The Impact of Higher Fixed Pay and Lower Bonuses on Productivity

Abstract

This study analyzes the effects of performance related pay on productivity exploiting a change in the payment structure of a large Dutch marketing company. Specifically, we investigate the consequences for company sales of higher fixed pay in combination with lower bonuses. Exploiting shift level data of individual workers we find that average productivity decreases when the pay structure shifts more to fixed pay. Further analysis shows that this drop in productivity is larger for older workers and for high-ability employees, while over time the negative effect of the new system becomes smaller.