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Performance Pay and Earnings: Evidence from Personnel Records

  • Tuomas Pekkarinen
  • Chris Riddell

This paper examines the earnings effects of performance pay using linked employee-employer panel data from Finland's metal industry for 1990-2000. The authors estimate the effects of performance pay contracts in the presence of individual and firm unobserved heterogeneity as well as in tasks of different complexity. Unobservable firm characteristics explain about 40% of the variance in the use of performance pay. Performance pay workers earned substantially more than fixed rate workers, a finding that persists even in analyses that use for identification only those workers who changed firms (and contracts) due to an establishment closure. There is also evidence of a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, several "quasi-experiments" show that when one plant underwent a compensation regime change but other highly similar plants in the same firm did not, workers in the "treatment" plant gained substantial earnings premiums.

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Article provided by ILR Review, Cornell University, ILR School in its journal ILR Review.

Volume (Year): 61 (2008)
Issue (Month): 3 (April)
Pages: 297-319

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Handle: RePEc:ilr:articl:v:61:y:2008:i:3:p:297-319
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  1. Daniel Parent, 2009. "The effect of pay-for-performance contracts on wages," Empirical Economics, Springer, vol. 36(2), pages 269-295, May.
  2. 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.
  3. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
  4. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  6. Groshen, Erica L, 1991. "Sources of Intra-industry Wage Dispersion: How Much Do Employers Matter?," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 869-84, August.
  7. Daniel Parent, 1999. "Methods of Pay and Earnings: A Longitudinal Analysis," ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
  8. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
  9. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  10. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  11. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
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