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Performance Pay and Productivity

  • Edward P. Lazear

Much of the theory in personnel economics relates to effects of monetary incentives on output, but the theory was untested because appropriate data were unavailable. A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates. In Safelite, productivity effects amount to a 44-percent increase in output per worker. This firm apparently had selected a suboptimal compensation system, as profits also increased with the change.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.5.1346
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 5 (December)
Pages: 1346-1361

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:5:p:1346-1361
Note: DOI: 10.1257/aer.90.5.1346
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  1. 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.
  2. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
  3. Robert W Drago & John S. Heywood, 1995. "The Choice of Payment Schemes: Australian Establishment Data," Working papers _006, University of Wisconsin - Milwaukee.
  4. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  5. 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.
  6. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  7. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  8. Charles Brown, 1990. "Wage Levels and Method of Pay," NBER Working Papers 3336, National Bureau of Economic Research, Inc.
  9. Goldin, Claudia, 1986. "Monitoring Costs and Occupational Segregation by Sex: A Historical Analysis," Scholarly Articles 2666727, Harvard University Department of Economics.
  10. 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.
  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. 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.
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