Performance Pay and Job Satisfaction

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    Journal of Industrial online version of this article can be found at:

    DOI: 10.1177/0022185606066143

    2006 48: 523JIRJohn S. Heywood and Xiangdong Wei

    Performance Pay and Job Satisfaction

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    On behalf of:

    Australian Labour and Employment Relations Association

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    - Sep 27, 2006Version of Record >>

  • Journal ofIndustrial Relations (48)4pay schemes may also increase or diminish productivity and satisfaction. Brownand Sessions (2003) suggest that workers prefer employment environmentsseen as rewarding their productivity and that such environments are associatedwith increased worker optimism about future employment and pay. Kennedy(1995), on the other hand, models the adverse consequence on morale of indi-vidual performance pay schemes that generate substantial earnings dispersionbetween workers doing the same job. In particular, he shows that it is possiblefor the morale effect to swamp the additional effort effect with the result thatproductivity actually declines as a result ofthe pay scheme.

    This article adds to the literature by estimating the direct influence ofperformance pay schemes on job satisfaction. In previous research, Miceli andMulvey (2000) show that workers satisfied with their payment method are morehighly committed to their firm. Brown (2001) shows that workers who believetheir payment methods are 'fair' report higher levels of satisfaction with theirpay. There also exists a literature on how relevant pay referents and deviationsfrom them influence satisfaction with pay (Brown, 2001; Heneman and Judge,1999; Klein, 1973). Our work, however, is novel in that it directly examines thelink between the payment method and job satisfaction. The estimates confirmgreater job satisfaction for workers paid by profit sharing and by individualperformance pay even after holding constant the level of pay. We furtherbreakdown the job satisfaction measure to examine three specific facets ofjobsatisfaction finding a robust role for performance pay schemes. Further, we usepanel data to confirm that individual fixed effects are not generating the rolewe find for payment schemes. Finally, we break the individual performancepay into specific types of pay: piece rates, commissions, bonuses, tips and stockoptions. For all types of pay other than piece rates, we confirm greater jobsatisfaction relative to time rates, all else equal.

    Job Satisfaction and Payment SchemesRenewed interest in job satisfaction has generated a variety of findings and alarge literature. Job satisfaction depends on comparison income (Clark andOswald, 1996). Job satisfaction is higher for the youngest and oldest workers(Clark, Oswald and Warr, 1996; Groot and van den Brink, 1999), for womenin Britain and the US and for union members (Clark, 1996, 1997; Sousa-Posaand Sousa-Posa, 2000).1 Job satisfaction decreases with hours, increases withprovision of fringe benefits and varies with occupation, industry and skills andhas, in general, been declining over the last three decades in the United States(Blanchflower and Oswald, 2004). The emerging empirical framework hasbeen used to examine job satisfaction within particular occupations (Moneyand Graham, 1999; Ward and Sloane, 2000) and the job satisfaction of workersin developing countries (Mulinge and Mueller, 1998). It has been used toidentify compensating differentials in the labour market and to identify thecharacteristics ofgood jobs (Clark, 2001).

    Blanchflower and Oswald (2004) provide a review of how this recent

  • Heyzwood & Wei: Performanace Pay andJob Satisfactioneconomics literature grew from, and is related to, work in social psychology.Much of the work in economics focuses on worker and labour marketcharacteristics available in typical micro-data sources. The usual approachuses a Likert measure of self-reported job satisfaction as the realization of anunderlying latent continuous variable thought of as the person's true well-being or utility from the job. While this latent variable is observable only tothe individual and cannot be conveyed unambiguously to the interviewer,the observed Likert measure has been shown to correlate well with objectivecharacteristics and behaviour (again see Blanchflower and Oswald, 2004). Theliterature uses observed worker and job characteristics as determinants of theself-reported Likert measure and a fairly standard set of independent variableshas emerged. To date, payment methods have not been integrated into any ofthese estimations despite several reasons suggesting they play a role.

