The Prevalence and Effects of Performance-Related Pay in Britain

Lead Research Organisation: National Institute of Economic & Soc Res
Department Name: National Institute of Economic & Soc Res

Abstract

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Description We have improved understanding of performance pay (PP) and its impact by achieving the four research objectives in our proposal, but also by examining other facets of PP such as its links to employee well-being. Our most significant achievements are:

1. Establishing the prevalence of PP across the economy and over time
a. PP is widespread. Approaching half (45%) of all jobs are PP jobs, and 30% of employees are in receipt of PP in a given year. PP extends into all sectors and all levels of the occupational hierarchy.
b. PP accounts for 6% of all wages in the economy, but in Finance PP accounts for 30% of all wages.
c. The share of all wages paid as PP rose markedly between 2003-2008, fell dramatically in the recession, but has recovered somewhat since 2010. This reflects change in the size of PP payments for PP workers. The growth in PP jobs, seen in the 1980's and 1990's, has ceased.
2. Identifying PP's impact on wages
a. Employees in PP jobs earn around 36% more than non-PP workers, but the PP wage premium is 15% among observationally-equivalent employees. One third of this premium is due to the greater propensity of high-paying workplaces to use PP. There are thus strong sorting mechanisms into PP jobs.
b. The likelihood of PP increases as one moves up the wage distribution, as does the PP wage premium. Wages are thus more dispersed in the presence of PP than they would be in its absence. However, PP has contributed only modestly to growth in wage dispersion during the 2000's.
c. Changes in PP payments accounted for only 16 per cent of the decline in aggregate wages between 2009 and 2012. The wage restraint seen through recession is thus largely the result of adjustments to base pay (in both PP and fixed-wage jobs).
d. Nevertheless, PP jobs were more likely to survive the recession than comparable fixed-wage jobs, consistent with employers making use of the wage flexibility inherent in PP jobs to retain employees in hard times.
3. Identifying links between PP and firm performance
PP is positively associated with firm profitability and productivity. PP is also more responsive to the business cycle and to firm performance than base pay. However, movements in PP over the past decade are not wholly explained by contemporaneous changes in firm performance, suggesting that firms have additional motivations beyond wage flexibility. One may be to engender greater effort through a 'gift-exchange', as we find that collective forms of PP are associated with increased job satisfaction.
4. Influencing policy formation through:
a. a NIESR seminar on PP attended by representatives from government, business and trade unions;
b. presentations at employers' conferences in London and Shanghai;
c. media coverage in the Financial Times and The Guardian;
d. a themed issue of the National Institute Economic Review, distributed to a range of government and corporate subscribers
e. mentions of papers from this study in Bank of England Monetary Policy Committee members' speeches
Exploitation Route • Policy makers will build on the enhanced understanding of the nature and impact of PP, especially with respect to wage growth and wage inequality, and the use of bonuses in Finance and elsewhere.
• Academics will benefit from our method for classifying PP jobs in the Annual Survey of Hours and Earnings (ASHE). We have developed links between the Monthly Wages and Salaries Survey (MWSS) and other ONS business data, providing new opportunities for PP-related research.
• Our findings have reached academic audiences through seminar/conference presentations and discussion papers. One paper has been published in JRSS Series A, two are book chapters, two are under review at the British Journal of Industrial Relations and the International Journal of Manpower. Three other submissions are scheduled for the New Year following presentations at AEA and RES.
• We have begun discussions with the Bank of England about the development of high-frequency linked employer-employee data, based on MWSS, and we have initiated round-table discussions between academics, the ONS and the UKDS about the further development of ASHE for research use. We have also contributed to public debate about the utility of the Workplace Employment Relations Survey for research on pay issues.
Sectors Aerospace, Defence and Marine,Agriculture, Food and Drink,Chemicals,Communities and Social Services/Policy,Construction,Creative Economy,Digital/Communication/Information Technologies (including Software),Education,Electronics,Energy,Environment,Financial Services, and Management Consultancy,Healthcare,Leisure Activities, including Sports, Recreation and Tourism,Government, Democracy and Justice,Manufacturing, including Industrial Biotechology,Culture, Heritage, Museums and Collections,Pharmace

URL http://niesr.ac.uk/projects/prevalence-and-effects-performance-related-pay-britain-0
 
