Performance Pay and Earnings: Evidence from Personnel Records

43 Pages Posted: 7 Sep 2006

See all articles by Tuomas Pekkarinen

Tuomas Pekkarinen

Aalto University; Institute for the Study of Labor (IZA); VATT Institute for Economic Research

Chris Riddell

Queen's University

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

Abstract

This paper examines the effects of performance pay on earnings using linked employee-employer panel data from Finland. These payroll data contain information on the exact share of earnings obtained and hours worked on a performance pay contract. Using these data, we estimate the effects of performance pay in the presence of both individual and firm-specific unobserved heterogeneity. Furthermore, we are able to estimate the effects of performance pay contracts in tasks of different complexity and for the subsample of workers who change jobs following an establishment closure. Unobservable firm characteristics explain 30-50% of the variance in performance pay. After controlling for unobservable individual and firm characteristics, performance pay workers earn substantially more than fixed rate workers. The effects persist when only workers who changed firms, and contracts, due to an establishment closure are used for identification. There is also a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, we exploit several "natural experiments" where there was a compensation regime change in one plant of a given firm, but not in other plants. The plants are highly similar pre-regime change, and had a common trend in earnings pre-regime change. These experiments also yield substantial earnings premiums.

Keywords: performance pay, piece rates, incentives

JEL Classification: J33, J41

Suggested Citation

Pekkarinen, Tuomas and Riddell, Chris, Performance Pay and Earnings: Evidence from Personnel Records (August 2006). IZA Discussion Paper No. 2253, Available at SSRN: https://ssrn.com/abstract=928791

Tuomas Pekkarinen (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Institute for the Study of Labor (IZA)

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

VATT Institute for Economic Research ( email )

Chris Riddell

Queen's University ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

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