    Payment schemes are designed to more closely align the interests of workerswith those of the firm. Increased effort, along a variety of possible dimensions,is elicited through tying payment to results. For instance, workers paid piecerates or commissions equal to the full value added put forth the optimal effort byequating the marginal cost of effort with the marginal value added (see Lazear,1995: Ch. 2; Parent, 2002). Paid according to time rates, workers stop short ofthe optimal effort, failing to produce units that generate for them value addedgreater than their effort cost. Thus, otherwise equal workers paid accordingto piece rates earn greater surplus than those paid time rates.2 Indeed, a widerange of studies have confirmed that those on piece rates increase effort andearn more than otherwise equal workers on time rates (Ewing, 1996; Lazear,2000; Parent, 1999; Oettinger, 2001; Seiler, 1984). Thus, payment by resultsschemes may allow worker optimization that is not captured by other variablesin typical determinants ofjob satisfaction.Beyond the ability to optimize, workers may inherently value the process of

    being rewarded on the basis of results (Brown and Sesssions, 2003). Alternatively,payment schemes may be part of a bundle of HRM innovations associatedwith high performance workplaces. These workplaces may provide workingconditions that create greater feelings of belonging, esteem and commitment.Godard (2001) provides evidence on the association of job satisfaction andhigh performance workplaces. Thus, to the extent that payment schemes proxysuch workplaces, we might anticipate a positive association between paymentschemes and job satisfaction.

    Against the hypothesis that performance pay increases workers surplus,exists a portrait of workers striving for subsistence at rates inadequate to coverbasic needs. In Mexico, for instance, Beneria and Roldan (1987) report thatpiece rates are associated with jobs at the extreme bottom of social prestigeand earnings. Case studies of call centres in both the US and UK presentbleak pictures of low wage, high stress jobs made worse by computerizedmonitoring and piece rates (Drago, 1996; Fernie and Metcalf, 1999). Weller(1999: 205) cites Australian industrial relations decisions identifying piece ratesas 'a deplorable practice' associated with unregulated work. Indeed, the close


  • journal ofIndusrial Relations (48)4

    association between piece ratesand theabsence ofjobsecurityand entitlementsin the Australian clothing industry has prompted unions in that country to callfor the elimination of piece rates (Weller, 1999: 223). Indeed, criticism of piecework goes back at least to Marx who criticized the 'putting out' system in theneedle trades.More recently, a variety of mechanisms have been modelled that might

    alter the expectation that performance pay increases effort allowing workersto capture greater surplus. First, Gibbons (1987) formalized the traditionalunion fear of 'ratcheting: a process in which piece rates are set only to berevised down after workers respond with additional effort. At its most extremesuch a process might shift the surplus associated with additional effort fromthe workers to the firm.3 Second, workers may have reduced satisfactionfrom the increased earnings risk associated with performance pay schemesthat may not be fully built into compensating wage differentials (Myerson-Milgrom et al., 2002). Third, extrinsic incentives may crowd out the intrinsicmotivation to do a good job. Frey and Jegen (2001) review the literature froma variety of disciplines concluding that, in some circumstances, the crowdingeffect can actually dominate the traditional relative price effect associated withperformance pay. Fourth, it is possible that morale is reduced by the greaterpay dispersion that results from performance payment schemes. Kennedy(1995) assumes that the effort of individual workers depends, in part, ontheir morale which is determined by their relative pay status. Thus, contractsthat reward only individual performance undermine the morale of the leastproductive workers and reduce their effort (productivity). Kennedy shows thatif the workforce is sufficiently heterogeneous, this effect can dominate thetraditional competition for pay and result in lower productivity in a firm usinga performance pay scheme compared to one using time rates.

    Concern over relative pay is certainly evident in the actual design of paymentschemes and personnel management texts routinely stress that equitable payrates are important in creating harmony and productivity (see the studiescited in Akerlof and Yellen, 1988). Moreover, in statistical estimates followingthe introduction of performance pay, Marsden et al. (2001) show that whilethere is evidence of an incentive effect for those gaining larger than averageperformance pay increments, it is 'more than offset' by opposing effects onthose with low performance pay increments and by the'demotivating effectarising from difficulties of measuring and evaluating performance fairly'

    In summary, we face an important empirical issue that has received little orno direct examination. Theory predicts alternative influences of performancepay on job satisfaction. To the extent it allows optimization and an increasein surplus, it should increase satisfaction, all else equal. To the extent, thatit creates earnings risk, crowds out intrinsic motivation, lowers morale andresults in ratcheting, it should lower satisfaction. To examine which influencedominates we now turn to the data.

  • Heywood & Wei: Performanace Pay andJob Saifaction

    Data and Empirical MethodologyWeneed data that provides detailed information on the presence ofperformancepay and on job satisfaction. Specifically, we wish to examine more than a singleaspect of job satisfaction and to have a reasonable variation in the types ofperformance pay. We use the 1988 wave of the National Longitudinal Study ofYouth (NLSY). This US survey is a representative sample of more than 12,000men and women between the ages of 14 and 22 at the time of the first wavein 1979. The combination of attrition and the dropping of some respondentsfrom a military subsample in 1985 result in an employed sample that still exceeds6600 in 1988.

