Performance Pay and Earnings: Evidence from Personnel Records

Posted: 2 Mar 2011

See all articles by Tuomas Pekkarinen

Tuomas Pekkarinen

Aalto University; Institute for the Study of Labor (IZA); VATT Institute for Economic Research

Chris Riddell

Queen's University

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2008


This paper examines the earnings effects of performance pay using linked employee-employer panel data from Finland's metal industry for 1990-2000. The authors estimate the effects of performance pay contracts in the presence of individual and firm unobserved heterogeneity as well as in tasks of different complexity. Unobservable firm characteristics explain about 40% of the variance in the use of performance pay. Performance pay workers earned substantially more than fixed rate workers, a finding that persists even in analyses that use for identification only those workers who changed firms (and contracts) due to an establishment closure. There is also evidence of a strong, negative relationship between job complexity and the incentive effects of performance pay. Finally, several "quasi-experiments" show that when one plant underwent a compensation regime change but other highly similar plants in the same firm did not, workers in the "treatment" plant gained substantial earnings premiums.

Keywords: Performance Pay

JEL Classification: J30, J31, J33

Suggested Citation

Pekkarinen, Tuomas and Riddell, Chris, Performance Pay and Earnings: Evidence from Personnel Records (April 1, 2008). Industrial and Labor Relations Review, Vol. 61, No. 3, 2008, Available at SSRN:

Tuomas Pekkarinen (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072

VATT Institute for Economic Research ( email )

Chris Riddell

Queen's University ( email )

Kingston, Ontario K7L 3N6 K7L 3N6

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