Performance Pay and Productivity
Edward P. Lazear
Stanford Graduate School of Business; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
NBER Working Paper 5672
What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.
Number of Pages in PDF File: 11
JEL Classification: L62, J33
Date posted: September 25, 1996
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