Working Paper: NBER ID: w2194
Authors: Andrew Weiss
Abstract: This paper is concerned with three types of incentive programs. First, individual wage incentives that cause a worker's efforts to have a major effect on his pay. Second, group incentives in which the pay of an individual is determined by the output of a group of workers-a group can be as small as a four member work team or as large as the whole firm. Finally, seniority based payment schemes in which the pay of a worker rises rapidly with his tenure with the firm. We show that these payment schemes have the effects in practice that we would predict from optimizing behavior by workers. We find that group incentives tend to compress the productivity distribution of workers. This is because the relative performance of the most productive workers tends to fall, and the most and least productive workers have relatively high quit rates when workers are paid on group incentives. We also present evidence that suggests that the low quit rates in large Japanese firms may be due to steep wage-tenure profiles in those firms.
Keywords: incentives; worker behavior; wage incentives; group incentives; seniority-based payment
JEL Codes: J31; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual wage incentives (J33) | pay differences (J31) |
| pay differences (J31) | quit rates (J63) |
| individual wage incentives (J33) | quit rates (J63) |
| group incentives (D70) | productivity distribution compression (D39) |
| group incentives (D70) | quit rates (J63) |
| steep wage-tenure profiles (J31) | quit rates (J63) |
| steep wage-tenure profiles (J31) | firm investment in training and recruiting (M53) |
| worker retention (J63) | firm performance (L25) |