American Economic Review: Vol. 90 No. 5 (December 2000)


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Performance Pay and Productivity

Article Citation

Lazear, Edward P. 2000. "Performance Pay and Productivity." American Economic Review, 90(5): 1346-1361.

DOI: 10.1257/aer.90.5.1346


Much of the theory in personnel economics relates to effects of monetary incentives on output, but the theory was untested because appropriate data were unavailable. A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates. In Safelite, productivity effects amount to a 44-percent increase in output per worker. This firm apparently had selected a suboptimal compensation system, as profits also increased with the change.

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Lazear, Edward P. (Stanford U)

JEL Classifications

J33: Compensation Packages; Payment Methods
J24: Human Capital; Skills; Occupational Choice; Labor Productivity

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