Contingent Pay, Wages and Worker Wellbeing

Pub. Date
02 December, 2011

Employers can motivate employees by paying for individual performance through for instance piece rates or commissions; or by paying for group performance through share ownership, profit sharing, all-employee stock options; or by offering workers gifts or efficiency wages in the hope that workers will reciprocate with greater effort. Does the form of remuneration affect worker well being differently when the firm does well relative to when it does poorly or when employees work under good or harsh working conditions? We find positive associations between the group performance modes of pay and worker well being in four of five data sets, both within and across firms, and across employees in Europe. The association is robust to a variety of job and workplace controls, and accounting for person fixed effects Part of the effect is associated with feelings of reciprocity expressed by employees, and a sense of co-ownership engendered by share capitalism, but part is also not captured by these measures. Performance payments also mitigate the negative effects of poorer working conditions on employee wellbeing. Higher wages and incentive payments also reduce quit rates. Wage cuts, on the other hand, increase quit rates and reduce employees' job satisfaction, but we find no evidence that incentive payments mitigate the effects of wage cuts.