Performance Pay as an Incentive for Lower Absence Rates in Britain

Pouliakas, Konstantinos and Theodoropoulos, Nikolaos (2009): Performance Pay as an Incentive for Lower Absence Rates in Britain.

Abstract

Using two cross-sections of a representative dataset of British establishments, the effect of various forms of incentive pay (e.g. performance-related pay (PRP), profit-sharing, share ownership, cash bonuses) on the absence rates of firms is investigated. Incentives that are tightly linked to individual or group merit are found to be significantly related to lower absenteeism. Important disparities in the effect of PRP on absenteeism are detected, which depend on the extent of monitoring, private-public status, teamwork, and other organizational changes. The findings are robust to the potential endogenous relation between monitoring, PRP and absenteeism, and have important implications for the design of optimal compensation policies by firms.

• Item Type: MPRA Paper
• Language: English
• Keywords: performance-related pay, incentives, absenteeism
• Subjects: J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods

References

Allen, S. (1984), “Trade unions, absenteeism and exit voice”, Industrial and Labor Relations Review, 37, pp. 331-345.

Allen, S. G. (1981), “An Empirical Model of Work Attendance”, Review of Economics and Statistics, 63, 77-87.

Arai, M. and Skogman Thoursie, P. (2005), “Incentives and selection in cyclical absenteeism”, Labour Economics, 12, 269–280.

Arthur, J.B. and Jelf, G.S. (1999), “The Effects of Gainsharing on Grievance Rates and Absenteeism Over Time”, Journal of Labor Research, 20 (1).

Artz, B, (2008), ‘Firm Size, Performance Pay and Job Satisfaction’, Labour, 2, 315-343.

Askildsen, J.E., Bratberg, E., Nilsen, Ø.A., (2002), “Unemployment, labour force composition and sickness absence: a panel data study”, IZA Discussion Paper, No. 466.

Barham, C. and Begum, N. (2005), “Sickness absence from work in the UK”, Labour Market Trends, Office for National Statistics, April: 149-158.

Barmby, T. Sessions, J.G. and Tremble., J. (1994), "Absenteeism, Efficiency Wages and Shirking", Scandinavian Journal of Economics, 96, 561-566.

Barmby, T. (2002), “Worker absenteeism: a discrete hazard model with bivariate heterogeneity”, Labour Economics, 9, 469–476.

Barmby, T. and Stephan, G. (2000), “Worker Absenteeism: Why Firm Size May Matter”, The Manchester School, 68, 568-577.

Barmby, T., Ercolani, M. and Tremble, J. (2002), “Sickness Absence: An International Comparison”, Economic Journal, 112, F315-331.

Barmby, T., Orme, C. and Treble, J. (1995). “Worker absence histories: a panel data study”, Labour Economics, 2: 53–65.

Barmby, T., Orme, C., and Treble, J. (1991), “Worker absenteeism: an analysis using microdata”, Economic Journal, 101, 214–229.

Barmby, T.A., M.G. Ercolani, and J.G Treble (2004), ‘‘Sickness Absence in the UK: 1984–2002,’’ Swedish Economic Policy Review, 11, 65–88.

Bauer T.K., (2004), “High Performance Workplace Practices and Job Satisfaction: Evidence from Europe”, IZA Discussion Paper, No. 1265.

Bergendorff, S. et al. (2004), ‘‘Sickness Absence in Europe-A Comparative Study,’’ Social Insurance Studies, No. 2 (Swedish National Insurance Board).

Black, S. and Lynch, L. (2004), “What’s Driving the New Economy: Understanding the Role of Workplace Practice”, Economic Journal, 114, F97-F116.

Bockerman, P. and Illmakunnas, P. (2008), “Interaction of working conditions, job satisfaction, and sickness absences: Evidence from a representative sample of employees, Social Science & Medicine, 67, 520–528.

Booth, A. and Frank. J. (1999), ‘Earnings, Productivity, and Performance-Related Pay’, Journal of Labor Economics, 17, 447-463.

