Performance Related Pay and Health: An Interdisciplinary Study

The 18th Century economist Adam Smith observed in his book Wealth of Nations, "Workmen...when liberally paid by the piece, are very apt to overwork themselves, and to ruin their health and constitution in a few years". Thus, even as early as 1776, economists observed a link between work and health - specifically here, how the method of pay affects health. Recently a number of research papers by economists and healthcare academics finds a strong relationship between performance-related pay (PRP) (i.e. being paid according to how well you perform) and health in large surveys of workers and in case studies. Those being paid by PRP typically show poorer health. However, it is not currently known whether PRP causes poor health in workers or whether people with poor health are simply more likely to work in PRP jobs. The present study will investigate this. Similarly, little is known about how PRP may affect health. The present study will investigate the possibility that workers paid by PRP report poorer health because PRP work is stressful in ways that are detrimental to health.

Economic theory would predict several potential pathways linking PRP to health, but research by two of the investigators (Bender and Theodossiou, 2014) suggests that because PRP induces increased effort at work and generates an uncertain stream of pay, stress will be higher for PRP workers than for workers paid under a typical salary scheme. Given the large and growing medical literature on the relationship between (particularly low-grade and constant) stress and physical and mental health, it is possible that if PRP increases stress, it will have negative health outcomes, all things equal.

The investigators designed a small pilot study (Allan et al. 2017) to take a look at this linkage in an experimental framework. Experiments have several advantages over survey data. First, they can explicitly control for the possibility that people select PRP jobs by randomising PRP across subjects so we know the direction of causality. Second, they allow us to measure stress both subjectively (by asking subjects how stressed they are) and objectively (by measuring salivary cortisol, a hormone that the body creates in larger quantities in response to acute stress). With only 40 individuals and a simple design, the investigators found significant differences in subjective stress and cortisol levels between the PRP and nonPRP groups.

The overarching goal of this project is to investigate this link more comprehensively. It is broken into several distinct projects. First, it will expand the subject pool and employ a crossover design to test the robustness of the findings in the pilot study. Second, it will investigate how important self-selection is in moderating the stress response to PRP. Most workers choose their payment contract, and so allowing subjects to choose the payment type and then measuring stress will examine how important this issue is. Third, we will look at anticipation effects of PRP to see if knowing in advance that the day ahead involves PRP work increases a worker's stress. Fourth, we will look at how intensity (via increased rewards and penalties) and monitoring by supervisors and peers can impact the stress generated by PRP. Finally, we will analyse a large survey of British workers where there is both information on the method of pay and noncortisol biomarkers related to stress. This is a useful parallel analysis to see whether the controlled conditions of the lab are found in the 'real world' where we cannot guarantee exogeneity.

In sum, this research will help establish the link between PRP and stress. Given the potential for stress to affect physical and mental health, the implementation of PRP may have significant impacts on workers through their individual health, on firms through lost productivity and on society through lost economic output and increased public health costs.

Academic Impact. This project will offer a novel interdisciplinary research project. While salivary cortisol as a measure of stress is widely used in health and psychology research, there is little penetration in economics research. Indeed, a recent (Nov 2017) search on 'Econlit', the most frequently used bibliographic database for Economics research, showed less than 20 papers using cortisol in economics research in any context. Beyond the interdisciplinary aspect of the research, the research will provide evidence regarding whether stress is a mechanism that links PRP to poor health using both experimental and survey data methods to investigate the link. Findings will be communicated through presentations at conferences, journal articles and an interdisciplinary conference.

Non-academic Impact. Beyond the academic impact, the research will identify areas that will be of interest for a number of non-academic stakeholders. Since the PRP-stress-poor health link is likely little known, understanding the unintended consequence of PRP on health can either decrease the use of PRP or have firms and government develop policies to mitigate the effects of the increased stress. The relevance to particular stakeholders is described below.

Politicians and Public Health Officials: As discussed in the Pathway to Impact section, the public health aspect of this research is potentially large. Nearly a quarter of all workers are paid at least in part by PRP (Bryson et al. 2014), a percentage that has been growing slowly but steadily. Similarly, stress-related mental and physical illnesses have increased steadily and is estimated to cost the NHS over £3 billion (HSE 2016b). Understanding whether stress caused by PRP contributes to these costs can help direct policy to reduce the potentially significant costs borne by the NHS and society to the increase in PRP.

Employers: While economic research has pointed to the productivity enhancing effects of PRP, it has ignored the unintended consequence of any health effects of the stress of PRP jobs. Lost workdays to physical and mental illnesses result in costs of £2.8 billion to firms (HSE 2016b). If PRP even accounts for 10% of this cost (which is less than the incidence of PRP), firms could save nearly £300 million through reductions in sickness absences. Thus, a better understanding of any link may give firms incentives to think about ways of mitigating stress or even find other forms of compensation.

Workers: Direct costs to employees due to physical and mental illness are even greater at £8 billion (HSE 2016b). Better understanding of the potential health costs of PRP can help workers make better informed decisions about strategies for reducing the stress from such jobs or perhaps to seek to avoid such employment contracts.

Specific activities to generate impact are discussed in the Pathways to Impact section, but the most important are twofold. First, a 'Practitioner Panel' with politicians and public health officials, employer and worker representatives will be convened to give an outlet for the findings of the research as well as take input from key stakeholders on the practical aspects of the PRP-stress-health link to inform a series of 'Policy Papers' around the findings in the research. Second, an interdisciplinary 'Academic/Practitioner Forum' conference will be held in Aberdeen where results from the project will be discussed, alongside other academics working in similar areas of the work and health relationship, to an audience that would include both academics and practitioners and public health officials. It would also include a round-table discussion of the issues raised in the research and how these findings can translate to practitioners. Using a project-dedicated webpage and Twitter account, we will coordinate our activities with the University's Communication and Public Relations teams to generate press releases to publicise the results from the project.