Who pays for performance?

Abstract

PurposeThe purpose of this paper is to improve our understanding of why some firms tie compensation to worker performance as well as the variation in type of performance pay system across firms.Design/methodology/approachThe study first presents a theoretical framework that motivates n empirical study of performance‐related pay. The data are based on Norwegian establishment surveys from 1997 and 2003. The empirical analysis addresses determinants of adoption of performance pay systems.FindingsPerformance‐related pay is more prevalent in firms where workers of the main occupation have a high degree of autonomy in how to organise their work. Performance pay is also more widespread in large firms, but is less common in highly unionised firms and in firms where wages are determined through centralised bargaining. Results show that performance pay is on the rise in Norway, even after accounting for changes in industry structure, bargaining regime, and union density. Finally, it is found that the incidence of performance‐related pay relates positively to product‐market competition and foreign ownership.Originality/valueThe paper provides new empirical evidence on the use of performance‐related pay. The results support an interpretation of incentive pay as motivated by agency problems, and provide new evidence on the relationship between payment schemes and institutions such as unions and bargaining framework.

Cooperation in Knowledge‐Intensive Firms

“…In contrast to these observations, empirical …ndings suggest that the use individual incentives, as opposed to team incentives, is higher in knowledge intensive …rms (see e.g. Long and Shields, 2005, and Barth et al 2006), and some empirical …ndings also suggest that people with more education are less satis…ed with their job than people with lower levels of education (Clark and Oswald, 1996). 14 Our paper responds to these …ndings by showing that cooperation can be more costly to implement in human capital-intensive industries.…”

“…We are here interested in situations where the agents'hold up power, as represented by , is large. So consider close to the upper bound s introduced above, see (5). Noting that the de…nition of s implies q 11 s Q = q 11 c q 10 q 00 , we see that for = s we have …”

“…Recall that we have assumed < s , see (5). It can be seen that there is 0 < s such that the cost to implement own e¤ort only (no help) is given by !…”

Incentive Provision When Contracting is Costly

“…Consider the EC constraint for v = 0, given by by G(e; 0; ) 0, see (5). (To save notation we ignore the dependence on u here.)…”

“…Note that by de…nition of e c (as arg max [e q eC 0 (e)]) we have q C 0 (e c ) e c C 00 (e c ) = 0 and hence G e (e c ; 0; c ) = q C 0 (e c ) 1 Thus G e (e c ; 0; c ) > 0 if c is su¢ ciently large ( c > 1 1+e c ; ). By de…nition of c (see (5)) this will be the case if e c q C(e c ) ũ is su¢ ciently small, i.e. if the spot surplusũ = e s q C(e s ) K(v s ) is su¢ ciently close to e c q C(e c ).…”