Paying for Productivity: A Look at the Evidence

Paying for Productivity: A Look at the Evidence

Paying for Productivity: A Look at the Evidence

Paying for Productivity: A Look at the Evidence

Synopsis

Will higher pay provide an incentive for better work? Can productivity be increased by changing the way workers are compensated? In response to the urgent need to improve productivity performance in American industry, leading economists examine alternative compensation schemes to assess their efficiency in raising productivity.

Over the years a number of suggestions have been made for improving labor productivity by changing the manner in which laborers are compensated for their efforts. The ideas presented and analyzed in this volume have all been put into practice, in modified form or on a small scale, in the United States or elsewhere. Some are new; others quite old.

David I. Levine and Laura D'Andrea Tyson consider the effects of employee participation in decisionmaking on firm performance, and Martin L. Weitzman and Douglas L. Kruse discuss the implications of profit sharing and related forms of pay for group performance. Michael A. Conte and Jan Svejnar analyze employee stock ownership plans in the United States and other forms of worker ownership in Europe; Masanore Hashimoto uses a transaction-cost perspective to assess Japanese employment and wage systems. Daniel J. B. Mitchell, David Lewin, and Edward E. Lawler III give an overall analysis of traditional and alternative pay systems, their history, development, and curent use, and recommend further experimentation with alternative compensation plans to ensure more adaptability on the part of U. S. firms. Blinder provides an overview of the findings and conclusions.

Excerpt

Over the long run, the economic performance of any nation depends on its rate of productivity growth. the more goods and services an economy can produce with a given labor input, the higher the living standards the consumers in the economy can enjoy. the faster labor productivity increases, therefore, the more rapidly living standards improve.

During the last decade, policymakers and academic experts have been wrestling with the difficult challenge of how the United States can raise its disappointing rate of productivity growth. After rising at more than 2 percent a year between 1945 and 1973, annual productivity growth has since slowed to little more than I percent.

This book examines one important potential mechanism for increasing productivity growth in the future: tying worker compensation to performance. Many firms, here and abroad, have already experimented with this approach, using different arrangements. Some have shared revenues with employees; some have tied compensation to profits; many have increasingly turned to employee stock ownership plans (ESOPs); and others have given workers an increased voice in firm management.

The authors in this book draw several important lessons from the rich variety of compensation systems in place. a major finding of all the papers in the book--one that was not expected when the book was initially planned--is that whatever compensation scheme is used, meaningful worker participation, beyond labor representation in boards of directors, enhances productivity. With respect to compensation schemes themselves, profit sharing does appear to raise productivity, although it is not clear that the productivity gains are sufficient to pay for profit-based supplements to wage-based compensation. There is much weaker evidence that ESOPs have any material productivity benefits. Gain sharing may be the best system . . .

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