    While somewhat dated, the 1988 wave of the NLSY remains important as itprovides four measures of job satisfaction and allows us ultimately to identifya half dozen types of performance pay. In addition, the NLSY has the addedadvantages of two additional years (1989 and 1990) that provide some (butnot all) of these measures allowing for panel estimation. Thus, while morethan a decade old, this data remains among the most appropriate for ourtesting purposes and has been used recently by others with related interests(see Geddes and Heywood, 2003). Moreover, Blanchflower and Oswald (2004)confirm that that the basic results from estimating the determinants of jobsatisfaction have remains remarkably stable across industrial democracies andacross time.4 Nonetheless, the estimations remain specific to the US and tothe period ofthe late 1980s.The initial dependent variable is the extent of overall jobs satisfaction as

    indicated on a four point integer Likert Scale (zero to three).The survey questionis identified to respondents as one on 'global job satisfaction' and asks 'Howdo you like your job? 0) very much dislike; 1) somewhat dislike; 2) somewhatlike; or 3) very much like' Identical Likert Scale responses are then solicited toquestions asking how well respondents like their co-workers, supervisors andpay. It is these three additional questions that are asked only in 1988.The critical independent variables come from questions identifying two

    broad types of performance pay: profit sharing and individual performancepay. In each case, the questions simply ask whether or not the respondentsreceive those forms of pay. The question on individual performance pay goeson to further identify five types of performance pay: piece rates, commissions,tips, bonuses and stock options. We emphasize that some of the criticism ofperformance pay such as effects on morale are not likely for profit sharing(assuming it is distributed evenly across workers). Moreover, some of theindividual performance pay types, say bonuses, may depend on supervisoryevaluations of effort while others, say piece rates, more nearly measure output.Finally, these different types of performance pay are associated with differentjobs and workers with different characteristics (Geddes and Heywood,2003). Thus, in total, the many measures present an interesting variation ofperformance pay types for the empirical examination.We note that the variables on performance pay do not identify the share of

  • Journal ofIndustial Relations (48)4

    earnings that come from these types of performance pay, a limitation sharedwith most individual data sets (see Heywood et al., 1998). In addition, the NLSYdoes not have questions identifying typesofgroup performance paybeyond thaton profit sharing. Thus, while we identify those workers who received neitherprofit sharing nor individual performance pay as time workers there may beexceptions. The means of the performance pay variables are very similar tothose presented by other researchers using the NLSY (Parent, 2002).The means of the job satisfaction variables are shown in Table 1 separated

    by method of pay. The measure of job satisfaction is higher for both thoseon profit sharing and on individual pay compared to those on time rates.This carries over to all of the other three facets of job satisfaction with themost dramatic differences being in satisfaction with pay for which thoseon performance pay (of either type) report an average of 2.10 compared tothose on time rates of only 1.72. The general pattern within the differenttypes of individual performance pay is largely reproduced with those earningcommissions, bonuses or stock options reporting higher satisfaction than timerate workers on all four measures. Those earning tips report higher satisfactionthan those on straight time on three of the four measures while those on piecerates report higher satisfaction only with pay.

    Following past research, the values of job satisfaction are fitted to thecumulative normal distribution through ordered probit estimates (see Clarkand Oswald, 1996 and Clark, 1997 among many others). The ordered probit

    Table 1 Average Job Satisfaction by Payment Schemes

    Payment Schemes Job SatisfactionGlobal Co-workers Supervisor Pay

    StraightTime (3099) 2.17 2.56 2.40 1.72Profit Sharing (1839) 2.29 2.60 2.46 2.10

    Individual Pay Schemes (1683): 2.32 2.63 2.47 2.10Piece Rates (199) 2.11 2.44 2.29 1.91

    Commission (335) 2.31 2.67 2.48 2.21

    Bonus (868) 2.38 2.65 2.53 2.14

    Stock option (60) 2.58 2.73 2.53 2.41

    Tips (221) 2.24 2.66 2.38 1.84Sample Size (6621) 6621 6513 6577 6598

    Note: Questions on job satisfaction and their coding:1. Global job satisfaction: how (do/did) you feel about (the job you have now/your most recent

    job)? 0- dislike very much; 1 - dislike somewhat; 2 - like fairly well; 3 - like very much.2. Job satisfaction with co-worker: Job satisfaction, most recent job - friendly co-workers? 0

    - not true at all; 1 - not too true; 2 - somewhat true; 3 - very true.3. Job satisfaction with supervisors: Job satisfaction, most recent job - supervisor is competent in

    job? 0- not true at all; 1 - not too true; 2 - somewhat true; 3 - very true.4. Job satisfaction with pay: Job satisfaction, most recent job - income is good? 0- not true at all;

    1 - not too true; 2 - somewhat true; 3 - very true.

