Advertisement

Journal of Management & Governance

, Volume 10, Issue 2, pp 149–177 | Cite as

What Makes Performance-Related Pay Schemes Work? Finnish Evidence

  • Antti Kauhanen
  • Hannu Piekkola
Article

Abstract

We analyze how features of performance-related pay (PRP) schemes affect their perceived motivational effects using a Finnish survey for upper white-collar employees from 1999. The results show that the following features are important for a successful PRP scheme: (i) the employees have to feel they are able to affect the outcomes; (ii) the organizational level of the performance measurement should be close to the employee: individual and team level performance measurement increase the probability that the scheme is perceived to be motivating; (iii) employees should be familiar with the performance measures; (iv) the level of payments should be high enough and rewards frequent enough. Levels below the median do not generate positive effects; (v) employees should participate in the design of the PRP scheme.

Keywords

design of incentive schemes effort provision employee involvement motivation performance-related pay 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Alchian, A., Demsetz, H. 1972“Production, Information Costs, and Economic Organization”American Economic Review62777795Google Scholar
  2. Alho, K., Heikkilä, A., Lassila, J., Pekkarinen, J., Piekkola, H., Sund, R. 2003Suomalainen sopimusjärjestelmä – työmarkkinaosapuolten näkemykset. (The Finnish Wage Bargaining System – Actors’ Perceptions.) Research Institute of the Finnish Economy (ETLA), Series B 203TaloustietoHelsinkiGoogle Scholar
  3. Bartol, K.M., Durham, C.C. 2000“Incentives: Theory and Practice”Cooper, C.Locke, E. eds. Industrial and Organizational PsychologyBlackwellOxford133Google Scholar
  4. Belfield, R., Marsden, D. 2003“Performance Pay, Monitoring Environments and Establishment Performance”International Journal of Manpower24452471CrossRefGoogle Scholar
  5. Benabou, R., Tirole, J. 2003“Intrinsic and Extrinsic Motivation”Review of Economic Studies70489520CrossRefGoogle Scholar
  6. Brown, M., Heywood, J.S. 2002Paying for Performance: An International ComparisonM.E. SharpeLondonGoogle Scholar
  7. Bullock, R.J., Tubbs, M.E. 1990“A Case Meta-Analysis of Gainsharing Plans as Organization Development Interventions”Journal of Applied Behavioral Science26383404CrossRefGoogle Scholar
  8. Dechow, P., Sloan, R. 1991“Executive incentives and the horizon problem”Journal of Accounting and Economics145189CrossRefGoogle Scholar
  9. Doucouliagos, C. 1995“Worker Participation and Productivity in Labor Managed and Participatory Capitalist Firms: A Meta-Analysis”Industrial and Labor Relations Review495877Google Scholar
  10. Erez, M., Earley, P., Hulin, C. 1985“The Impact of Participation on Goal Acceptance and Performance: A Two-Step Model”Academy of Management Journal285066Google Scholar
  11. Fakhfakh, F., Perotin, V. 2002“France: Weitzman Under State Paternalism”Brown, M.Heywood , J.S. eds. Paying for Performance: An International Comparison M.E. Sharpe PublishersLondon90114Google Scholar
  12. Fehr, E., Falk, A. 2002“Psychological Foundations of Incentives”European Economic Review46687724CrossRefGoogle Scholar
  13. Frey, B., Oberholzer-Gee, F. 1997“The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out”American Economic Review8774655Google Scholar
  14. Gneezy, U., Rustichini, A. 2000“Pay Enough or Don’t Pay at All”Quarterly Journal of Economics115791810CrossRefGoogle Scholar
  15. Hamilton, B., Nickerson, J., Owan, H. 2003“Team incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation”Journal of Political Economy11146597CrossRefGoogle Scholar
  16. Harris, L 2001“Rewarding Employee Performance: Line Managers’ Values, Beliefs and Perspectives”International Journal of Human Resource Management1211821192Google Scholar
  17. Healy, P 1985“The effect of Bonus Schemes on Accounting Decisions”Journal of Accounting and Economics785107CrossRefGoogle Scholar
  18. Heikkilä, A., Piekkola, H. 2005“Explaining the Desire for Local Bargaining: Evidence from a Finnish Survey of Employers and Employees”Labour: Review of Labour Economics and Industrial Relations19399423Google Scholar
  19. Heywood, J.S., Jirjahn, U. 2002“Payment Schemes, Gender and Industrial Relations in Germany”Industrial Labour Relations Review564464Google Scholar
  20. Heywood, J.S., Jirjahn, U., Tsertsvadze, G. 2005“Does Profit Sharing Lower the Conflict with Boss? Evidence from Germany”International Economic Journal19235250Google Scholar
