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Who pays for performance?

Author

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

Abstract

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.

Suggested Citation

  • 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, March.
  • Handle: RePEc:eme:ijmpps:v:29:y:2008:i:1:p:8-29
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    References listed on IDEAS

    as
    1. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 917-962.
    2. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
    3. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, pages 415-420.
    4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, pages 7-63.
    5. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, pages 1425-1436.
    6. Fumas, Vincente Salas, 1993. "Incentives and supervision in hierarchies," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 315-331, August.
    7. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, pages 1346-1361.
    8. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
    9. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, pages 1346-1361.
    10. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, pages 1058-1082.
    11. 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.
    12. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Performance Pay and Within-Firm Wage Inequality," Discussion Papers 535, Statistics Norway, Research Department.
    13. John S. Heywood & W. S. Siebert & Xiangdong Wei, 1997. "Payment by Results Systems: British Evidence," British Journal of Industrial Relations, London School of Economics, vol. 35(1), pages 1-22, March.
    14. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    15. 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.
    16. 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.
    17. Charles Brown, 1990. "Firms' Choice of Method of Pay," ILR Review, Cornell University, ILR School, pages 165-1-182-.
    18. 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.
    19. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
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    More about this item

    Keywords

    Performance related pay; Compensation; Payments; Profits; Norway;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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