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Performance-Related Pay


  • Booth, Alison L
  • Frank, Jeff


The paper extends the theoretical approach in Lazear (1986, 1996) to show that jobs with performance related pay (PRP) attract workers of higher unobservable ability, and also induce workers to provide greater effort. We then test some of the predictions of this model against data from the British Household Panel Survey, using earnings as a proxy for productivity. We find that PRP raises wages by about 9% for men and 6% for women over the entire (union and non-union) sample. Our theoretical calculations show that the estimated earnings differentials represent average productivity differentials net of monitoring costs, but not of the disutility of additional effort expended by workers. But the productivity differential is not a true productivity gain, for it includes a non-productive sorting effect as well as the effort effect. For all these reasons, the estimated return to PRP of 9% for men and 6% for women represents upper bounds on the productivity gains.

Suggested Citation

  • Booth, Alison L & Frank, Jeff, 1997. "Performance-Related Pay," CEPR Discussion Papers 1593, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1593

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    References listed on IDEAS

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    Cited by:

    1. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Performance Pay and Within-Firm Wage Inequality," Discussion Papers 535, Statistics Norway, Research Department.
    2. NAKABAYASHI, Masaki, 2009. "Poaching, Courts, and Settlements:Complementarity of Governance in Labor Markets," ISS Discussion Paper Series (series F) f145, Institute of Social Science, The University of Tokyo, revised 01 Mar 2012.
    3. Cowling, Marc, 2007. "Performance Related Pay Coverage in the UK," MPRA Paper 1619, University Library of Munich, Germany.
    4. Brice Corgnet, 2012. "Peer Evaluations And Team Performance: When Friends Do Worse Than Strangers," Economic Inquiry, Western Economic Association International, vol. 50(1), pages 171-181, January.
    5. Stephen Drinkwater & Peter Ingram, 2005. "Have Industrial Relations in the UK Really Improved?," LABOUR, CEIS, vol. 19(2), pages 373-398, June.
    6. Chia-ying Liu & Juin-jen Chang, 2011. "Macroeconomic implications of a sharing compensation scheme in a model of endogenous growth," Journal of Economics, Springer, vol. 102(1), pages 57-75, January.
    7. Fernie, Sue & Metcalf, David, 1998. "(Not)hanging on the telephone: payment systems in the new sweatshops," LSE Research Online Documents on Economics 20275, London School of Economics and Political Science, LSE Library.
    8. Hasnain, Zahid & Manning, Nick & Pierskalla Henryk, 2012. "Performance-related pay in the public sector : a review of theory and evidence," Policy Research Working Paper Series 6043, The World Bank.
    9. Lucifora, Claudio & Origo, Federica, 2012. "Performance Related Pay and Firm Productivity: New Evidence from a Quasi-Natural Experiment in Italy," IZA Discussion Papers 6483, Institute for the Study of Labor (IZA).
    10. Sue Fernie & David Metcalf, 1998. "(Not)Hanging on the Telephone: Payment systems in the New Sweatshops," CEP Discussion Papers dp0390, Centre for Economic Performance, LSE.

    More about this item


    Incentive Pay; Labour Productivity; Performance Related Pay;

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods


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