Association for Public Policy Analysis & Management

Performance pay is a wage incentive structure designed to boost worker productivity by directly linking compensation to effort and productivity, in contrast to a steady salary based on expected effort. The rationale behind the use of performance pay is simple – it encourages worker productivity by financially rewarding activities such as production speed and intensity. Performance pay mechanisms such as the piece rate, which is pay linked directly to the production unit or ‘piece,’ is generally understood as an effective means of boosting worker performance. However, the impact of performance pay on profits, balancing both revenues and costs, is less straightforward. Recent evidence suggests that gains in productivity may be offset by maladaptive worker behaviors, including those detrimental to worker health and well-being that ultimately increase operating costs and lower profits.

The unintended consequences of performance pay on worker health and well-being is becoming increasingly relevant with the growth of the on-demand service sector in the US, also known as the gig economy. Workers in this industry are rewarded for effort during periods of peak demand, which often occur on a part-time, irregular, and/or night schedule, all of which have also been linked to negative worker health outcomes. As this sector continues to grow, it is important to understand and anticipate the effects of wage and work structure on the health and well-being of the US workforce, evidence that will ideally be used support effective policy mechanisms and controls to protect workers.

This paper explores these hypotheses using data from the US National Longitudinal Survey of Youth 1979 and 1997 cohorts. The NLSY79 dataset follows a cohort of approximately 10,000 respondents born between 1957 and 1964, with data available in survey waves from 1979 to 2014; while the NLSY97 follows another cohort of nearly 9,000 respondents born between 1980 and 1984, with data available between 1997 and 2015. A random effects logit model is used to track and identify individual health outcomes as workers in these cohorts move in and out of performance pay, isolating the impact over time and testing for cumulative effects. The results identify a statistically significant link between performance pay and poor worker health, effects that are attenuated for susceptible sub-groups of workers, including female, minority, and low-income workers.