Description Our findings have been used directly by government policy analysts, government economists, the Bank of England and human resource (HR) managers in large corporations. Our findings have also been used by the media to inform the debate around performance-related pay. Policy analysts and government economists have been most concerned to hear the answer to four questions. First, what role did performance pay (PP) play in the smooth running of the labour market after the financial crisis of 2008? We have been able to demonstrate that PP had a modest, albeit significant, role to play in explaining the absence of real wage growth in the first few years after the recession. We have also been able to show that PP jobs were more likely to survive the recession than comparable fixed-wage jobs, consistent with employers making use of the wage flexibility inherent in PP jobs to retain employees in hard times. This has given policy makers valuable information on the role of PP in the face of economic shocks and has led policy makers to think harder about the value of PP in the future. These considerations have been evident in discussions at workshops and seminars attended by government policy analysts and economists, and in a speech made by Martin Weale, one of the co-investigators on the project who is also a member of the Bank of England's Monetary Policy Committee. Second, policy analysts have been interested for some time to introduce more PP into public sector jobs on the assumption that this should improve the efficiency with which public services are delivered. They have therefore wanted to understand more fully how PP operates in the public sector at present, and how this differs from the private sector. We have been able to indicate the types of workers and jobs that are exposed to various types of PP in the public sector. But, perhaps more importantly, we have shown that public sector PP does not conform to theoretical expectations about how PP operates, unlike PP in the private sector. This raises important questions about how and why PP is being used in the public sector currently, and has prompted government agencies to think more carefully about their objectives for PP in the public sector. This was apparent in discussions that followed the presentations of our findings at the Office for Manpower Economics and at a special session of the economists sitting on the Independent Pay Review Bodies. Third, there is new interest in worker well-being and its links to organisational performance. It was therefore timely that we were able to show that PP, and the size of PP payments, are positively associated with employees' job satisfaction. The Department for Business Energy and Industrial Strategy and others within government are now interested in the value of PP as an instrument for improving worker well-being in the hope and expectation that this may improve workplace performance via improvements in worker productivity. We have been able to demonstrate that there is a positive association between the use of PP and firm profitability and productivity. Fourth, policy makers have become increasingly concerned about the detrimental impact that wage inequality may have on economic performance. We have been able to show that, in contrast to one study for the United States, PP has not been major contributor to growing wage inequality in Britain. Concerns about the use of PP as a potentially major contributor to rising inequality thus appear ill-founded, and this is prompting policy analysts to consider other potential causes in more detail. It is also worth noting that the preference for evidence-based policy making has provided opportunities for us to engage with policy advisers to discuss the limitations of the current data infrastructure when addressing the links between PP and some of the issues noted above. We have begun discussions with the Bank of England about the development of high-frequency linked employer-employee data covering firms' output and labour costs, and we have initiated round-table discussions between academics, the Office for National Statistics and the UK Data Service about the further development of the Annual Survey of Hours and Earnings (ASHE) dataset for research use. We have also contributed to public debate about the utility of the Workplace Employment Relations Survey for research on pay issues. Turning to the use of our findings by the corporate sector this has taken two principal forms. First HR managers have been keen to establish how and why their competitors use various forms of PP to recruit, retain and motivate staff. We have been able to provide detail on these issues for nationally-representative populations of firms and workplaces with the array of large-scale data sets we have analysed. This has allowed HR managers to "benchmark" their operations against those of their competitors. Second, we have engaged in detailed analysis of one particular firm's compensation policies (ShareCo is the pseudonym we use) and, in particular, their use of a tax-advantaged all employee share plan. We have shown that members of the scheme outperform their non-member colleagues on a number of dimensions that are productivity-enhancing, a message the company is now disseminating via its industry networks. Finally, our findings have been used in the media to further understand the extent to which the financial crisis was, at least in part, driven by the PP-based incentives driving key workers in the finance sector. We have been able to show how extensive the use of PP is in the finance sector, and how the sector's reliance on PP grew dramatically prior to the 2008 crisis. We have also shown how rapidly the sector returned to the use of very substantial gearings between PP and salaries since 2010. However, we are less adamant than some others that PP is "to blame" for the crisis since there is little in our work to suggest that PP has been used to the detriment of firm performance.
First Year Of Impact 2011
Sector Education,Financial Services, and Management Consultancy,Other
Impact Types Societal,Economic

 
Description Citation in "Spare Capacity and Inflation", Martin Weale, Member of Monetary Policy Committee of the Bank of England to CBI, Belfast, 18 June 2014
Geographic Reach National 
Policy Influence Type Citation in other policy documents
 
Description Employee Share Plans - What's in it for your Firm? (Deloite, Shanghai) April 2012 
Organisation Computershare
Country Australia 
Sector Private 
PI Contribution Presentation of survey findings to employer
Collaborator Contribution bringing together clients to listen to presentation
Impact Surveys of employees, discussion papers and journal articles. Also changes in HRM practices in the firm.
Start Year 2006
 
