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Making the Right Call: The Heterogeneous Effects of Individual Performance Pay on Productivity

Author

Listed:
  • Clemens, Marco

    (IAAEU, University of Trier)

  • Sauermann, Jan

    (IFAU)

Abstract

Performance pay has been shown to have important implications for worker and firm productivity. Although workers' skills may directly matter for the cost of effort to reach performance goals, surprisingly little is know about the heterogeneity in the effects of incentive pay across workers. In this study, we apply a dynamic difference-in-differences estimator to the introduction of a generous bonus pay program to study how salient performance thresholds affect incentivized and non-incentivized performance outcomes for low- and high-skilled workers. While we do find that individual incentive pay did not affect workers' performance on average, we show that this result conceals an underlying heterogeneity in the response to individual performance pay: individual performance pay has a significant effect on the performance of high-skilled workers but not for low-skilled workers. The findings can be rationalized with the idea that the costs of effort differ by workers' skill level. We also explore whether agents alter their overtime hours and find a negative effect, possibly avoiding negative consequences of longer working hours.

Suggested Citation

  • Clemens, Marco & Sauermann, Jan, 2024. "Making the Right Call: The Heterogeneous Effects of Individual Performance Pay on Productivity," IZA Discussion Papers 17119, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp17119
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    References listed on IDEAS

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    More about this item

    Keywords

    performance pay; incentives; productivity; skills; panel data;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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