  21. Holmström, B., Milgrom, P. 1987“Aggregation and Linearity in Provision of Intertemporal Incentives”Econometrica55303328Google Scholar
  22. Jirjahn, U. 2002“German Experience with Performance Pay”Brown, M.Heywood, J.S. eds. Paying for Performance: An International ComparisonM.E. Sharpe PublishersLondon148178Google Scholar
  23. Kandel, E., Lazear, E.P. 1992“Peer Pressure and Partnerships”Journal of Political Economy100801817CrossRefGoogle Scholar
  24. Kessler, I. 1994“Performance Related Pay: Contrasting Approaches”Industrial Relations Journal25122135Google Scholar
  25. Knez, M., Simester, D. 2001“Firm-wide Incentives and Mutual Monitoring at Continental Airlines”Journal of Labor Economics19743772CrossRefGoogle Scholar
  26. Kruse, D.L. 1992“Profit Sharing and Productivity: Microeconomic evidence from the United States”Economic Journal1022436Google Scholar
  27. Lazear, E. 1989“Pay Equality and Industrial Politics”Journal of Political Economy97561580CrossRefGoogle Scholar
  28. Lazear, E. 1998Personnel Economics for ManagersWileyNew YorkGoogle Scholar
  29. Lazear, E. 2000“Performance Pay and Productivity”American Economic Review9013461361Google Scholar
  30. Locke, E.A., Latham, G.P. 2002“Building a Practically Useful Theory of Goal Setting and Task Motivation: A 35-Year Odyssey”American Psychologist57705717Google Scholar
  31. Long, R.J. 2002“Performance Pay in Canada”Brown, M.Heywood, J.S. eds. Paying for Performance: An International ComparisonM.E. Sharpe PublishersLondon5289Google Scholar
  32. Marsden, D. 2004“The Role of Performance-Related Pay in Renegotiating the ‘Effort Bargain’: The Case of British Public Services”Industrial and Labor Relations Review57350370Google Scholar
  33. Marsden, F., S. French and K. Kubo.: 2001, “Does Performance Pay De-Motivate, And Does It Matter?”, The Centre for Economic Performance Discussion Paper No. 660Google Scholar
  34. Marsden, D., Richardson, R. 1994“Performing for Pay? The Effects of ‘Merit Pay’ on Motivation in a Public Service”British Journal of Industrial Relations32243260Google Scholar
  35. Mitchell, T., Thompson, K., George-Falvy, J. 2000“Goal Setting: Theory and Practice”Cooper, C.Locke, E. eds. Industrial and Organizational PsychologyBlackwellOxford216249Google Scholar
  36. Murphy, K.J., 1999, “Executive compensation”, in O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics 3B (Amsterdam: North Holland), pp. 2485–2563Google Scholar
  37. Oyer, P. 1998“Fiscal Year Ends and Non-Linear Incentive Contracts: The Effects on Business Seasonality”Quarterly Journal of Economics113149185CrossRefGoogle Scholar
  38. Parent, D. 2002“Performance Pay in the United States: Its Determinants and Effects”Brown, M.Heywood, J.S. eds. Paying for Performance: An International ComparisonM.E. Sharpe PublishersLondon1751Google Scholar
  39. Piekkola, H. 2005“Profit Sharing in Finland: Earnings and Productivity Effects”International Journal of Manpower26619635Google Scholar
  40. Prendergast, C. 1999“Provision of Incentives in Firms”Journal of Economic Literature37763Google Scholar
  41. Shield, J. 2002“Performance Related Pay in Australia”Brown, M.Heywood, J.S. eds. Paying for Performance: An International ComparisonM.E. Sharpe PublishersLondon179213Google Scholar
  42. TT (The Confederation of Finnish Industry and Employers): 2002, Tulospalkkaus 2002: Tulos- ja voittopalkkiot palkkaustapatiedustelun mukaan, Helsinki TTGoogle Scholar
  43. TT (Confederation of Finnish Industry and Employers): 2004, Palkkaustapatiedustelu (Wage Survey), Helsinki TTGoogle Scholar
  44. Uusitalo, R.: 2002, Tulospalkkaus ja tuottavuus (Performance-Related Pay and Productivity), Government Institute of Economic Research Discussion Papers No. 276, HelsinkiGoogle Scholar
  45. Vartiainen, J.: 1998, The Labour Market in Finland – Institutions and Outcomes, Prime Minister’s Office, Helsinki. Available at www.vnk.fi/resource/fi/2096.pdfGoogle Scholar
  46. Wadhwani, S., Wall, M. 1990“The Effects of Profit sharing on Employment, Wages, Stock Returns and Productivity: Evidence from UK Micro-Data”The Economic Journal100117Google Scholar
  47. Wooldridge, J. 2002Econometric Analysis of Cross Section and Panel DataMIT PressCambridgeGoogle Scholar

Copyright information

© Springer 2006

Authors and Affiliations

  1. 1.Department of EconomicsHelsinki School of Economics, and HECERHelsinkiFinland
  2. 2.The Research Institute of the Finnish EconomyHelsinkiFinland

Personalised recommendations