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Firms' Choice of Method of Pay

Charles Brown

No 3065, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Three types of pay-setting methods are piece rates (pay mechanically linked to output), merit pay (pay based on less formal judgments by one's supervisor), and standard rates (pay based on one's job classification and perhaps seniority, but not directly on performance). Firms' choice among methods depends on balancing the gains from more precise links between performance and pay against the costs of either precise or judgmental measures of output. Using data from the BLS Industry Wage Study program, hypotheses suggested by this observation are tested and for the most part confirmed.

Date: 1989-08
Note: LS
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Published as Industrial and Labor Relations Review, Vol. 43, No. 3, Special Issue, pp. 165-182, (February 1990).

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