This report studies the incidence of incentive pay and selection of workers into incentive pay jobs, measures and compares the wage-tenure profiles of incentive pay and time-rate workers, and tests for labor market discrimination in incentive pay jobs relative to time-rate jobs using the National Longitudinal Survey of Youth (NLSY). Workers in this study are classified as incentive pay earners if they receive either piece rates, bonuses, commissions, or tips. Each of these methods of pay are based on individual performance and may supplement a worker's typical salary or wage.
A primary hypothesis underlying this study is that monitoring costs are relatively low in jobs that use incentive pay and base a worker's compensation, at least in part, on individual performance. Monitoring and information costs have been used to rationalize a number of empirical findings, from the employer size wage premium to positive returns to tenure in wage regressions. Monitoring cost explanations of empirical phenomena are typically unsatisfying, however, because these costs are unobservable to the researcher. The incentive pay data in the NLSY provides the best opportunity to evaluate a number of these information cost models, by comparing wage-tenure profiles, turnover, and employer size wage premia (for workers with similar observable characteristics) across jobs with relatively high and low monitoring costs.
The first section of our study describes incentive pay earners and their jobs. We are able to provide a more complete picture of incentive pay workers than studies based on establishment data, such as the Industry Wage Surveys. We find substantial differences across categories of incentive pay.
The second section of our study tests the monitoring cost explanation of positively sloped wage-tenure profiles, by comparing the wage-tenure profiles of incentive pay and time-rate workers.
The final section of our study examines racial and gender differences in the incidence and amount of incentive pay.