Performance‐related pay and firm performance in Finland

Purpose - To analyse productivity effects of performance‐related pay (PRP). Design/methodology/approach - Fixed effect analysis of the productivity effects of the introduction of PRP scheme using linked employer‐employee data from Finland in 1996‐2002 and controlling for the skill structure of the employees. Findings - PRP improves both productivity and profitability by the same magnitude of around 6 per cent, but only if the compensations are substantial enough and exceeding on average 3.6 per cent of salaries for those who receive it. Incentive effects relate to the introduction of PRP, usually accompanied by new human resource management. PRP in Finland cannot, however, be directly linked to an increase in participation of employees in decision‐making. PRP schemes have substantially improved firm performance without creating much wage pressures. Practical implications - Useful information for the implementation and design of incentive‐based wage schemes. Originality/value - Very few papers using large data sets have information on exact PRP payments that are separate from bonus pay or piece wages.