  • Heywood & Wei: Performanace Pay andjob Satisfactionestimation follows appropriately when the dependent variable has a naturalordering, such as from least to most satisfied (see McKelvey and Zavonia,1975) and can be used to predict the probability of reporting each value forjobsatisfaction for variation in the values ofthe independent variables.

    Table 2 Variable Means and Standard Deviations (n=6545)

    Variables Mean Std.Dev MeaningsPiece rate 0.030 0.171 Dummy=1 if worker is paid by a piece rateCommission 0.050 0.218 Dummy=1 if worker receives a commissionBonus 0.131 0.338 Dummy=1 if worker receives a bonusStock option 0.009 0.095 Dummy=1 if worker receives a stock optionTips 0.033 0.179 Dummy=1 if worker receives tipsProfit sharing 0.277 0.447 Dummy=1 if worker receives profit sharingFemale 0.467 0.499 Dummy=1 if respondent is female

    Black 0.248 0.432 Dummy=1 if respondent is African AmericanHispanic 0.125 0.331 Dummy=1 if respondent is HispanicMarried 0.490 0.500 Dummy=1 if respondent is currently marriedSupervisor 0.383 0.486 Dummy=1 if respondent is a supervisorAge 27.047 2.251 Years of ageEducation 12.892 2.341 Years of completed educationTenure 145.28 144.96 Months of tenure on current jobHours 41.404 8.540 Weekly hours of workUnion 0.120 0.325 Dummy=1 if respondent is a union memberPublic 0.118 0.322 Dummy=1 if respondent's primary employer is the


    Plant size 514.59 2396.43 The number of employees in respondent'sworkplace

    Pension 0.510 0.500 Dummy=1 if respondent has an employerprovided pension plan

    Childcare 0.042 0.201 Dummy=1 if respondent has employer providedcfhildcare

    Health Ins 0.737 0.440 Dummy=1 if respondent has employer providedhealth insurance

    Vacation 0.782 0.413 Dummy=1 if respondent has employer paidvacation days

    LogPay 2.018 0.512 The natural log of hourly earningsPromotion 0.246 0.430 Dummy=1 if respondent receives any promotion

    since last interviewInjury 0.098 0.297 Dummy=1 if respondent suffered from injury on

    current job since the last interviewAFQT 40.464 29.552 Armed forces qualification test

    Source: 1988 wave of NLSY.

  • Journal ofIndustial Relations (48)4

    The independent variables are shown in Table 2 and their choice largelyfollows the economics literature on job satisfaction. They include demographic,employment relations and human capital variables. Among these is the hoursof work which allows us to distinguish between full and part time workers. Inaddition, we will use occupation controls (8 categories), industry controls (13categories), region controls (5 categories), the provision of a series of fringebenefits, actual earnings and comparison earnings as explanatory variables.Thecomparison earnings measure is basedon a traditional log earningsequation andis the predicted earnings for each individual which proxies what an otherwiseequal respondent would be expected to earn (Clark and Oswald, 1996).

    Estimation of the Determinants of Job SatisfactionTable 3 presents the estimation of overall job satisfaction using the 1988 wave.The controls act largely as expected with minorities and those with an injuryreporting lower job satisfaction and supervisors, those with fringe benefitsand with chances for promotion reporting higher job satisfaction. Those withhigher earnings report greater overall job satisfaction and those with higher

    Table 3 Estimates ofJob Satisfaction (1988 NLSY)

    (1) (2) (3) (4)Global Job Satisfaction Satisfaction SatisfactionSatisfaction with Co-workers with Supervisor with Pay

    Constant 2.486** 2.322** 2.089** .8897**(7.63) (6.452) (5.947) (2.736)

    Individual .1605** .2424 .0220 .2438**Performance Pay (4.247) (0.585) (0.567) (6.515)

