Worker separation under performance pay : Empirical evidence from Finland

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Title: Worker separation under performance pay : Empirical evidence from Finland
Author: Jones, Derek C. ; Kalmi, Panu ; Kato, Takao ; Mäkinen, Mikko
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 33/2017
Year of publication: 2017
Publication date: 19.10.2017
Published in: Online First International Journal of Human Resource Management as "The Differing Effects of Individual and Group Incentive Pay on Worker Separation: Evidence using Finnish Panel Data".
Pages: 39
Subject (yso): palkkiot; kannustimet; työntekijät; tasa-arvo; työvoiman liikkuvuus; palkat
Keywords: Suomi; tulospalkkaus
JEL: J33; M52; J31; J62; J63
Other keywords: performance pay; worker separation; job mobility; earnings inequality
Abstract: This paper investigates the role of individual incentive (II) and group incentive (GI) pay as determinants of worker separation. We use a large linked employer-employee panel data set for full-time male manufacturing workers during 1997-2006 from Finland. We follow actual job spells and switches of individual employees and define separation as worker exit from his current employer. The key finding for white-collar workers is that group incentive pay is associated significantly with increased probability of separation and hence diminished employment stability, but in large firms only. For blue-collar workers our results consistently indicate that individual incentive pay is associated with a decreased probability of separation and hence enhanced employment stability, both in small and large firms. Our finding that group incentive pay increases the risk of separation for white-collar workers is more consistent with theoretical work such as Lazear (2000) and Fehr and Gaechter (2000), while uncovering that individual incentive pay decreases employment stability for blue-collar workers supports theoretical work such as Parent (1999) and Paarsch and Shearer (2000).

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