IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp17791.html

Does Performance Pay Deter Job Quits?

Author

Listed:
  • Artz, Benjamin

    (University of Wisconsin, Oshkosh)

  • Heywood, John S.

    (University of Wisconsin, Milwaukee)

Abstract

We use US longitudinal survey data to examine the role of performance pay (other than profit sharing) in worker quit decisions. We argue that performance pay should increasingly be viewed as an indicator of an internal labor market rather than of a simple contemporaneous incentive. Suggestive of this claim, we find that in ever more complete specifications that account for worker and employer characteristics, aggregate earnings and worker job satisfaction, performance pay is associated with a reduced probability of worker quits. This remains when including worker fixed effects that control for unmeasured invariant heterogeneity. We investigate how it varies with the type of performance pay and its intensity. We confirm heterogeneity in this influence by workplace size.

Suggested Citation

  • Artz, Benjamin & Heywood, John S., 2025. "Does Performance Pay Deter Job Quits?," IZA Discussion Papers 17791, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17791
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp17791.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Baktash, Mehrzad B. & Heywood, John S. & Jirjahn, Uwe, 2022. "Worker stress and performance pay: German survey evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 201(C), pages 276-291.
    2. Gittleman, Maury & Pierce, Brooks, 2013. "How Prevalent is Performance-Related Pay in the United States? Current Incidence and Recent Trends," National Institute Economic Review, National Institute of Economic and Social Research, vol. 226, pages 4-16, November.
    3. Swain, Walker A. & Rodriguez, Luis A. & Springer, Matthew G., 2019. "Selective retention bonuses for highly effective teachers in high poverty schools: Evidence from Tennessee," Economics of Education Review, Elsevier, vol. 68(C), pages 148-160.
    4. William Fuchs, 2015. "Subjective Evaluations: Discretionary Bonuses and Feedback Credibility," American Economic Journal: Microeconomics, American Economic Association, vol. 7(1), pages 99-108, February.
    5. Anne Gielen & Marcel Kerkhofs & Jan Ours, 2010. "How performance related pay affects productivity and employment," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(1), pages 291-301, January.
    6. Clark, Andrew E., 2001. "What really matters in a job? Hedonic measurement using quit data," Labour Economics, Elsevier, vol. 8(2), pages 223-242, May.
    7. Allan, Julia L. & Andelic, Nicole & Bender, Keith A. & Powell, Daniel & Stoffel, Sandro & Theodossiou, Ioannis, 2021. "Employment contracts and stress: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 360-373.
    8. Farrell E. Bloch, 1979. "Labor Turnover in U.S. Manufacturing Industries," Journal of Human Resources, University of Wisconsin Press, vol. 14(2), pages 236-246.
    9. Benjamin Artz & John S. Heywood, 2015. "Performance Pay and Workplace Injury: Panel Evidence," Economica, London School of Economics and Political Science, vol. 82, pages 1241-1260, December.
    10. Micole De Vera & Javier Garcia‐Brazales, 2025. "Establishment size and the task content of jobs: evidence from 46 countries," Economica, London School of Economics and Political Science, vol. 92(366), pages 548-579, April.
    11. Thomas Cornelißen, 2009. "The Interaction of Job Satisfaction, Job Search, and Job Changes. An Empirical Investigation with German Panel Data," Journal of Happiness Studies, Springer, vol. 10(3), pages 367-384, June.
    12. Grund, Christian & Sliwka, Dirk, 2010. "Evidence on performance pay and risk aversion," Economics Letters, Elsevier, vol. 106(1), pages 8-11, January.
    13. Keith A. Bender & Ioannis Theodossiou, 2014. "The unintended consequences of the rat race: the detrimental effects of performance pay on health," Oxford Economic Papers, Oxford University Press, vol. 66(3), pages 824-847.
    14. van Huizen, Thomas & Alessie, Rob, 2019. "Risk aversion and job mobility," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 91-106.
    15. Böckerman, Petri & Ilmakunnas, Pekka, 2007. "Job disamenities, job satisfaction, quit intentions, and actual separations: putting the pieces together," MPRA Paper 3245, University Library of Munich, Germany.