Description Are Firms Paying More for Performance? (King's College seminar presentation) 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Participants in your research and patient groups
Results and Impact Seminar at Kings College, London, Department of Management

Participants showed great interest in findings not seen before
Year(s) Of Engagement Activity 2013
URL http://www.niesr.ac.uk/publications/are-firms-paying-more-performance#.VGNK3PmsUTF
 
Description Are firms paying more for performance (poster presentation) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other academic audiences (collaborators, peers etc.)
Results and Impact Poster presentation at the Workshop on Firm-Level Analysis of Labour Issues at UCL-Belgium, Louvain-la-Neuve (May 2014).
This led to useful discussions with other academics working in the field.

We were later asked to submit a copy of the article on which the poster was based to a special issue of the International Journal of Manpower
Year(s) Of Engagement Activity 2014
URL http://www.niesr.ac.uk/publications/are-firms-paying-more-performance-3#.VGDlr2ApWM8
 
Description Are firms paying more for performance? (RES presentation 2014) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? Yes
Geographic Reach International
Primary Audience Participants in your research and patient groups
Results and Impact Paper presented at 2014 Royal Economic Society (RES) Annual Conference, Manchester

developed thinking on paper
Year(s) Of Engagement Activity 2014
 
Description Coverage of our research in The Guardian, 12th November 2013 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Public/other audiences
Results and Impact Prompted enquiries about our research

Requests for further information about our research outputs
Year(s) Of Engagement Activity 2013
URL http://www.theguardian.com/commentisfree/2013/nov/12/performance-related-pay-risky-behaviour
 
Description Coverage of paper 'Are firms paying more for performance?' in the Financial Times, 7th April 2014 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Media (as a channel to the public)
Results and Impact Prompted enquiries about our research from practitioners (e.g. bank economists)

Increased public engagement with our research outputs
Year(s) Of Engagement Activity 2014
URL http://www.ft.com/cms/s/0/7df4aeba-bc14-11e3-a31c-00144feabdc0.html#axzz2yVR55aAQ
 
Description Does How You Are Paid Affect the Way You Feel? NIESR/NatCen Workshop on Linking Paid Work, Health and Wellbeing 2012 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Public/other audiences
Results and Impact Increased authors' desire to work on the issue.

Spawned collaboration with other labour economists.
Year(s) Of Engagement Activity 2012
URL http://www.niesr.ac.uk/event/event.php
 
Description Does performance pay increase wage inequality? (presentation at NIESR workshop) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Presentation at NIESR workshop on performance pay, to audience of academics and policymakers. Presentation resulted in useful discussions and feedback from the audience.

Useful feedback on developing paper on which the presentation was based.
Year(s) Of Engagement Activity 2014
URL http://www.niesr.ac.uk/publications/performance-pay-workshop-conference-slides#.VGIZcWApWUk
 
Description Eversheds Labour Relations Conference 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Got HR practitioners to engage with big questions about nature of performance pay, its incidence and effects

On-going relationship with Eversheds who provide legal and consulting services to large firms
Year(s) Of Engagement Activity 2012
URL http://www.niesr.ac.uk/pdf/241012_222626.pdf
 
Description Measuring performance pay: using the Annual Survey of Hours and Earnings and the Monthly Wages and Salaries Survey (seminar presentation) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Participants in your research and patient groups
Results and Impact Sparked discussion about further uses of the data, building on the experience we have gained in this project

Further discussions have taken place with colleagues that are likely to lead to new research projects based on these data
Year(s) Of Engagement Activity 2014
URL http://www.niesr.ac.uk/publications/measuring-performance-pay-using-annual-survey-hours-and-earnings...
 
Description Performance pay and wage flexibility in the Great Recession (presentation at NIESR workshop) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Presentation of findings to audience of policymakers and academics, at NIESR organised workshop on performance pay. Led to useful discussions and feedback for developing paper on which presentation based.

Useful feedback for further developing paper on which presentation was based
Year(s) Of Engagement Activity 2014
URL http://www.niesr.ac.uk/publications/performance-pay-workshop-conference-slides#.VGIZcWApWUk
 
Description The Performance Pay Premium (AEA, Boston) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other academic audiences (collaborators, peers etc.)
Results and Impact Questions after presentation on how research was conducted.

