IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp3019.html
   My bibliography  Save this paper

Performance Pay, Sorting, and Outsourcing

Author

Listed:
  • Henneberger, Fred

    () (University of St. Gallen)

  • Sousa-Poza, Alfonso

    () (University of Hohenheim)

  • Ziegler, Alexandre

    () (University of Lausanne)

Abstract

Implementing performance pay requires that workers' output be measured. When measurement costs differ among firms, those with a measurement cost advantage choose to implement performance pay. They attract the best workers, and both the level and variability of compensation are higher at these firms than at salary firms. Workers may select firms with different compensation methods at different stages of their work life. Productive workers start at performance pay firms and switch to salary firms once their productivity is revealed. The magnitude of the resulting worker flows depends on the payoff from effort and is therefore related to the age profile of the wage differential between performance pay and salary firms. Advantages in measuring worker productivity constitute a plausible explanation for the emergence of specialized business related service (BRS) firms. Accordingly, BRS firms should make a much wider use of performance pay and employ better workers than diversified corporations. Data from the 1998 Swiss Wage Structure Survey confirm the model's predictions both for the economy at large and for BRS firms.

Suggested Citation

  • Henneberger, Fred & Sousa-Poza, Alfonso & Ziegler, Alexandre, 2007. "Performance Pay, Sorting, and Outsourcing," IZA Discussion Papers 3019, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3019
    as

    Download full text from publisher

    File URL: http://ftp.iza.org/dp3019.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
    2. Ewing, Bradley T., 1996. "Wages and performance-based pay: Evidence from the NLSY," Economics Letters, Elsevier, vol. 51(2), pages 241-246, May.
    3. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
    4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    5. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(2), pages 201-228, Fall.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. David H. Autor, 2001. "Why Do Temporary Help Firms Provide Free General Skills Training?," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1409-1448.
    8. Daniel Parent, 2009. "The effect of pay-for-performance contracts on wages," Empirical Economics, Springer, vol. 36(2), pages 269-295, May.
    9. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
    10. Abraham, Katharine G & Taylor, Susan K, 1996. "Firms' Use of Outside Contractors: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 394-424, July.
    11. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    12. Fama, Eugene F, 1991. "Time, Salary, and Incentive Payoffs in Labor Contracts," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 25-44, January.
    13. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January.
    14. Lazear, Edward, 2003. "The Peter Principle: A Theory of Decline," IZA Discussion Papers 759, Institute for the Study of Labor (IZA).
    15. Andreas Diekmann & Henriette Engelhardt, 1995. "Einkommensungleichheit zwischen Frauen und Männern. Eine ökonometrische Analyse der Schweizer Arbeitskräfteerhebung," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(I), pages 57-83, March.
    16. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
    17. Charles Brown, 1990. "Firms' Choice of Method of Pay," ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-1-182-, April.
    18. Geanakoplos, John & Milgrom, Paul, 1991. "A theory of hierarchies based on limited managerial attention," Journal of the Japanese and International Economies, Elsevier, vol. 5(3), pages 205-225, September.
    19. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    20. Seiler, Eric, 1984. "Piece Rate vs. Time Rate: The Effect of Incentives on Earnings," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 363-376, August.
    21. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
    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. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
    2. Ola Kvaløy & Trond E. Olsen, 2012. "The Rise of Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 493-518, June.

    More about this item

    Keywords

    asymmetric information; sorting; incentives; productivity; outsourcing;

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

    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:dp3019. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak). General contact details of provider: http://www.iza.org .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.