    Profit Sharing .0937** -.0100 .0656* .1176**(2.507) (0.247) (1.716) (3.122)

    Female -.1478** -.0668 -.0913** -.0788*(3.469) (1.414) (2.038) (1.875)

    Black -.2687** -.3148** -.2066** -.1543**(6.709) (7.325) (4.949) (3.898)

    Hispanic .0413 -.0445 -.0278 -.0001(0.846) (0.873) (0.556) (0.002)

    Married .0979** .2777 -.0089 .1096**(3.262) (0.860) (0.267) (3.673)

    Supervisor .0745** -.0037 -.0437 .0009(2.331) (0.106) (1.299) (0.029)

    Age .0069 .0058 -.0002 -.0144**(1.042) (0.817) (0.028) (2.251)

    Tenure -.0001 .0020 -.0003** .0001(0.090) (1.470) (2.531) (0.713)

  • Heywood & Wei: Performanace Pay andjob Satisfaction

    (1)Global JobSatisfaction

    Union .1284**(2.350)

    Establishment -.0003**Size (4.710)Pension .0927**

    (2.235)Hours .0039**

    (2.190)Child Care .1931**

    (2.740)Vacation -.0625

    (1.365)Health .2026**

    (3.977)Public -.0319

    (0.530)Promotions .2533

    (7.153)Injury -.1490*

    (7.153)Wage .2176**

    (6.666)Comparison -.7500Wage (4.967)SMSA .0419

    (0.095)Urban -.0142

    (0.305)Regions YESIndustry YESOccupations YESMu(1) .7803**

    (25.46)Mu(2) 2.280**

    (63.76)Chi-squared 484.0**N 6545


    with Co-workers-.1316**(2.287)-.1687**(2.246)-.0500(1.128).0018














    with Supervisor-.1889**(3.447)-.0001(1.368)-.0078(0.185).0018




    (3.701)-.1 156**(2.443).0660*






    1 .667**(54.06)256.1 **


    (4)Satisfactionwith Pay


    .1 826**(4.444).0075**





    (3.772)-.2167**(4.835)1 .002**







    Note: *Significant at the 10 percent level. "Significant at the 5 percent level.

    ----- --- --- __ --- ----

  • Journal ofIndusial Relations (48)4comparison income report lower overall job satisfaction.Thus, as actual earningsare further above predicted earnings, the worker reports greater satisfaction.The surprising coefficients are those for work hours and unionization whichare both positive and that for women which is negative. These results havebeen replicated in other waves of the NLSY from the 1 980s and may reflect therelatively young age of the cohort (see Donohue and Heywood, 2004).

    Importantly, both measures of performance pay emerge with large andstatistically significant coefficients. Thus, despite 50 explanatory variablesthose receiving either individual performance pay or profit sharing reportgreater overall job satisfaction, all else equal. The magnitude of the effectsis explored by taking all variables other than performance pay to be at theirmean levels and predicting the satisfaction probabilities altering the paymentmethod. Thus, the first column of Table 4 shows a predicted probability ofhaving the lowest job satisfaction of being .033 for those with neither typeof performance pay. This contrasts with a smaller .026 probability for thosewith profit sharing and a still smaller .022 probability for those with individualperformance pay and .018 for those with both types of performance pay. Thus,the presence of both types of pay (holding actual earnings constant) cuts theprobability of being in the least satisfied category roughly in half. Conversely,performance pay increases the probability of having the most job satisfactionas shown in Table 2.

    Table 4 Predicted Probabilities ofJob Satisfaction

    Without Profit Individual Profit sharingperformance sharing performance and individual

    pay pay performance payVery much dislike .033 .026 .022 .018

    Somewhat dislike .105 .091 .083 .071

    Somewhat like .481 .485 .486 .487

    Very much like .381 .398 .409 .424

    Note:These are projects based on the estimation reported in Column 1 ofTable 3. All variablesare held at their mean other than the performance pay indicators.

    We now exploit the three facets ofjob satisfaction available in the 1988 waveby replicating our estimation from column one with each of these measures.The second column of Table 3 shows the estimation of satisfaction withco-workers. This estimation is remarkably flat with only a small handful ofcoefficients statistically significant. Union members and those in larger firmsare less satisfied with their co-workers while those with a chance of promotionand with childcare are more satisfied.

