Does performance-related pay improve productivity?

Economists have for a long time argued that performance-based bonuses raise performance. Indeed, many firms use bonuses tied to individual performance to motivate their employees. However, there has been heated debate among human resources professionals recently, and some firms have moved away from individual performance bonuses toward fixed wages only or collective performance incentive schemes such as profit-sharing or team incentives.

Bonus plans can work,
but they are no panacea to motivate employees in firms. 

When simple key performance measures are available that capture key elements of an employee's work and when they are hard to monitor, then bonus payments based on individual employee performance measures tend to work as expected.

However, individual performance bonuses may have limited effects for certain types of employees, for instance those who are
strongly self-motivated to give their best. 

Furthermore, other management practices such as symbolic rewards or performance review conversations can alternatively motivate employees. Moreover, when individual performance cannot be assessed objectively, subjective assessments must be used to determine bonuses and these tend to be biased.

An alternative to individual performance bonuses are team bonuses based on the success of a specific team or of the whole organization. While economists have typically feared free-rider problems, there is mounting evidence that team bonuses may work quite well as they raise both incentives and cooperation.

Read Dirk Sliwka's article 
Bonuses and performance evaluations

What is the economic impact of Covid-19 around the world?

Editor-in-chief Professor Dan Hamermesh has commissioned four further conversations with experts from South Africa, Japan, Ireland and Chile on the effects in their countries:

Find more national responses to Covid-19 here.

Read some of our recent commentaries:

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Articles relating to pandemics and the labor market:

The Covid-19 pandemic is likely to have lasting economic and social impacts on employment, income, and working conditions in labor markets around the world. 

IZA has therefore invited a number of experts to monitor individual countries' crisis responses on their
Crisis Response Monitoring site:

Latest articles
 

• Recruiting intensity (Deutsch) by R. Jason Faberman

• Who benefits from firm-sponsored training? (Deutsch) by Benoit Dostie

• Bonuses and performance evaluations (Deutsch) by Dirk Sliwka

• Labor market performance and the rise of populism (Deutsch) by Sergei Guriev 

• Are workers motivated by the greater good? (Deutsch) by Mirco Tonin

• Skill-based immigration, economic integration, and economic performance (Deutsch) by Abdurrahman B. Aydemir

• The labor market in Norway, 2000–2018 (Deutsch) by Øivind A. Nilsen

• What is the nature and extent of student-university mismatch? (Deutsch) by Gillian Wyness and Richard Murphy

• The impact of monitoring and sanctioning on unemployment exit and job-finding rates (Deutsch) by Duncan McVicar

• The determinants of housework time (Deutsch) by Leslie S. Stratton

• Internal hiring or external recruitment? (Deutsch) by Jed DeVaro

• Migration and human capital accumulation in China (Deutsch) by John Giles and Yang Huang

• Overeducation, skill mismatches, and labor market outcomes for college graduates (Deutsch) by Peter J. Sloane and Kostas Mavromaras 

• The labor market in Switzerland, 2000-2018 (Deutsch) by Rafael Lalive and Tobias Lehmann

• Naturalization and citizenship: Who benefits? (Deutsch) by Christina Gathmann and Ole Monscheuer

• The labor market in South Africa: 2000–2017 (Deutsch) by Jacqueline Mosomi and Martin Wittenberg
   

All one-pagers are also available to read and download in German. Find out more.

One-pagers are now available in Spanish. Take a look at the Spanish key topics page.

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