.
  12. Lorenzo Cappellari & Stephen P. Jenkins, 2003. "MVPROBIT: Stata module to calculate multivariate probit regression using simulated maximum likelihood," Statistical Software Components, Boston College Department of Economics S432601, Boston College Department of Economics, revised 25 Jan 2006.
  13. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(1), pages 7-63, March.
  14. 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.
  15. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 415-420, May.
  16. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 21(3), pages 315-331, August.
  17. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. 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, National Bank of Poland, Economic Institute 113, National Bank of Poland, Economic Institute.
  2. Anja Schöttner & Veikko Thiele, 2010. "Promotion Tournaments and Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 19(3), pages 699-731, 09.
  3. Kvaløy, Ola & Olsen, Trond E., 2008. "Relative performance evaluation, agent hold-up and firm organization," Journal of the Japanese and International Economies, Elsevier, vol. 22(2), pages 229-241, June.
  4. 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, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 145-168, June.
  5. 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).
  6. 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).
  7. 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, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm 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 University Rotterdam.
  8. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, University of Chicago Press, vol. 2(4), pages 410-440.
  9. Ola Kvaloy & Trond Olsen, 2007. "The Rise of Individual Performance Pay," CESifo Working Paper Series 2145, CESifo Group Munich.
  10. Kvaløy, Ola & Olsen, Trond E., 2010. "Incentive provision when contracting is costly," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2010/10, Department of Business and Management Science, Norwegian School of Economics.
  11. Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers, Centre for Economic Performance, LSE dp1112, Centre for Economic Performance, LSE.
  12. Hunnes, Arngrim & Kvaløy, Ola & Mohn, Klaus, 2009. "Performance appraisal and career opportunities: A case study," UiS Working Papers in Economics and Finance, University of Stavanger 2009/11, University of Stavanger.
  13. 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, Departamento de Economía - Universidad Pública de Navarra 1210, Departamento de Economía - Universidad Pública de Navarra.

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