Pay and incentives

  • Multitasking at work: Do firms get what they pay for?

    Rewarding only one dimension of performance may result in employees ignoring other dimensions

    Ann P. Bartel, May 2017
    To align employees’ interests with the firm’s goals, employers often use performance-based pay, but designing such a compensation plan is challenging because performance is typically multifaceted. For example, a sales employee should be incentivized to sell the company’s product, but a focus on current sales without rewarding the salespeople according to the quality of the product and/or customer service may result in fewer future sales. To solve this problem, firms often increase the number of metrics by which they evaluate their employees, but complex compensation plans may be difficult for employees to understand.
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  • Working-time autonomy as a management practice

    Giving workers control over their working hours increases their commitment and benefits firm performance

    Michael Beckmann, January 2016
    Allowing workers to control their work hours (working-time autonomy) is a controversial policy for worker empowerment, with concerns that range from increased shirking to excessive intensification of work. Empirical evidence, however, supports neither view. Recent studies find that working-time autonomy improves individual and firm performance without promoting overload or exhaustion from work. However, if working-time autonomy is incorporated into a system of family-friendly workplace practices, firms may benefit from the trade-off between (more) fringe benefits and (lower) wages but not from increased productivity.
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  • High involvement management and employee well-being

    Giving employees more discretion at work can boost their satisfaction and well-being

    Petri Böckerman, July 2015
    A wide range of high involvement management practices, such as self-managed teams, incentive pay schemes, and employer-provided training have been shown to boost firms’ productivity and financial performance. However, less is known about whether these practices, which give employees more discretion and autonomy, also benefit employees. Recent empirical research that aims to account for employee self-selection into firms that apply these practices finds generally positive effects on employee health and other important aspects of well-being at work. However, the effects can differ in different institutional settings.
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  • Efficient markets, managerial power, and CEO compensation

    CEO pay, often contentious, is the product of many forces

    Michael L. Bognanno, February 2019
    The escalation in chief executive officer (CEO) pay over recent decades, both in absolute terms and in relation to the earnings of production workers, has generated considerable attention. The pay of top executives has grown noticeably in relation to overall firm profitability. The pay gap between CEOs in the US and those in other developed countries narrowed substantially during the 2000s, making top executive pay an international concern. Researchers have taken positions on both sides of the debate over whether the level of CEO pay is economically justified or is the result of managerial power.
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  • Relative pay, effort, and labor supply

    Comparisons to others’ pay and to one’s own past earnings can affect willingness to work and effort on the job

    Anat Bracha, June 2017
    Recent studies show that even irrelevant relative pay information—earnings compared to the past or to others—significantly affects workers’ willingness to work (labor supply) and effort. This effect stems mainly from those whose pay compares unfavorably; accordingly, earning less compared to others or less than in the past significantly reduces one’s willingness to work and effort exerted on the job. Comparing favorably, however, has mixed effects—with usually no effect on effort, but positive or no effects on labor supply. Understanding when relative pay increases labor supply and effort can thus help firms devise optimal payment structures.
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  • Does government spending crowd out voluntary labor and donations?

    There is little evidence that government spending crowds out private charitable donations of time and money

    Julia Bredtmann, September 2016
    Private charitable contributions play an essential role in most economies. Despite the existence of welfare states, people contribute money and supply volunteer labor to charity. From a policy perspective, there is concern that comprehensive government spending might crowd out these private charitable donations. If perfect crowding out occurs, then every dollar spent by the government will lead to a one-for-one decrease in private spending, leaving the total level of welfare unaltered. Understanding the magnitude and causes of crowding out is crucial, as it represents a hidden cost to public spending and can thus have significant impacts on public welfare.
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  • Should firms allow workers to choose their own wage?

    Delegating the choice of wage setting to workers can lead to better outcomes for all involved parties

    Gary B. Charness, January 2016
    Economists typically predict that people are inherently selfish; however, experimental evidence suggests that this is often not the case. In particular, delegating a choice (such as a wage) to the performing party may imbue this party with a sense of responsibility, leading to improved outcomes for both the delegating entity and the performing party. This strategy can be risky, as some people will still choose to act in a selfish manner, causing adverse consequences for productivity and earnings. An important issue to consider is therefore how to encourage a sense of responsibility in the performing party.
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  • Inequality and informality in transition and emerging countries

    Higher inequality decreases capital accumulation and increases informality, which, in turn, raises the income of the poor

    Roberto Dell'Anno, December 2016
    Higher inequality reduces capital accumulation and increases the informal economy, which creates additional employment opportunities for low-skilled and deprived people. Despite this positive feedback, informality raises problems for public finances and biases official statistics, reducing the effectiveness of redistributive policies. Policymakers should consider the links between inequality and informality because badly designed informality-reducing policies may increase inequality. However, convincing empirical evidence is still lacking and is usually limited to correlations rather than causal effects.
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  • Internal hiring or external recruitment?

    The efficacy of internal or external hiring hinges on other policies that a firm uses simultaneously

    Jed DeVaro, February 2016
    Hiring is one of a firm’s most important decisions. When an employer fills a vacancy with one of its own workers (through promotion or lateral transfer), it forgoes the opportunity to fill the position with a new hire from outside the firm. Although both internal and external hiring methods are used, firms frequently have a bias favoring insiders. Internal and external hires differ in observable characteristics (such as skill levels), as do the employers making each type of hiring decision. Understanding those differences helps employers design and manage hiring policies that are appropriate for their organizations.
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