Performance Pay and Within-Firm Wage Inequality

Arbeitspapier

This paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual effort increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of employee records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Papers ; No. 535

Classification and Topics

• Classification: Wirtschaft ; Wage Level and Structure; Wage Differentials ; Compensation Packages; Payment Methods
• Subject: Performance related pay ; wage inequality ; union bargaining

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Barth, Erling ; Bratsberg, Bernt ; Hægeland, Torbjørn ; Raaum, Oddbjørn
• Event: Veröffentlichung
• (who): Statistics Norway, Research Department
• (where): Oslo
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/192517
• Last update: 10.03.2025, 11:42 AM CET