1 / 11

Performance related pay

Performance related pay. 1. Background 2. Effects 3. Empirical evidence 4. Problems with PRP. 1. Background. Recall Output depends on worker effort Workers have free will effort & specific skills effort is a ‘bad’, higher wages are a ‘good’ Firms wish to maximise effort / skill use

jafari
Download Presentation

Performance related pay

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Performance related pay • 1. Background • 2. Effects • 3. Empirical evidence • 4. Problems with PRP

  2. 1. Background • Recall • Output depends on worker effort • Workers have free will • effort & specific skills • effort is a ‘bad’, higher wages are a ‘good’ • Firms wish to maximise effort / skill use • Divergence of interests – principal-agent problem • Informational asymmetries

  3. 1. Background • ‘Old Pay’ versus ‘New Pay’ • ‘Old pay’ systems • job evaluated grade-wage structure • pay = f(time, seniority, job characteristics) • ‘New Pay’ systems • Pay related to firm’s strategy • Flexible & variable pay systems

  4. 1. Background • Types of PRP incentive scheme • (i) Piece rates: w = f(Q) • (ii) Commission on sales • (iii) Group-based PRP I.e. bonus systems (US = ‘gainsharing’) • (iv) Profit sharing

  5. 2. Effects of PRP • Three (expected) effects, compared to what? • (i) Effort & output will rise • (ii) Average level of earnings will rise • (iii) Variance of effort & wages across workers in a firm will rise

  6. 3. Empirical evidence • Lazear (2000) • Safelite Glass Corporation • Data • 3,707 workers, 19 months = 38,764 ‘person-months’ • Output = average no. of glass units installed per day in a month • Methods • Regression with & without fixed effects

  7. 3. Empirical evidence • Findings • Output per worker rose by 44 percent • A) average worker produces more – incentive scheme • B) hire more productive workers & reduction in quits amongst the most productive workers • Workers received a 10 percent increase in pay • Variance in output increased • Effect on profits? • Effect on quality of output? • Effects are large & in line with economic theory

  8. 3. Empirical evidence • Gregg, Jewell & Tonks (2005) • Executive pay & company performance in the puzzle • Panel data - UK • Time: 1994-2002 • Companies: 415 • Total observations 2,859 • Methods • ExecPayit=µi + αt + β1(CompPerform) + β2(Controls) + eit

  9. 3. Empirical evidence • Literature • Low pay-performance sensitivities for UK firms (elasticity= 0.15) • Total compensation matters more • Main et al (1996) – share option – elasticity • increased from 0.15 to 0.71 (total board remuneration) • Increased from 0.23 to 0.9 (highest paid director)

  10. 3. Empirical evidence • Findings • Total board pay rose by 33% over the period • Mean pay of highest paid director increased by 45% in real terms • Regression results • Firm size has the biggest effect • Total share holder return has a much smaller effect

  11. 4. Problems implementing PRP • a) Individual output – difficult to measure • b) Time & performance • c) Team production, effort & output • d) Teams & Group output • e) Multi-task workers – performance • Other pay mechanisms

More Related