Bradley, S., Green, C. and Leeves, G. (2007), “Employment Contracts and Effort: Why Do Temporary Workers Take Less Absence?”, Lancaster University Management School working paper 2007/026.

Bradley, S., Green, C. and Leeves, G. (2007), “Workers’ Absence and Shirking: Evidence from Matched Teacher-School Data”, Labour Economics, 14, 319-334.

Brown, C. (1992), ‘Wage Levels and Methods of Pay’, Rand Journal of Economics, 23, 366-375.

Brown, S. and Sessions, J. (1996), “The economics of absence: theory and evidence”, Journal of Economic Surveys, 10, 23–53.

Brown, S., Fakhfakh, F. and Sessions, J.G. (1999), “Absenteeism and Employee Sharing: An Empirical Analysis Based on French Panel Data, 1981- 1991”, Industrial and Labor Relations Review, 52, 234-251.

Brown, S., Sessions, J. G., 2003. “Attitudes, Expectations and Sharing”. Labour, 17, 543-69.

Burgess, S. and Rato, M. (2003), “The Role of Incentives in the Public Sector: Issues and Evidence”, Oxford Review of Economic Policy, 19, 285-300.

Chaudhury, M and Ng, I. (1992), “Absenteeism predictors: least squares, rank regression, and model selection results”, Canadian Journal of Economics, 3, 615-634.

Coles, M., Lanfranchi, J., Skalli, A., and Treble, J., (2007), “Pay, technology and the cost of worker absence”, Economic Inquiry, 45, 268–285.

Coles, M.G. and Tremble, J. (1996), ‘Calculating the cost of absenteeism’ Labour Economics 3, 169-188.

Cornelissen, T, Heywood, J. and Jirjahn, U (2008), ‘Performance Pay, Risk Attitudes and Job Satisfaction’ SOEPpaper No. 136.

Deci, E. (1971), ‘The Effects of Externally Mediated Rewards on Intrinsic Motivation’, Journal of Personality and Social Psychology, 18, 105-115.

Dione, J. and Dostie, B. (2005), “New Evidence on the Determinants of Absenteeism Using Linked Employer-Employee Data”, CIRPEE, Cahier de recherche/Working Paper 05-21.

Dixit, A. (2002), “Incentives and Organizations in the Public sector: An Interpretative Review”, Journal of Human Resources, 37, 696-727.

Drago, R. (1996), “Workplace transformation and the disposable workplace: Employee involvement in Australia”, Industrial Relations, 35, 526-43.

Drago, R. and Garvey, G. (1998), “Incentives for helping on the job: Theory and evidence”, Journal of Labor Economics, 16, 1-25.

Drago, R. and Wooden, M (1992), “The determinants of labor absence: Economic factors and workgroup norms across countries”, Industrial and Labor Relations Review, 45 764-778.

Engellandt, A. and Riphahn, R.T. (2004), “Incentive Effects of Bonus Payments: Evidence from an International Company”, IZA Discussion Paper, No. 1229.

Engellandt, A., and Riphahn, R.T. (2005). “Temporary Contracts and Employee Effort”, Labour Economics, 12, 281–99.

Engstrom, P. and Holmlund, B. (2007), “Worker absenteeism in search equilibrium”, Scandinavian Journal of Economics, 109, 439-467.

Ercolani, M.G. (2009), “Socio-Economic Patterns in UK Employees’ Sickness Absence: 1984-2008”, working paper Birmingham University Department of Economics.

Fenn, P. and Ashby, S. (2004), “Workplace Risk, Establishment Size and Union Density”, British Journal of Industrial Relations, 43, 461-480.

Fernie, S. and Metcalfe, D. (1999), ‘(Not) hanging on the telephone: payment systems in the new sweatshop’, Advances in Industrial Relations, Vol. 9, pp. 23-68.

