Performance pay and earnings: Evidence from personnel records

Abstract

This paper examines the effects of performance pay on earnings using linked employeeemployer panel data from Finland. With this data, we are able to estimate the effects of performance pay contracts in the presence of individual and firm unobserved heterogeneity as well as in tasks of different complexity and for the subsample of workers who change jobs following an establishment closure. Unobservable firm characteristics explain about 40 % of the variance in performance pay. We find that 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 preregime change, and had a common trend in earnings preregime change. These experiments also yield substantial earnings premiums