    16. Bertheau, Antoine, 2021. "Employer Search Behavior: Reasons for Internal Hiring," Labour Economics, Elsevier, vol. 73(C).
    17. Jed DeVaro & Hodaka Morita, 2013. "Internal Promotion and External Recruitment: A Theoretical and Empirical Analysis," Journal of Labor Economics, University of Chicago Press, vol. 31(2), pages 227-269.
    18. Levy-Garboua, Louis & Montmarquette, Claude & Simonnet, Veronique, 2007. "Job satisfaction and quits," Labour Economics, Elsevier, vol. 14(2), pages 251-268, April.
    19. Christos A Makridis & Maury Gittleman, 2022. "On the Cyclicality of Real Wages and Employment: New Evidence and Stylized Facts from Performance Pay and Fixed Wage Jobs [“Options, the Value of Capital and Investment,”]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(3), pages 889-920.
    20. Janice Fanning Madden & Alexander Vekker, 2017. "Output-Based Performance Pay, Performance-Support Bias, and the Racial Pay Gap within a Large Retail Stock Brokerage," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 56(4), pages 662-687, October.
    21. Curme, Michael & Stefanec, Noah, 2007. "Worker quality and labor market sorting," Economics Letters, Elsevier, vol. 96(2), pages 202-208, August.
    22. Cornelissen, Thomas & Heywood, John S. & Jirjahn, Uwe, 2011. "Performance pay, risk attitudes and job satisfaction," Labour Economics, Elsevier, vol. 18(2), pages 229-239, April.
    23. Ekinci, Emre, 2019. "Discretionary bonuses and turnover," Labour Economics, Elsevier, vol. 60(C), pages 30-49.
    24. Steven Balsam & Richard Gifford & Sungsoo Kim, 2007. "The effect of stock option grants on voluntary employee turnover," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 6(1), pages 5-14, February.
    25. Bauer, Thomas K., 2004. "High Performance Workplace Practices and Job Satisfaction: Evidence from Europe," IZA Discussion Papers 1265, Institute of Labor Economics (IZA).
    26. Benjamin Artz, 2023. "The gender gap in voluntary turnover," International Journal of Manpower, Emerald Group Publishing Limited, vol. 45(4), pages 779-800, November.
    27. Daniel Parent, 1999. "Methods of Pay and Earnings: A Longitudinal Analysis," ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
    28. Tuomas Pekkarinen & Chris Riddell, 2008. "Performance Pay and Earnings: Evidence from Personnel Records," ILR Review, Cornell University, ILR School, vol. 61(3), pages 297-319, April.
    29. Benjamin Artz & Colin P. Green & John S. Heywood, 2021. "Does performance pay increase alcohol and drug use?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 34(3), pages 969-1002, July.
    30. Weiss, Andrew, 1984. "Determinants of Quit Behavior," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 371-387, July.
    31. Eric T. Swanson, 2007. "Real Wage Cyclicality In The Panel Study Of Income Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 617-647, November.
    32. Francine D. Blau & Lawrence M. Kahn, 1981. "Race and Sex Differences in Quits by Young Workers," ILR Review, Cornell University, ILR School, vol. 34(4), pages 563-577, July.
    33. Aldatmaz, Serdar & Ouimet, Paige & Van Wesep, Edward D, 2018. "The option to quit: The effect of employee stock options on turnover," Journal of Financial Economics, Elsevier, vol. 127(1), pages 136-151.
    34. Colin Green & John S. Heywood, 2008. "Does Performance Pay Increase Job Satisfaction?," Economica, London School of Economics and Political Science, vol. 75(300), pages 710-728, November.
    35. Christian Pfeifer & Stefan Schneck, 2012. "Relative Wage Positions and Quit Behavior: Evidence from Linked Employer-Employee Data," ILR Review, Cornell University, ILR School, vol. 65(1), pages 126-147, January.
    36. John Grigsby & Erik Hurst & Ahu Yildirmaz, 2021. "Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data," American Economic Review, American Economic Association, vol. 111(2), pages 428-471, February.
    37. Marko Ledić, 2018. "Performance Pay Jobs and Job Satisfaction," CESifo Economic Studies, CESifo Group, vol. 64(1), pages 78-102.
    38. Emilio J. Castilla, 2012. "Gender, Race, and the New (Merit-Based) Employment Relationship," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51, pages 528-562, April.
