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Performance Pay and Productivity

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Author Info
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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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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Handle: RePEc:nbr:nberwo:5672

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Find related papers by JEL classification:
J00 - Labor and Demographic Economics - - General - - - General
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Edward P. Lazear & Sherwin Rosen, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June. [Downloadable!] (restricted)
  3. Paarsch, Harry J. & Shearer, Bruce, 1997. "Fixed Wages, Piece Rates, and Intertemporal Productivity: a Study of tree Planters in British Columbia," Cahiers de recherche 9702, Université Laval - Département d'économique. [Downloadable!]
    Other versions:
  4. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Lazear, Edward P, 1986. "Salaries and Piece Rates," Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. K Clark & M Tomlinson, 2001. "The Determinants of Work Effort: Evidence from the Employment in Britain Survey," The School of Economics Discussion Paper Series 0113, Economics, The University of Manchester. [Downloadable!]
  2. Richard Belfield & David Marsden, 2006. "Pay for Performance Where Output is Hard to Measure: the Case of Performance Pay for School Teachers," CEP Discussion Papers dp0747, Centre for Economic Performance, LSE. [Downloadable!]
  3. Daniel Parent, 2001. "Incentive Pay in the United States: Its Determinants and Its Effects," CIRANO Working Papers 2001s-04, CIRANO. [Downloadable!]
  4. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Cowling, Marc, 2007. "Performance Related Pay Coverage in the UK," MPRA Paper 1619, University Library of Munich, Germany. [Downloadable!]
  6. Boselie, J.P.E.F. & Paauwe, J. & Jansen, P., 2000. "Human Resource Management and Performance," Research Paper ERS-2000-46-ORG Revision_, 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. [Downloadable!]
  7. Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Susan Helper, 2000. "Economists and Field Research: "You Can Observe a Lot Just by Watching."," American Economic Review, American Economic Association, vol. 90(2), pages 228-232, May. [Downloadable!] (restricted)
  9. repec:fth:prinin:383 is not listed on IDEAS
  10. Iain Cockburn & Rebecca Henderson & Scott Stern, 1999. "The Diffusion of Science-Driven Drug Discovery: Organizational Change in Pharmaceutical Research," NBER Working Papers 7359, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Canice Prendergast, 1996. "What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies," NBER Working Papers 5802, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Eva M. Meyersson-Milgrom & Trond Petersen & Rita Asplund, 2002. "Pay,Risk,and Productivity.The Case of Finland,1980 -1996," Finnish Economic Papers, Finnish Economic Association, vol. 15(1), pages 3-23, Spring. [Downloadable!]
  13. Gerald Marschke & Pascal Courty, 2000. "Performance Incentives with Award Constraints," Discussion Papers 00-11, University at Albany, SUNY, Department of Economics. [Downloadable!]
    Other versions:
  14. Rudolf Winter-Ebmer & Josef Zweimueller, . "Intra-firm Wage Dispersion and Firm Performance," IEW - Working Papers iewwp008, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  15. Jostein Grytten & Dorthe Holst & Irene Skau, 2009. "Incentives and remuneration systems in dental services," International Journal of Health Care Finance and Economics, Springer, vol. 9(3), pages 259-278, September. [Downloadable!] (restricted)
  16. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May. [Downloadable!] (restricted)
  17. Jarvis, Lovell S. & Vera-Toscano, Esperanza, 2002. "Seasonal Adjustment In A Market For Female Agricultural Workers," 2002 Annual meeting, July 28-31, Long Beach, CA 19587, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  18. Felipe Balmaceda, . "Compensation Methods in Competitive Labor Markert," ILADES-Georgetown University Working Papers inv118, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  19. Margit Osterloh & Bruno S. Frey, . "Motivation, Knowledge Transfer, and Organizational Form," IEW - Working Papers iewwp027, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  20. Richard Belfield & David Marsden, 2005. "Performance Pay for Teachers: Linking Individual and Organisational Level Targets," CEP Discussion Papers dp0703, Centre for Economic Performance, LSE. [Downloadable!]
  21. Newman, Constance & Jarvis, Lovell, 2000. "Worker And Firm Determinants Of Piece Rate Variation In An Agricultural Labor Market," Working Papers 11977, University of California, Davis, Department of Agricultural and Resource Economics. [Downloadable!]
  22. Frans van Dijk & Joep Sonnemans & Frans van Winden, 1998. "Incentive Systems in a Real Effort Experiment," Tinbergen Institute Discussion Papers 98-023/1, Tinbergen Institute. [Downloadable!]
  23. Peter Egger & Doina Maria Radulescu, 2008. "Labour Taxation and Foreign Direct Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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