    There is no indication that performance pay influences satisfaction withone's co-workers. Thus, the notion suggested by Drago and Garvey (1998)that individual performance pay may generate less 'helping effort' and more

  • Heywood & Wei: Performanace Pay andJob Satisfactioncompetition among co-workers thereby generating more negative feelingstoward co-workers receives no support. Similarly, the contention that profitsharing should increase helping effort and generate more positive feelings getsno support. This contrasts with Rotemberg's (1994) claim that profit sharingmay elicit better attitudes toward co-workers and a shift toward altruism withinthe firm.The third column shows the estimation of satisfaction with their supervisor.

    While not as pronounced as the results on overall satisfaction, many ofcoefficients follow the same pattern with blacks, females, union members andthe injured reporting less satisfaction and those with higher wages, childcareand chances of promotion reporting greater satisfaction. There is no evidencethat individual performance pay influences satisfaction with supervisors butthere is weak evidence that those on profit sharing feel more satisfied with theirsupervisor. This is consistent with work from the German Socio EconomicPanel suggesting that conflict with one's supervisor is reduced by the presenceof profit sharing (Heywood, Jirjahn and Tsertsvadze, 2005a).The final column shows the estimation of satisfaction with pay. The controls

    follow a similar pattern to that already established with females, blacks andthose injured reporting lower satisfaction with pay. Those with fringe benefits,chances of promotion and those married reporting greater satisfaction withpay. The earnings and comparison earnings variable follow the results fromoverall job satisfaction. Not following the earlier results is the finding that olderworkers have lower satisfaction with their pay all else being equal.Yet, followingthe overall job satisfaction results, are those for individual performance payand profit sharing. Both emerge with large positive and significant coefficients.Thus, across all facets and the overall measure, performance pay, whenstatistically significant, positively influences job satisfaction. There is evidenceof such an influence in the overall measure, the pay measure and the supervisormeasure.The pay measure results are particularly interesting as the level of pay is

    controlled for in the estimations so the correlations with performance pay donot simply reflectthefactthatthose on such schemes may earn morethan thosenot on such schemes. Instead, there is an effect of the pay scheme independentof the level of earnings. This, in particular, seems consistent with the notionthat tying pay to performance allows workers to optimize.We now combine all three waves of the NLSY to control for fixed effects.

    Such an effort may be critical to control for sorting. Indeed, Lazear (2000)suggests that 56 percent of the increase in productivity associated with piecerates results from attracting inherently more productive workers (sorting).These same workers may be more likely to report job satisfaction raising thepossibility that performance pay is not genuinely associated with greater jobsatisfaction merely that it attracts those who would otherwise report beingmore satisfied under any method of pay.To control for fixed effects (worker specific effects on job satisfaction) we

    estimate fixed-effects ordered probits using the within worker variation across

  • Journal ofIndustrial Relations (48)4

    the three waves.5 The specification used in Table 3 is replicated recognizingthat variables which show no variation across the years for a given workerwill drop out of the estimation (such as race and gender). Also those workerswho have the identical level of job satisfaction in all three years add nothingto the underlying likelihood function and drop out of the estimation as well.Finally, some observations are only in the panel two of three years so the panelis unbalanced with a resulting final number of observations of 8859 across thethree waves.Column 1 of Table 5 summarizes the results. Most of the controls carry

    over with same sign and with statistical significance. The noticeable changesinclude the emergence of a strong negative effect for additional tenure and theloss of any union effect. The latter result suggests that the previous influenceattributed to unionization may be a result of the individuals who are sortedinto unionization. The critical measures of performance pay both emergewith the same sign, rough size and levels of statistical significance. Thus,even after accounting for individual worker effects, those receiving indiyidualperformance pay or profit sharing report higher overall job satisfaction.We next use the disaggregated measure of individual performance pay to

    isolate the separate influences of receiving piece rates, commissions, bonuses,stock options or tips. Thus, the fixed effect estimate of job satisfaction now

    Table 5 Panel Estimates ofjob Satisfaction (i988-9ggo NLSY)

    (1) (2) (3) (4)Global Job Global Job Global Job Global JobSatisfaction Satisfaction Satisfaction Satisfaction

    (MEN) (WOMEN)Individual .1537**performance pay (3.224)Piece rates -.3095** -.2697* -.2104

