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Who pays for performance?

  • Erling Barth
  • Bernt Bratsberg
  • Torbjørn Hægeland
  • Oddbjørn Raaum

Purpose – The purpose of this paper is to improve our understanding of why some firms tie compensation to worker performance as well as the variation in type of performance pay system across firms. Design/methodology/approach – The study first presents a theoretical framework that motivates n empirical study of performance-related pay. The data are based on Norwegian establishment surveys from 1997 and 2003. The empirical analysis addresses determinants of adoption of performance pay systems. Findings – Performance-related pay is more prevalent in firms where workers of the main occupation have a high degree of autonomy in how to organise their work. Performance pay is also more widespread in large firms, but is less common in highly unionised firms and in firms where wages are determined through centralised bargaining. Results show that performance pay is on the rise in Norway, even after accounting for changes in industry structure, bargaining regime, and union density. Finally, it is found that the incidence of performance-related pay relates positively to product-market competition and foreign ownership. Originality/value – The paper provides new empirical evidence on the use of performance-related pay. The results support an interpretation of incentive pay as motivated by agency problems, and provide new evidence on the relationship between payment schemes and institutions such as unions and bargaining framework.

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Article provided by Emerald Group Publishing in its journal International Journal of Manpower.

Volume (Year): 29 (2008)
Issue (Month): 1 (May)
Pages: 8-29

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Handle: RePEc:eme:ijmpps:v:29:y:2008:i:1:p:8-29
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  1. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
  2. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  3. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  4. Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2009. "Performance Pay and Within-Firm Wage Inequality," IZA Discussion Papers 4137, Institute for the Study of Labor (IZA).
  5. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
  6. Vicente Cuñat & María Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," CEP Discussion Papers dp0687, Centre for Economic Performance, LSE.
  7. Charles Brown, 1989. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  8. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  9. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  10. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
  11. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 917-962, August.
  12. Lorenzo Cappellari & Stephen P. Jenkins, 2003. "MVPROBIT: Stata module to calculate multivariate probit regression using simulated maximum likelihood," Statistical Software Components S432601, Boston College Department of Economics, revised 25 Jan 2006.
  13. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  14. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  15. Pedro Ortín-Ángel & Vicente Salas-fumás, 1998. "Agency-Theory and Internal-Labor-Market Explanations of Bonus Payments: Empirical Evidence from Spanish Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 573-613, December.
  16. 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.
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