Freeman, R.B. and Kleiner, M.M. (2005), “The last American Shoe Manufactures: Decreasing Productivity and Increasing Profits in the Shift to Continuous Flow Production, Industrial Relations, 44, 307-330.

Frey, B. S. and Jegen, R. (2001), ‘Motivation Crowding Theory: A Survey of Empirical Evidence’, Journal of Economic Surveys, 15, 589-611.

Frick, B., Gotzen, U. and Simmons, R. (2008), “The Hidden Costs of High Performance Work Practices: Evidence from a Large German Steel Company”, mimeo.

Gielen, A.C., Kerkhofs, M.J.M, and van Ours, J.C. (2009), “Performance Related Pay and Labor Productivity”, Journal of Population Economics, forthcoming.

Goldin, C. (1986), ‘Monitoring Costs and Occupational Segregation by Sex: A Historical Analysis’, Journal of Labor Economics, 4, 3–27.

Green, C. and Heywood, G. (2008), ‘Does Performance Pay Increase Job Satisfaction’, Economica, 75, 710-728.

Hassink, W. and Koning, P. (2005), “Do Financial Bonuses to Employees Reduce their Absenteeism: Outcome of a Lottery”, IZA Discussion Paper No. 1644.

Henrekson, M., and M. Persson, (2004), ‘‘The Effects on Sick Leave of Changes in the Sickness Insurance System,’’ Journal of Labor Economics, 22, 87–114.

Heywood, J.S. and Jirjahn, U. (2004), “Teams, Teamwork and Absence”, Scandinavian Journal of Economics, 106, 765-782.

Heywood, J.S., Jirjahn, U. and Wei, X. (2008), “Teamwork, monitoring and absence”, Journal of Economic Behavior and Organization, 68, 676-690.

Holmstrom, B. (1979), ‘Moral hazard and observability’, Bell Journal of Economics, 9, 74-91.

Holmstrom, B. and Milgrom, P. (1991), ‘Multitask principal-agent analyses: incentive contracts, asset ownership, and job design’, Journal of Law, Economics, and Organization, 7, 24-52.

Holmström,B. and Milgrom, P. (1987), “Aggregation and linearity in the provision of intertemporal incentives”, Econometrica, 55, 303-328.

Jacobson, S.L. (1989), “The Effects of Pay Incentives on Teacher Absenteeism”, Journal of Human Resources, 24, 280-286.

Johansson, P., and M. Palme (1996), ‘‘Do Economic Incentives Affect Work Absence? Empirical Evidence Using Swedish Micro Data,’’ Journal of Public Economics, 59, 195–218.

Kandel and Lazear (1992), “Peer Pressure and Partnerships”, Journal of Political Economy, 100, 801-817.

Kohn, A. (1993), Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes, Mariner Books.

Kreps, D.M. (1997), ‘Intrinsic Motivation and Extrinsic Incentives’, American Economic Review, 87, 359-364.

Lazear, E.P. (1986), ‘Salaries and Piece Rates’, Journal of Business, 59, 405-431.

Lazear, E.P. (2000), ‘Performance Pay and Productivity’, American Economic Review, 90, 1346-1361.

Leigh, J.P. (1985), ‘‘The Effects of Unemployment and the Business Cycle on Absenteeism,’’ Journal of Economics and Business, 37, 159–70.

Lepper, M., Greene, D., and Nisbett, R. (1973), ‘Undermining Children’s Intrinsic Interest with Extrinsic Reward’, Journal Personality and Social Psychology, 28, 129-137.

Lusinyan, L. and Bonato, L. (2007), “Work Absence in Europe”, IMF Staff Papers, 54(3): 475-538.

Marsden, D. and French, S. (1998), ‘What a performance: performance related pay in the public services’, Centre for Economic Performance Special Report, July, London School of Economics: London.

McCausland, W.D., Pouliakas, K. and Theodossiou, I. (2005), “Some are Punished and some are Rewarded: A Study of the Impact of Performance Pay on Job Satisfaction”, International Journal of Manpower, 26, 636-659.