    (2.725) (1.697) (1.083)Commissions .2814** .5538** -.0351

    (3.090) (4.671) (0.226)Bonuses .1322** .1613** .0452

    (2.271) (2.108) (0.483)Stock options .5882** .6603** .5737**

    (3.392) (2.821) (1.965)Tips .2937** -.1644 .6735**

    (2.314) (0.882) (3.841)Profit sharing .1231** .1134** .1076* .0422

    (2.694) (2.314) (1.677) (0.614)Married .0763* .0823** .0348 .1177**

    (1.935) (2.084) (0.631) (2.001)Supervisor -.3481 ** -.3488** -.4293** .2955**

    (8.059) (8.055) (7.121) (4.439)

  • Herywood & Wei: Perfotrmanae Pay andjob Satifaciion



    Establishment size










    Comparison wage






    (1)Global JobSatisfaction

    (2)Global JobSatisfaction

    -.0006(4.879)-.0455(0.721)-.0001(0.310).2071 **(3.903).0054**(2.036).2523**(3.125).0295(0.456).2807**(4.137).1967**(2.612).3310**(7.011)-.3671 **(5.001).3386**(6.791)-.7604**(4.871)-.0553(0.779).0296(0.404)YES



    1.41 6**(34.80)3.793**(77.11)8859

    -.0006**(5.045).0228(0.362)-.0001(0.278).2001 **(3.779).0062**(2.342).2625**(3.260)-.0248(0.384).2718**(4.012).2067**(2.746).3313**(7.034)-.3704**(5.051).3491 **(7.022)-.7065**(4.526)-.0476(0.671).0214(0.293)YESYES



    (3)Global JobSatisfaction

    (MEN)-.0007**(4.092).2389**(2.854)-.0001(1.117).4000**(5.328).1001 **(2.805).0439(0.357).0691(0.790).4894**(5.300).3238**(2.844).3566**(5.587)







    (4)Global JobSatisfaction(WOMEN)-.0007**(3.774)).1978*(1.868)-.0001(0.323)-.0178(0.220).0003(0.064).5175**(4.834)-.1896*(1.841).2081 **(1.981)-.0819(0.323).3985**(5.535)-.3529**(2.705).3515**(4.503)-.4625(1.633)-.0161(0.149)-.1991*(1.794)YESYES



    Note: *Significant at the 10 percent level. "Significant at the 5 percent level.

  • Journal ofIndusial Relations (48)4has six indicators of performance pay. The results are presented in column 2.Profit sharing and all of the five measures of individual performance pay havestatistically significant coefficients. There is, however, an interesting pattern.Piece rates emerge with a negative coefficient even as the other four individualperformance pay measures and profit sharing have positive coefficients.

    It is possible that the negative coefficient for piece rates reflects either themorale effect (Kennedy, 1995), the deterioration of helping effort and co-worker relations (Drago and Garvey, 1998) or the ratchet effect (Gibbons,1987). Yet, these same arguments would seem to apply to commissions whichare often taken as a sales equivalent of piece rates. Interestingly, Geddes andHeywood (2003) show that there are actually substantial differences betweenthose who receive piece rates and those who receive commissions. While piecerate workers are disproportionately shorter tenure workers and women (Goldin,1986), those on commissions are longer tenure workers and disproportionatelymale when compared to other workers in sales.We follow-up the suggestion that gender may be an important related

    variable by estimating the fixed effect probit separately by gender. Whilethis reduces sample size, some basic differences are evident as shown in thethird and fourth columns of Table 5. The pension and hours results evident inthe combined sample are generated exclusively by men but the childcare andmarital status results evident in the combined sample are generated exclusivelyby women.6There are substantial differences in the role of performance pay as well.

    The male results largely mimic the combined sample with the exception oftips for which there is an insignificant coefficient. The female results reveala strikingly different pattern. First, profit sharing is not even close to beingimportant for women. This suggests that while men value profit sharing,holding the wage constant, women do not value profit sharing. This result fitswith the conjecture that women will not be well motivated by group schemesas such schemes are common in circumstances of interdependent productivityand in these circumstances the lower labour force attachment ofwomen placesthem at a disadvantage. The point is not to conflate job satisfaction withmotivation but rather to stress that the mutual monitoring that is associatedwith profit sharing may have a less positive influence on those workers leastable to respond to such monitoring with additional effort. Thus, Heywood etal. (2005b) present German evidence that while profit sharing causes greatercooperation among men, it does not do so for women. Thus, if women are lessable to respond to group incentives, they may feel greater peer pressure and soless job satisfaction.

