The Impact of Performance Related Pay on Individual Employment Stability: Evidence from Finnish Workers

Abstract

I analyze the effect of performance related pay on employment stability. I find evidence that workers who participate in performance related pay schemes enjoy greater employment stability. I also show that after having controlled for the level of compensation and simultaneous determination, those schemes have a more limited effect on individual separations. Besides, the relation between separation rates and the proportion of flexible pay is not monotonic, but U-shaped. For lower ratio of flexible to fix pay an increase in the proportion of flexible pay reduces the separation rate, but this trend is reversed after a certain threshold.

Keywords: performance related pay, employment, panel data

JEL Classification: C23, E24, J33, M52