Performance-related pay and labor productivity

A growing number firms offer to their employees a compensation package which links pay to performance. The aim is to motivate workers to be more efficient at work also increasing their attachment to the company thereby reducing turnover and absenteeism. The effects of pay on productivity very much depend on the type (individual or group performance) and the design of schemes (commissions linked to sales, piece rate linked to output or sharing schemes linked to profit). In general individual incentives show the largest effect (20-40 per cent), while group or team incentives are smaller in magnitude (in the order of 5–6 per cent). The case for government intervention through tax breaks and other financial incentives is highly debated due to the heterogeneity of firms and the large deadweight losses involved.