Interest in the WERS data set
Year(s) Of Engagement Activity 2014
 
Description The Performance Pay Premium (NIESR internal seminar March 2104) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Participants in your research and patient groups
Results and Impact NIESR seminar

Helped develop thinking on the paper
Year(s) Of Engagement Activity 2013,2014
URL http://niesr.ac.uk/sites/default/files/publications/Bryson%20et%20al%20-%20The%20Performance%20Pay%2...
 
Description The Performance Pay Premium: How Big Is It and Does It Affect Wage Dispersion? (University of Durham) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Participants in your research and patient groups
Results and Impact stimulated discussion

seminar at University of Durham Business School stimulating discussion on incidence, correlates and effects of performance pay
Year(s) Of Engagement Activity 2014
 
Description The performance pay premium (poster presentation) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other academic audiences (collaborators, peers etc.)
Results and Impact Poster presentation at the Workshop on Firm-Level Analysis of Labour Issues, UCL-Belgium, Louvain-la-Neuve, May 2014.
The poster led to useful discussions with other academics working in the field.

Gained useful feedback to inform further development of the paper on which this poster was based.
Year(s) Of Engagement Activity 2014
URL http://www.niesr.ac.uk/publications/performance-pay-premium-how-big-it-and-does-it-affect-wage-dispe...
 
Description What Happens to Performance-related Pay in Recession? (University of Aberdeen conference) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Participants in your research and patient groups
Results and Impact Paper presented at University of Aberdeen "New Research in Performance-related Pay Conference"

Helped inform fellow economists about firm payment of performance pay.
Year(s) Of Engagement Activity 2013
 
Description What's the Big Deal With Pay for Performance? (NIESR-organized workshop) 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? Yes
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact 50-60 policy makers, employers groups, unions, and academics discussed incidence and impact of performance pay in the UK's public and private sectors.

Network of academics and policy makers better informed about incidence and effects of performance pay.
Year(s) Of Engagement Activity 2013,2014
URL http://www.niesr.ac.uk/publications/performance-pay-workshop-conference-slides
 
Description What's the big deal with pay for performance? (NIESR blog) 
Form Of Engagement Activity A magazine, newsletter or online publication
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact NIESR Blog for the NIER Economic Review Special Issue

Section not completed
Year(s) Of Engagement Activity 2013
URL http://niesr.ac.uk/blog/whats-big-deal-pay-performance#.Unj_8_kRJc5
 
Description Who fared better? The fortunes of performance-pay and fixed-pay workers through recession (COPE, 2015) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Participants in your research and patient groups
Results and Impact Presentation at the 2015 Colloquium on Personnel Economics, University of Vienna. Talk led to useful discussion and feedback that will be incorporated into revisions to the paper.

Obtained useful feedback with which to further develop paper.
Year(s) Of Engagement Activity 2015
 
Description Who fared better? The fortunes of performance-pay and fixed-pay workers through recession (SOLE/EALE 2015) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other academic audiences (collaborators, peers etc.)
Results and Impact Poster presentation given at the Society of Labor Economists and European Association of Labour Economists World Meeting, 26-28 June 2015.
Presentation led to useful discussion with other academics and other attendees at the conference regarding the findings and future work.


Useful feedback obtained for further developing paper on which presentation based
Year(s) Of Engagement Activity 2015
 
Description Who fared better? The fortunes of performance-pay and fixed-pay workers through recession (WPEG 2015) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other academic audiences (collaborators, peers etc.)
Results and Impact Presentation at the 2015 conference of the Work, Pensions and Labour Economics Study Group (WPEG). Led to useful discussion and feedback on the work.

Obtained useful feedback that can be used to further develop paper.
Year(s) Of Engagement Activity 2015
 
Description Who fared better? The fortunes of performance-pay and fixed-pay workers through recession (presented at 2015 RES) 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? Yes
Geographic Reach International
Primary Audience Participants in your research and patient groups
Results and Impact Talk led to useful discussion which will be incorporated into revisions to the paper for submission to a journal

Obtained useful feedback with which to further develop the paper
Year(s) Of Engagement Activity 2015
 
Description Workshop to consider the further development of the ASHE and NES datasets with workplace identifiers 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact The meeting brought together government researchers, data providers and academics with experience of using the ASHE and NES to discuss linking ASHE, NES and components of the Business Structure Database. Each participant had information not known by the others, and this information was shared to give everyone a much better picture of what opportunities exist for extending the ASHE/NES dataset with workplace identifiers.

The participants have since engaged in further bilateral discussions and work has begun to fill in some of the remaining gaps in our knowledge, and to search out old datasets which are not in the public domain. A more formal program of work to extend the data has been planned out.
Year(s) Of Engagement Activity 2014