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Performance Pay and Productivity

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  • Edward P. Lazear

Abstract

What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5672.

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Date of creation: Jul 1996
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Publication status: published as Lazear, E. P. "Performance Pay And Productivity," American Economic Review, 2000, v90(5,Dec), 1346-1361.
Handle: RePEc:nbr:nberwo:5672

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  1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  2. Goldin, Claudia, 1986. "Monitoring Costs and Occupational Segregation by Sex: A Historical Analysis," Scholarly Articles 2666727, Harvard University Department of Economics.
  3. Robert Drago & John S. Heywood, 1994. "The Choice of Payment Schemes: Australian Establishment Data," Labor and Demography 9402001, EconWPA, revised 04 Feb 1994.
  4. Booth, A-L & Frank, J, 1997. "Performance Related Pay," CEPR Discussion Papers 364, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  5. repec:ese:iserwp:96-14 is not listed on IDEAS
  6. Charles Brown, 1990. "Wage Levels and Method of Pay," NBER Working Papers 3336, National Bureau of Economic Research, Inc.
  7. Harry J. Paarsch & Bruce S. Shearer, 1997. "Fixed Wages, Piece Rates, and Intertemporal Productivity: A Study of Tree Planters in British Columbia," CIRANO Working Papers 97s-01, CIRANO.
  8. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  9. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  10. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
  11. Seiler, Eric, 1984. "Piece Rate vs. Time Rate: The Effect of Incentives on Earnings," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 363-76, August.
  12. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  13. Fama, Eugene F, 1991. "Time, Salary, and Incentive Payoffs in Labor Contracts," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 25-44, January.
  14. Beth J. Asch, 1990. "Do incentives matter? The case of Navy recruiters," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 89-106, February.
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