Performance Pay and Productivity

Edward P. Lazear

NBER Working Paper No. 5672
Issued in July 1996
NBER Program(s):Labor Studies Program, Productivity, Innovation, and Entrepreneurship Program

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.

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Document Object Identifier (DOI): 10.3386/w5672

Published: Lazear, E. P. "Performance Pay And Productivity," American Economic Review, 2000, v90(5,Dec), 1346-1361. citation courtesy of

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