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The authors investigate the causal effect on firm productivity of a switch from fixed wages to collective performance-related pay, exploiting a reform in the structure of collective bargaining triggered by a social pact. They find that an increase in the adoption of collective performance-related pay leads to a 3 to 5% productivity gain but that such effect declines over time. They show that the effect on productivity varies substantially by firm size, industry affiliation, and union density. Both the size of the bonus and the design of the scheme—in terms of number and types of parameters used—are also important features for a firm's productivity.

Performance-related pay (PRP) is a tool used to induce productivity gains by aligning workers and enterprises incentives. In the public sector it involves, in addition to motivation, attracting and maintaining qualified personnel, reducing costs and promoting public objectives. Several countries have adopted PRP in the public sector. PRP in the public sector differ from those seen in private sector because in most of the public sector organizations there is no obvious way to measure productivity. This article contributes to the PRP discussion by presenting a theoretical model, discussing recent experiences, and simulating an application to a case study to a Brazilian government agency showing that a productivity gain of 3% would be sufficient to cover the cost of the gratifications leaving a positive net result to the Treasury.

The last decades’ reform of public administrations has in numerous countries included the use of performance-related pay (PRP). Such programs have been said to reduce civil servants’ incentives for bribe taking and have therefore been promoted as an anticorruption tool. However, the article proposes that such schemes’ suppressing effect on corruption incentives is questionable in highly corrupt settings because the absence of non-corrupt senior managers—and hence independent performance evaluations—may lead to the capture of such programs. An in-depth study of reforms in the South African civil service provides micro-level insights into the process in which such schemes may fail. The investigation outlines how PRP bonuses are used as rewards from corrupt senior managers to colluding subordinates. Honest bureaucrats are instead isolated and receive no addition to their salary. These selective rewards make honest behavior increasingly costly and function as an incentive for civil servants to engage in bribery.

Motivation crowding theory (MCT) argues that performance-related pay (PRP) can crowd out intrinsic motivation, with detrimental consequences for employees' willingness to exert effort, but this mechanism is only expected when PRP is perceived to be controlling. However, the issue of whether the mechanism is motivational, as expected, has not been tested. This article finds support for such expectations using a vignette survey experimental setup of 1,150 responses (from 384 respondents). The results indicate that PRP positively affects organizational citizenship behavior (OCB), but that the effect is reduced significantly when PRP is perceived as a control factor, because the importance of intrinsic motivation for effort is weakened. Thus, PRP can cause a cognitive shift from intrinsic to extrinsic orientation, but only if PRP is perceived as controlling. When PRP is perceived as noncontrolling, the importance of intrinsic motivation can actually increase. The findings imply that PRP is not necessarily harmful, and that managers should pay close attention to how their employees perceive performance-based pay systems.

We address basic questions about performance-related pay in the US. How widespread is it? What characteristics of employers and jobs are associated with it? What are recent trends in its incidence? What factors are responsible for these trends? Nearly two-fifths of hours worked in the US economy in 2013 were in jobs with performance-related pay, but this share has been declining. We consider several possible causes for this trend and find that they do not have much explanatory power. We do establish, however, that any potential explanation must also account for a long-term shift in the relative incidence of performance-related pay away from low-wage and toward high-wage jobs.

The best worker is not always the best candidate for manager. In these cases, do firms promote the best potential manager or the best worker in their current job? Using microdata on the performance of sales workers at 131 firms, we find evidence consistent with the Peter Principle, which proposes that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance. We estimate that the costs of promoting workers with lower managerial potential are high, suggesting either that firms are making inefficient promotion decisions or that the benefits of promotion-based incentives are great enough to justify the costs of managerial mismatch. We find that firms manage the costs of the Peter Principle by placing less weight on sales performance in promotion decisions when managerial roles entail greater responsibility and when frontline workers are incentivized by strong pay for performance.

Previous research in economics shows that compensation based on the pay-for-performance principle is effective in inducing higher levels of effort and productivity. On the other hand, research in psychology argues that performance-based financial incentives inhibit creativity and innovation. How should managerial compensation be structured if the goal is to induce managers to pursue more innovative business strategies? In a controlled laboratory setting, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, whereas golden parachutes can alleviate these innovation-reducing effects. This paper was accepted by David Hsu, entrepreneurship and innovation.

Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. We instead focus on the strategic compensation of nonexecutive employees, arguing that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance-based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance-based compensation, building a theoretical framework predicting more prominent use of team-based, seniority-based, and flatter compensation. We argue that compensation is strategic not only in motivating and attracting the worker being compensated but also in its impact on peer workers and the firm's complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory.

The number of quality measures directed at US health care providers by external entities such as Medicare, Medicaid, and private health insurance plans has increased rapidly during the past decade. These measures, such as rates of mammography screening for women or of testing for cholesterol or hemoglobin A1c levels for diabetes, are used to provide publicly reported information for patients and as a basis for financial \"pay-for-performance\" incentives to physicians. Practices reported that their physicians and staff spent 15.1 hours per physician per week dealing with external quality measures including the following: tracking quality measure specifications, developing and implementing data collection processes, entering information into the medical record, and collecting and transmitting data. In November 2014 the authors used the Medical Group Management Association database to invite 1,000 randomly selected practices to respond to a confidential Web-based survey, including 250 practices from each of four specialty types: cardiology, orthopedics, primary care, and multispecialty practices that included primary care.

Incentives are often associated with narrow financial rewards such as bonuses or executive stock options. But in general such rewards are just a small part of the design of incentives. Properly designed incentive systems have to take into account the full portfolio of activities that the agent can engage in, the array of instruments, many nonfinancial that are available to influence individuals and consider the factors that motivate them in different settings. Thinking about incentives as a system of interacting instruments and influences has been a major advance in the economics of incentives in recent years. In this lecture I will describe the path from pay for performance to the broader view of incentive systems.