Performance pay: trends and consequences introduction

From First Principles, one of the key implications of standard labour economic theory is that workers should be paid their marginal product. Pay that is tied to a worker’s performance, therefore, would seem to provide the most direct link to satisfy this theoretical requirement (Lazear, 1986). Indeed, there is ample evidence that indicates that implementing pay for performance increases productivity through a combination of increased incentives for high productivity and incentives for highly productive workers to sort themselves into these types of jobs (e.g., Lazear, 2000; Haley, 2003; Gielen et al., 2010; Jones et al., 2010 and Bryson et al., 2013). Because of these potentially beneficial attributes of performance-related pay, much research has been devoted to identifying how widespread the pay practice is compared with other methods of compensation, how it has changed over time, how it is viewed by different labour market actors and whether it correlates (positively or negatively) with other labour market outcomes, as well as a host of other research questions.