Performance Pay and Productivity

36 Pages Posted: 19 Jul 2000 Last revised: 2 Oct 2010

See all articles by Edward P. Lazear

Edward P. Lazear

Stanford Graduate School of Business; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1996

Abstract

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.

Suggested Citation

Lazear, Edward P., Performance Pay and Productivity (July 1996). NBER Working Paper No. w5672, Available at SSRN: https://ssrn.com/abstract=225573

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