    Second, the pattern of individual performance schemes is different forwomen. They do not show the same negative influence from piece rates or thesame positive influence from commission or bonuses. In general, there appearsto be less of a role played by methods of pay in the job satisfaction of women.The absence of a negative influence from piece rates for women may reflectthe association of piece rates with circumstances without interdependent

  • Heyzvood & Wei: Performanace Pay andjob Satisfaation

    productivity providing more flexibility for home and work responsibilities(Heywood and Wei, 1997).

    ConclusionThe object of this article has been to test for the direct influence of performancepay schemes on job satisfaction. There are many contradictory and compleximplications from theory but a basic building block is that such schemes rewardproductivity and so allow workers to optimize in a way that a salary or hourlywage does not. Thus, we anticipated that both individual performance pay andprofit sharing should be associated with greater job satisfaction even holdingthe wage constant. In general this anticipation has been confirmed but thereremain some interesting patterns that suggest a more complex association.

    In the cross-sectional estimations both individual pay schemes and profitsharing are associated with greater job satisfaction. These associations carriedover to two of the three facets with the results for satisfaction with pay beingextremely strong. In panel estimates, holding fixed worker effects constant, thesame two performance pay indicators retained strong statistical significance.The fixed effect estimates then disaggregated the individual performancepay variable into five constituent parts. The indicators for commissions,tips, stock options and bonuses all joined profit sharing in having a strongpositive association with job satisfaction holding constant the level of earnings.Interestingly, piece rates emerged with a negative association.

    Dividing the results by gender revealed that most of the associations werebeing generated by males. The differences across genders suggest that the linkbetween payment method and pay need not be universal.Women in particularseem to get no additional satisfaction from profit sharing schemes, a resultwe suggest may reflect their relative disadvantage in circumstances of teamproduction where there is a greater premium on labour force attachment.We note that our results are specific to the United States and to the time

    frame of our data. They certainly deserve to be examined in other countries andin more recent years. In addition, detailed information on the share of earningsassociated with performance pay schemes might be able to shed further lighton the relationship between such schemes and job satisfaction.


    The authors thank the Centre for Public Policy Studies at Lingnan University for a travelgrant that allowed the authors to work together and recognize the valuable comments ofW.S. Siebert and David MacPherson as well as those of seminar participants at Florida StateUniversity and the University of Melbourne.


    1 Donohue and Heywood (2004) show that the gender difference in job satisfaction maynot exist among younger US workers.


  • Journal ofIndustrial Relations (48)42 This begs the question why all workers are not paid with piece rates but technology

    of production often prohibits identifying individual contributions or pieces (Alchianand Demsetz, 1972) and in these circumstances appropriate piece rates cannot beestablished.

    3 This view would seem to depend on the presence of monopsony power ofthe firm in thelabor market.

    4 They also show that while overall job satisfaction has been stable in the UK it hasdeclined recently in the US.

    S The estimation was performed with specific ordered probit with fixed effect programs inLimdep 8.0.

    6 The fact that men and women value different fringe benefits and that these differencesare reflected in job satisfaction has been shown by Donohue and Heywood (2004).


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    W)JIRJournal ofIndiustrial Relations (48)40 Industrial Relations Society of AustraliaSAGE Publikations Ltd,London, Thousand Oaks and New DelhiISSN 0022-1856, (48)4 541-546[DOI: 10.1 177/0022185606066144]

    Recent Developments in Co-determinationatVolkswagen: Challenges and Changes

    Thomas HaipeterInstitute Work and Technology, Germany

    IntroductionFor well over a decade, there has been a growing interest in the institution ofco-determination by German social scientists. While co-determination is seenfrom different angles, there is one denominator common to all research. It isthe question about the risks and opportunities of co-determination in an age offar-reaching and radical changes in the worlds of work and economy, charac-terized by the globalization of production and the financialization of corporategovernance. Is co-determination being rendered irrelevant by these changes?Or can co-determination come to play a role of its own in the economic process- as a social and democratic corrective? A very interesting example of the chal-lenges and changes of co-determination is Volkswagen (VW). The exampleof VW shows that globalization and financialization can be accompanied bynew forms of regulation of industrial relations and enhanced opportunities forco-determination to participate in entrepreneurial decision-making processes.This view is based on evidence from extensive field research in the archivesof the company and on interviews with experts of management and the workscouncil at all levels in the company.

    Contact address: Thomas Haipeter, Institute Work and Technology, Germany,Munscheidstral3e 14,45886 Gelsenkirchen, Germany. [email:]


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