McNabb, R. And Whitfield, K. (2007), “The impact of varying types of performance-related pay and employee participation on earnings, International Journal of Human Resource Management, 18, 1004-1025.

Milgrom, P. and Roberts, J. (1992), Economics, Organizations and Management: Prentice-Hall: NY.

Mirlees, J. (1976), ‘The optimal structure of incentives and authority within an organization’, Bell Journal of Economics, 7, 105-131.

OECD (2005), Landel, D. and Marsden, D. (2005) Performance Related Pay Policies For Government Employees: An Overview of OECD Countries, Organisation for Economic Cooperation and Development, OECD, Paris.

Ose, S.O. (2005), “Working conditions, compensation and absenteeism”, Journal of Health Economics, 24, 161–188.

Osterkamp, R., and Rohn, O. (2007). “Being on Sick Leave: Possible Explanations for Differences of Sick-leave Days Across Countries”. CESifo Economic Studies 53: 97-114

Papke, L.E., and Wooldridge, J.M., (1996), “Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates”, Journal of Applied Econometrics, 11, 619-632.

Parent, D. (1999), ‘Methods of Pay and Earnings: A Longitudinal Analysis’, Industrial and Labor Relations Review, 53, 71-86.

Pendleton, A., Whitfield, K. and Bryson, A. (2009) ‘The changing use of contingent pay in the modern British workplace’ , Chapter 11 in W. Brown, A. Bryson, J. Forth and K. Whitfield (eds.) The Evolution of the Modern Workplace, pp. 256-284, Cambridge University Press

Petrescu, A. and Simmons, R. (2008). Human resource management practices and workers’ job satisfaction. International Journal of Manpower, forthcoming.

Pouliakas, K. and Theodossiou, I. (2009), ‘Confronting objections to performance pay: An study of the impact of individual and gain-sharing incentives on the job satisfaction of British employees’, Scottish Journal of Political Economy, forthcoming.

Prendergast, C. (1999), ‘The Provision of Incentives in Firms’, Journal of Economic Literature, 37, 7-63.

Prendergast, C. (2008), “Intrinsic Motivation and Incentives”, American Economic Review, 98, 201-05.

Rivers, D. and Vuong, Q. (1988), “Limited information estimators and exogeneity tests for simultaneous probit models”, Journal of Econometrics, 39, 347-366.

Schnebller, G.O., and Kopelman, R.E. (1983), “Using Incentives to Increase Absenteeism: A Plan that Backfired”, Compensation Benefits Review, 15, 40-45.

Scoppa, V (2008): Worker Absenteeism and Incentives: Evidence from Italy. Unpublished.

Seiler, E. (1984), ‘Piece Rate vs. Time-Rate: The Effect of Incentives on Earnings’, The Review of Economics and Statistics, 66, 363-376.

Smith, R. and Blundell, R. (1986), “An exogeneity test for a simultaneous equation tobit model with an application to labour supply”, Econometrica, 54, 679-685.

Steers, R. M. & Rhodes, S. N. (1978). Major influences on employee attendance: a process model. Journal of Applied Psychology, 63, 391-407.

Vistnes, J P. 1997. “Gender Differences in Days Lost from Work Due to Illness.” Industrial and Labor Relations Review 50, 304–23.

Wagner, T.J. and Bankshares, D. (1990), “A meta-analytic review of absenteeism control methods”, Applied HRM Review, 1, 19-22.

Wilson, N. and Peel, M.J. (1991), “The Impact on Absenteeism and Quits of Profit-Sharing and Other Forms of Employee Participation”, Industrial and Labor Relations Review, 3, 454-468.

Wolf, C.H. (1974), “The Effect of Monetary Incentives on Absenteeism: A Case Study”, USDA Forest Service Research Paper, NE-291.

Wooldridge, J. M. (2002), Econometric Analysis of Cross Section and Panel Data, MIT Press: Cambridge, Massachusetts.