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Performance Pay and Earnings: Evidence from Personnel Records

Author

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  • Pekkarinen, Tuomas

    () (VATT, Helsinki)

  • Riddell, Chris

    () (Cornell University)

Abstract

This paper examines the effects of performance pay on earnings using linked employee-employer panel data from Finland. These payroll data contain information on the exact share of earnings obtained and hours worked on a performance pay contract. Using these data, we estimate the effects of performance pay in the presence of both individual and firm-specific unobserved heterogeneity. Furthermore, we are able to estimate the effects of performance pay contracts in tasks of different complexity and for the subsample of workers who change jobs following an establishment closure. Unobservable firm characteristics explain 30-50% of the variance in performance pay. After controlling for unobservable individual and firm characteristics, performance pay workers earn substantially more than fixed rate workers. The effects persist when only workers who changed firms, and contracts, due to an establishment closure are used for identification. There is also a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, we exploit several ‘natural experiments’ where there was a compensation regime change in one plant of a given firm, but not in other plants. The plants are highly similar pre-regime change, and had a common trend in earnings pre-regime change. These experiments also yield substantial earnings premiums.

Suggested Citation

  • Pekkarinen, Tuomas & Riddell, Chris, 2006. "Performance Pay and Earnings: Evidence from Personnel Records," IZA Discussion Papers 2253, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2253
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    References listed on IDEAS

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    1. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
    2. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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    4. Ronald G. Ehrenberg, 1990. "Introduction: Do Compensation Policies Matter?," ILR Review, Cornell University, ILR School, vol. 43(3), pages 3, April.
    5. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
    6. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    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. Charles Brown, 1990. "Firms' Choice of Method of Pay," ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-1-182-, April.
    10. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-463, July.
    11. 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.
    12. Erica L. Groshen, 1991. "Sources of Intra-Industry Wage Dispersion: How Much Do Employers Matter?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 869-884.
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    Citations

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    Cited by:

    1. 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.
    2. Böckerman, Petri & Bryson, Alex & Viinikainen, Jutta & Hakulinen, Christian & Pulkki-Råback, Laura & Raitakari, Olli & Pehkonen, Jaakko, 2017. "Biomarkers and long-term labour market outcomes: The case of creatine," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 259-274.
    3. repec:lan:wpaper:3007 is not listed on IDEAS
    4. repec:lan:wpaper:2913 is not listed on IDEAS
    5. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Performance Pay and Within-Firm Wage Inequality," Discussion Papers 535, Statistics Norway, Research Department.
    6. repec:lan:wpaper:2915 is not listed on IDEAS
    7. Papps, Kerry L., 2010. "Productivity under Large Pay Increases: Evidence from Professional Baseball," IZA Discussion Papers 5133, Institute for the Study of Labor (IZA).
    8. Harald Dale-Olsen, 2014. "Sickness Absence, Sick Leave Pay, and Pay Schemes," LABOUR, CEIS, vol. 28(1), pages 40-63, March.
    9. Petri Bockerman & Alex Bryson & Christian Hakulinen & Jaakko Pehkonen & Laura Pulkki-Raback & Olli Raitakari & Jutta Viinikainen, 2014. "Biomarkers and Long-term Market Outcomes: The Case of Creatine," CEP Discussion Papers dp1279, Centre for Economic Performance, LSE.
    10. Westling, Tatu, 2011. "Incentive pay and gender gaps in the Nordic countries," MPRA Paper 33083, University Library of Munich, Germany.
    11. Pekkarinen, Tuomas & Uusitalo, Roope, 2012. "Aging and Productivity: Evidence from Piece Rates," IZA Discussion Papers 6909, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    piece rates; performance pay; incentives;

    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

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