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Performance Pay and Within-Firm Wage Inequality

Author

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  • Barth, Erling

    (Institute for Social Research, Oslo)

  • Bratsberg, Bernt

    (Ragnar Frisch Centre for Economic Research)

  • Haegeland, Torbjørn

    (Statistics Norway)

  • Raaum, Oddbjørn

    (Ragnar Frisch Centre for Economic Research)

Abstract

This paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual output increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of individual employee pay records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.

Suggested Citation

  • Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2009. "Performance Pay and Within-Firm Wage Inequality," IZA Discussion Papers 4137, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp4137
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    Cited by:

    1. John S. Heywood & Daniel Parent, 2012. "Performance Pay and the White-Black Wage Gap," Journal of Labor Economics, University of Chicago Press, vol. 30(2), pages 249-290.
    2. Anders Akerman & Ingvil Gaarder & Magne Mogstad, 2015. "The Skill Complementarity of Broadband Internet," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1781-1824.
    3. Catherine Laffineur & Alexandre Gazaniol, 2019. "Foreign direct investment and wage dispersion: Evidence from French employer-employee data," International Economics, CEPII research center, issue 157, pages 203-226.
    4. Janice Fanning Madden & Alexander Vekker, 2017. "Output-Based Performance Pay, Performance-Support Bias, and the Racial Pay Gap within a Large Retail Stock Brokerage," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 56(4), pages 662-687, October.
    5. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Who pays for performance?," International Journal of Manpower, Emerald Group Publishing Limited, vol. 29(1), pages 8-29, March.
    6. Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers dp1112, Centre for Economic Performance, LSE.
    7. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
    8. repec:wsr:wpaper:y:2015:i:155 is not listed on IDEAS

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    More about this item

    Keywords

    wage inequality; performance related pay; union bargaining;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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