Performance Pay, Sorting, and Outsourcing

41 Pages Posted: 9 Sep 2007

See all articles by Fred Henneberger

Fred Henneberger

University of St. Gallen

Alfonso Sousa-Poza

University of Hohenheim - Institute of Household and Consumer Economics; IZA Institute of Labor Economics

Alexandre Ziegler

University of Zurich - Department of Banking and Finance

Date Written: August 2007

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.

Keywords: asymmetric information, sorting, incentives, productivity, outsourcing

JEL Classification: J22, J29, J50

Suggested Citation

Henneberger, Fred and Sousa-Poza, Alfonso and Ziegler, Alexandre, Performance Pay, Sorting, and Outsourcing (August 2007). IZA Discussion Paper No. 3019. Available at SSRN: https://ssrn.com/abstract=1012810

Fred Henneberger

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

HOME PAGE: http://www.faa.unisg.ch/zum_Institut/Mitarbeiter/fred_henneberger_site.htm

Alfonso Sousa-Poza (Contact Author)

University of Hohenheim - Institute of Household and Consumer Economics ( email )

Fruwirthstrasse 48
Kavaliershaus 4 116
70599 Stuttgart
Germany
++49 (0)711/459-22863 (Phone)
++49 (0)711/459-23953 (Fax)

HOME PAGE: http://www.uni-hohenheim.de/hhoek/englisch/people/alfonsosousapoza/index.html

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Alexandre Ziegler

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Z├╝rich, 8032
Switzerland

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