    39. Michelle Brown & John S. Heywood, 2005. "Performance Appraisal Systems: Determinants and Change," British Journal of Industrial Relations, London School of Economics, vol. 43(4), pages 659-679, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Heywood, John S. & Nießen, Anna, 2025. "Performance Appraisal and Quits: Does Performance Pay Add Anything?," GLO Discussion Paper Series 1687, Global Labor Organization (GLO).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heywood, John S. & Nießen, Anna, 2025. "Performance Appraisal and Quits: Does Performance Pay Add Anything?," GLO Discussion Paper Series 1687, Global Labor Organization (GLO).
    2. Baktash, Mehrzad B. & Heywood, John S. & Jirjahn, Uwe, 2022. "Worker stress and performance pay: German survey evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 201(C), pages 276-291.
    3. Baktash, Mehrzad B. & Heywood, John S. & Jirjahn, Uwe, 2025. "Performance Pay and Happiness: Work vs. Home?," GLO Discussion Paper Series 1677, Global Labor Organization (GLO).
    4. Green, Colin P. & Heywood, John S., 2023. "Performance pay, work hours and employee health in the UK," Labour Economics, Elsevier, vol. 84(C).
    5. Jirjahn, Uwe & Rienzo, Cinzia, 2025. "Working from Home and Mental Health: Giving Employees a Choice Does Make a Difference," IZA Discussion Papers 18187, Institute of Labor Economics (IZA).
    6. Mehrzad B. Baktash, 2024. "Does Performance Pay Increase the Risk of Worker Loneliness?," Research Papers in Economics 2024-12, University of Trier, Department of Economics.
    7. Benjamin Artz & Colin P. Green & John S. Heywood, 2021. "Does performance pay increase alcohol and drug use?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 34(3), pages 969-1002, July.
    8. Mehrzad B. Baktash & John S. Heywood & Uwe Jirjahn, 2022. "Performance pay and alcohol use in Germany," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 61(4), pages 353-383, October.
    9. Baktash, Mehrzad B. & Heywood, John S. & Jirjahn, Uwe, 2023. "Does Performance Pay Increase the Risk of Marital Instability?," GLO Discussion Paper Series 1305, Global Labor Organization (GLO).
    10. Baktash, Mehrzad B., 2023. "Overeducation, Performance Pay and Wages: Evidence from Germany," GLO Discussion Paper Series 1327, Global Labor Organization (GLO).
    11. Marco Clemens, 2024. "Bonuses, Profit-sharing and Job Satisfaction: the More, the Better?," IAAEU Discussion Papers 202406, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    12. Nicole Andelic & Julia Allan & Keith A. Bender & Daniel Powell & Ioannis Theodossiou, 2024. "Performance‐related pay, mental and physiological health," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 63(1), pages 3-25, January.
    13. Green, Colin P. & Heywood, John S., 2022. "Does Performance Pay Influence Hours of Work?," IZA Discussion Papers 15474, Institute of Labor Economics (IZA).
    14. Keith Bender & Colin Green & John Heywood, 2012. "Piece rates and workplace injury: Does survey evidence support Adam Smith?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(2), pages 569-590, January.
    15. Uwe Jirjahn & Jens Mohrenweiser, 2019. "Performance Pay and Applicant Screening," British Journal of Industrial Relations, London School of Economics, vol. 57(3), pages 540-575, September.
    16. Jirjahn, Uwe & Mohrenweiser, Jens, 2025. "Management Practices, Workplace Health Promotion and Productivity," IZA Discussion Papers 18059, Institute of Labor Economics (IZA).
    17. Allan, Julia L. & Andelic, Nicole & Bender, Keith A. & Powell, Daniel & Stoffel, Sandro & Theodossiou, Ioannis, 2021. "Employment contracts and stress: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 360-373.
    18. Benjamin Artz & John S Heywood, 2024. "Performance pay and work hours: US survey evidence," Oxford Economic Papers, Oxford University Press, vol. 76(3), pages 609-627.
    19. Benjamin C. Adams, 2024. "Locus of control and performance pay: Evidence from US survey data," LABOUR, CEIS, vol. 38(3), pages 395-423, September.
    20. Mehrzad B. Baktash & John S. Heywood & Uwe Jirjahn, 2025. "Variable pay and work hours: does performance pay reduce the gender time gap?," Economica, London School of Economics and Political Science, vol. 92(368), pages 1149-1167, October.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp17791. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.