Who Fared Better? The Fortunes of Performance Pay and Fixed Pay Workers through Recession
| Author | Martin Weale,Lucy Stokes,Alex Bryson,John Forth |
| DOI | http://doi.org/10.1111/bjir.12245 |
| Date | 01 December 2017 |
| Published date | 01 December 2017 |
British Journal of Industrial Relations doi: 10.1111/bjir.12245
55:4 December 2017 0007–1080 pp. 778–801
Who Fared Better? The Fortunes of
Performance Pay and Fixed Pay Workers
through Recession
Lucy Stokes, Alex Bryson, John Forth
and Martin Weale
Abstract
Using the Annual Surveyof Hours and Earnings, we explore whetherthe fortunes
of employees paid for performance dier fromthose of fixed pay workers during
recession. Only in the bottom quintile of the wagedistribution were performance
pay employees morelikely to experience greater falls in real wagesthan fixed pay
employees. Accounting forfixed unobserved worker characteristics suggeststhat
this was not due to the wage-setting mechanism itself, but that other factors are
likely to be at play.While across most of the earnings distribution there was little
evidence of greater wageflexibility among performance pay employees, they did
have longer job tenure than fixed pay employees over the recession.
1. Introduction
The period since the financial crisis of 2008 has seen very low ratesof growth in
nominal earnings, and a decline in real earnings on a scale not experienced for
many years. At the same time, employment levels have held up much better
than past experience would have suggested given the sharp fall in output in
2008/2009 and the four years of stagnation which followed. While there have
been a number of discussions of these aggregatet rends, including some which
have sought to map the trajectories for individual workers (e.g. Elsby et al.
2013; Gregg et al. 2014), there has been relatively little in-depth analysis of
the role of wage-setting mechanisms in either exposing workers to risk or
protecting them from it through this period.1
Lucy Stokes and John Forth are at the National Institute of Economic and Social Research
(NIESR). Alex Bryson is at the UCL Department of Social Science, at the National Institute of
Economic and Social Research (NIESR) and at the IZA, Rutgers and WISERD. Martin Weale
is at King’sCollege London, the Centre for Macroeconomics and NIESR.
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2017 John Wiley & Sons Ltd.
Who Fared Better? 779
For many employees, a share of their total wage is conditional upon their
performance, or the performance of some broader unit to which they belong,
such as a team, a department or the whole firm. In this article, we examine
whether employees in these performance payjobs fared dierently in terms of
wage growth and labour market prospects through the recent recession than
their counterparts in fixed pay jobs. In theory, we might anticipate that, since
performance pay workers share the income risks of economic shocks with
their employers, their earnings may be more flexible than those of fixed pay
employees, at least in the depths of recession. However, for this very reason,
they may experience more stableemployment patterns than fixed pay workers,
whose ‘stickier’ wages may make them susceptible to job loss. This micro-
behaviour would, at a macro-level, translate into bonuses playing the role
suggested by Gordon (1982) as a factor facilitating wage flexibility and thus
employment stability in the face of macro-economic fluctuations.
The relationship between profit-sharing, employment and wages was
studied by Wadhwani and Wall (1990) using company data. Instead, we
look at data on individual workers and consider a broader definition of
performance pay that goes beyond profit sharing. To our knowledge, ours
is the first paper to explore the contribution of performance pay to wage
flexibility in the recent recession. We explore how the evolution of wage
growth has diered among individuals in performance pay jobs compared
with workers in jobs where there is no performance pay component, both
for all workers as well as considering dierences between workers at dierent
points in the earnings distribution. As well as examining the consequences
for wage flexibility, we consider the implications for job tenure. Our primary
data source is the Annual Survey of Hours and Earnings (ASHE): it provides
very accurate information on earnings and allows us to follow individuals
over time; this longitudinal component to the survey enables us to move
beyond a simple identifier of the receipt of performance pay and to arrive
at a more comprehensive identification of employees who are working in
performance pay jobs. Our analysis is conducted for the private sector only,
where performance pay is more prevalent.2
The article is organized as follows. Section 2 provides a brief overview of
the literature and sets out our key hypotheses. Section 3 introduces the data.
Section 4 presents our results, and Section 5 concludes.
2. Existing evidence and hypotheses
In the period before the financial crisis, nominal average earnings typically
grew by around 4–5 per cent per annum (Levy 2013: figure A4). This growth
rate briefly fell below zero in early 2009 and, after a short bounce, settled in
the region of 1–2 per cent over the period 2010–2012. Movements in nominal
regular pay (excludingbonuses) were less pronounced over this period, but the
growth rate similarly fell by at least half, from around 4 per cent before 2008
to around 1–2 per cent in the subsequent years. At the level of the individual
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2017 John Wiley& Sons Ltd.
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