Performance Pay and Within-Firm Wage Inequality
AbstractThis paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual effort increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of employee records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 535.
Date of creation: Apr 2008
Date of revision:
Performance related pay; wage inequality; union bargaining;
Other versions of this item:
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-15 (All new papers)
- NEP-BEC-2008-04-15 (Business Economics)
- NEP-LAB-2008-04-15 (Labour Economics)
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.:
- 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.
- repec:ese:iserwp:2000-35 is not listed on IDEAS
- Nicolai J. Foss & Keld Laursen, 2002.
"Performance Pay, Delegation, and Multitasking under Uncertainty and Innovativeness An Empirical Investigation,"
DRUID Working Papers
02-14, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
- Foss, Nicolai J. & Laursen, Keld, 2005. "Performance pay, delegation and multitasking under uncertainty and innovativeness: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 246-276, October.
- Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008.
"Who pays for performance?,"
International Journal of Manpower,
Emerald Group Publishing, vol. 29(1), pages 8-29, May.
- Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April.
- Lemieux, Thomas & MacLeod, W. Bentley & Parent, Daniel, 2007.
"Performance Pay and Wage Inequality,"
IZA Discussion Papers
2850, Institute for the Study of Labor (IZA).
- Thomas Lemieux & W. Bentley Macleod & Daniel Parent, 2006. "Performance Pay And Wage Inequality," Departmental Working Papers 2006-08, McGill University, Department of Economics.
- Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
- David Blanchflower & Alex Bryson, 2002. "Changes over time in union relative wage effects in the UK and the US revisited," NBER Working Papers 9395, National Bureau of Economic Research, Inc.
- David Card & Thomas Lemieux & W. Craig Riddell, 2004. "Unions and Wage Inequality," Journal of Labor Research, Transaction Publishers, vol. 25(4), pages 519-562, October.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-28, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
- Barth, Erling & Raaum, Oddbjorn & Naylor, Robin, 2000.
"Union Wage Effects: Does Membership Matter?,"
University of Manchester, vol. 68(3), pages 259-75, June.
- Barth, E. & Raaum, O. & Naylor, R., 1998. "Union Wage Effects: Does Membership Matter?," The Warwick Economics Research Paper Series (TWERPS) 500, University of Warwick, Department of Economics.
- Barth, E. & Naylor, R. & Raaum, O., 1995. "Union Wage Effects; Does Membership Matter?," Memorandum 09/1995, Oslo University, Department of Economics.
- Barth, Erling & Lucifora, Claudio, 2006. "Wage Dispersion, Markets and Institutions: The Effects of the Boom in Education on the Wage Structure," IZA Discussion Papers 2181, Institute for the Study of Labor (IZA).
- Pierre Cahuc & AndrÃ© Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x.
- Heywood, John S. & Parent, Daniel, 2009.
"Performance Pay and the White-Black Wage Gap,"
CLSSRN working papers
clsrn_admin-2009-42, Vancouver School of Economics, revised 22 Jul 2009.
- Katrin Sommerfeld, 2012. "Higher and Higher?: Performance Pay and Wage Inequality in Germany," SOEPpapers on Multidisciplinary Panel Data Research 476, DIW Berlin, The German Socio-Economic Panel (SOEP).
- Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2006.
"Who Pays for Performance?,"
IZA Discussion Papers
2142, Institute for the Study of Labor (IZA).
- Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers dp1112, Centre for Economic Performance, LSE.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (J Bruusgaard).
If references are entirely missing, you can add them using this form.