The Prevalence and Effects of Performance-Related Pay in Britain

Only very recently evidence has begun to emerge about the use and effects of performance-related pay (PRP). This evidence suggests that the proportion of employees whose pay is linked to performance has been rising in the USA, the UK and elsewhere. Its growth in the USA has been linked to rising wage inequality while individual-based performance pay has been linked to higher labour productivity. Nevertheless, evidence on trends in PRP and its effects on firms and workers remains sparse. This study improves our understanding of PRP and its impact on employees and firms through a systematic investigation of its prevalence and effects in Britain using the latest available data.

Methods

We concentrate on firm-level data and data linking employees to firms. The firm-only data come from the Monthly Wages and Salaries Survey (MWSS). The linked employer-employee data come from: the management and employee components of the Workplace Employment Relations Survey 2011 (WERS); and the Annual Survey of Hours and Earnings (ASHE) linked to the Business Structure Database (BSD). WERS, ASHE and the MWSS can also be linked to the Annual Respondents' Database (ARD), as a means of obtaining measures of firm performance. Some of these data are only now becoming available, while others have not previously been used for academic research on PRP. They each offer data items not readily available in individual-level surveys, such as the British Household Panel Survey and Survey of Personal Incomes. The study will address salient issues for academics and policy analysts. First, we will explore the reasons for the incidence and growth of PRP in Britain among firms and workers. Second, we will establish the relationship between PRP and firm performance. Third, we will consider PRP's impact on wages and the wage distribution. The findings will be of value to firms who are seeking to gain a competitive advantage through changes to their compensation structures. Results will also be of considerable interest to policy makers concerned with employee engagement, given successive governments' desire to support growth in employee financial participation via tax breaks, and to policy makers concerned with pay levels and the distribution of rewards from employment. This policy interest has heightened recently with public concerns about the role of bonuses in contributing to both the recent banking crisis and rising wage inequality.

Funder and partners

The research is funded by the Economic and Social Research Council.

Timescale and outputs

The project began in 2011 and will be completed in Autumn 2014.

Papers
Bryson, A., Forth, J. and Stokes, L. (2014) "The Performance Pay Premium: How Big Is It and Does It Affect Wage Dispersion?", NIESR Discussion Paper No. 433 and IZA Discussion Paper 8360
Forth, J., Bryson, A. and Stokes, L. (2014) "Are Firms Paying More For Performance?", CEP Discussion Paper No. 1272 and NIESR Discussion Paper No. 423
Böckerman, P., Bryson, A. and Ilmakunnas, P. (2013) "Does High Involvement Management Lead to Higher Pay?", Journal of the Royal Statistical Society Series A, 176, 4: 861-885 (previously NIESR Discussion Paper No. 376 and CEP Discussion Paper No. 1046)
Bender, K. A. and Bryson, A. (2013) "Performance Pay: Trends and Consequences", National Institute Economic Review, 226: R1-R3
Elliott, R. and Bryson, A. (2012) "The Reform of Pay Setting" Chapter 7 in D. Bell, S. Boyd, A. Bryson, B. Elliott, E. Frizzell, A. Hatchett, B. Howat, D. Londsdale, J. Peat and D. Watt (eds.) "Public Sector Remuneration in Scotland", pp. 269-82, Hume Occasional Paper No. 93, The David Hume Institute, Edinburgh
Bryson, A., Freeman, R., Lucifora, C., Pellizzari, M and Perotin, V. (2012) "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation", CEP Discussion Paper No. 1112

Conferences and Seminars
19th November 2014: "Who Fared Better? The Fortunes of Performance-Pay and Fixed-Pay Workers Through Recession", University of Aberdeen
​20th September 2014: "The Performance Pay Premium", European Association of Labour Economists, Ljubljana, Slovenia
19th June 2014: Performance Pay Workshop, NIESR
14th May 2014: "The Performance Pay Premium: How Big Is It and Does It Affect Wage Dispersion?", University of Durham Business School
2nd May 2014: "Are firms paying more for performance?", SOLE, Arlington, USA
9th April 2014: "Employee Stock Purchase Plans: Gift or Incentive?", Royal Economic Society, University of Manchester
25th March 2014: "The Performance Pay Premium: How Big Is It and Does It Affect Wage Dispersion?", NIESR internal seminar
10th January 2014: "Are firms paying more for performance?", NIESR seminar
20th November 2013: "Are Firms Paying More for Performance?", Kings College, London, Dept of Management Seminar
21st February 2013: "Does How You are Paid Affect the Way You Feel?", 16th Colloquium on Personnel Economics (POEK), Tubingen University
13th January 2013: "Employee Share Purchase Plans: Gift or Incentive?", Mid-Year Fellows Workshop in Honour of Louis O. Kelso, Rutgers University, New Brunswick
25th October 2012:  "Incentive Pay: how important is it and does it work?", Eversheds Labour Relations Conference, London Stock Exchange
June 25th 2012: “Does How You Are Paid Affect the Way You Feel?”, NIESR/NatCen Workshop on “Linking Paid Work, Health and Wellbeing”
5th May 2012: "Employee Share Purchase Plans: Gift or Incentive?", Society of Labor Economists, Chicago
23rd April 2012: "Employee Share Plans: What's in it for your firm and Your Workforce?", seminar to employers, Deloitte/Computershare seminar series, Shanghai, China
15th March 2012: "Company Share Plans - Gift or Incentive?", Keynote Guest speaker, 2012 POEK Conference, University of Paderborn, Germany
7th January 2012: "Company Share Plans - Gift or Incentive?", AEA, Chicago

Media
7th April 2014: Financial Times performance pay
12th November 2013: Polly Toynbee, Guardian on performance-related pay
5th November 2013: Blog on performance pay