Variable Payment Schemes and Productivity: Do Individual-Based Schemes Really Have a Stronger Influence than Collective Ones?

Uwe Jirjahn and Jens Mohrenweiser

No 16267, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: While studies on individual-based and collective payment schemes are largely unconnected, there appears to be a widely held belief that individual-based schemes have a stronger influence on firm performance than collective ones. This also applies to an index of best management practices developed by Bloom and Van Reenen (2007). The index assigns the highest weight to individual-based performance pay, a medium weight to group-based performance pay and a low weight to profit sharing. This weighting is obviously driven by the implicit assumption that collective payment schemes suffer from a free-rider problem so they have a less strong influence on productivity than individual-based schemes. We show that this assumption is questionable from both a theoretical and an empirical point of view. Using the German Management and Organizational Practices Survey, one of the datasets initiated by Bloom and Van Reenen, we show that individual-based performance pay does not outperform group-based performance pay or profit sharing. The finding also holds when accounting for possible interactions among the payment schemes and considering the moderating roles of firm size, employee representation, and innovativeness. Our results suggest that researchers should be careful with respect to the assumptions and subjective priors guiding their empirical analyses.

Keywords: management practices; free-rider problem; individual performance pay; group performance pay; profit sharing (search for similar items in EconPapers)
JEL-codes: J33 M50 M52 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2023-06
New Economics Papers: this item is included in nep-cdm, nep-eff, nep-hrm and nep-lma
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Working Paper: Variable Payment Schemes and Productivity: Do Individual-Based Schemes Really Have a Stronger Influence Than Collective Ones? (2023)
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