What Happens to Performance Pay in Recession?

Abstract

Although performance-related-pay (PRP) can raise productivity and firm performance in many settings, we find the size of performance payments is usually too small to influence the performance of most employees and its incidence across firms and workplaces in Britain is fairly low, especially if one excludes the Finance sector. The share of total pay attributable to bonus payments rose markedly in the mid-2000s, but this was largely a function of a rise in the size of the average bonus in the Finance sector.  The share of pay attributable to bonus payments remained broadly stable elsewhere. Outside of the Finance sector, both regular pay and bonus payments responded to the onset of recession in 2008. However in Finance only bonus pay responded to the recession: real base pay continued to rise. Workplace level data indicate no substantial change in the employment coverage of PRP schemes between 2004 and 2011, although the mix of schemes in the private sector has changed a little. There is no compelling evidence that use of PRP in 2004 assisted employers in tackling the impact of recession through adjustments to the price of labour rather than the quantity, although share plans did reduce the likelihood of private sector employers resorting to cuts in fringe benefits and cuts/freezes in pay.