The Economic Effects of Multiple Incentives

Introduction There has been growing use of multiple pay incentives in British firms and workplaces over recent years. Nearly forty per cent of British workplaces used two or more incentive arrangements by the mid-2000s compared with just over twenty per cent two decades earlier (Pendleton et al 2009: 279). Most instances of multiple incentives combine individual with collective incentives. Recent theory in Personnel Economics suggests that adding collective incentives to individual incentives can reduce the dysfunctional effects of the latter by widening the range of performance metrics and by encouraging greater employee commitment. In this way distortion of task behaviour and manipulation of information by employees is less likely to occur. Our starting point is that incentive pay schemes can have both positive and negative effects on worker behaviour, and the addition of further schemes may mitigate the negative effects. Alternatively, some incentives schemes have weak positive (" low-powered ") effects which may be enhanced by adding further schemes. The logic of these is that combinations of incentive pay schemes will have a complementary impact on workplace and company performance. As far as we know, this possibility has not been empirically investigated to date despite the theoretical interest. The paper assesses the effects of multiple pay incentives on labour productivity and product or service quality. The focus is three types of pay incentives: individual payment by results (IPBR), collective payments by results (CPBR) and profit-sharing (PS). The data source is the 2004 Workplace Employment Relations Survey: this survey enquires as to the use of these three forms of pay (along with employee share ownership plans and merit pay) 3. The main approach in the paper is to examine the " marginal effects " of combinations of scheme presence (i.e. interactions) on productivity and quality " outcomes ". As well as examining these effects for the sample of workplaces as a whole, we consider whether the nature of work organisation influences the effectiveness of combinations of pay incentives. We then examine how the marginal effects of individual performance pay on productivity and quality are affected by the involvement of steadily increasing proportions of the workforce in a profit sharing scheme. 3 We do not focus on employee share ownership in the paper because some share plans observed in WERS requires employees to contribute to plans – in these cases share plans do not function as rewards in the same way as …