An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using a bonus, a commission, or a piece rate. In this paper, we look at the…growing incidence of performance pay on wage inequality. The basic premise of the paper is that performance pay jobs have a more competitive. pay structure that rewards productivity differences more than other jobs. Consistent with this view, we show that compensation in performance pay jobs is more closely tied to both measured (by the econometrician) and unmeasured productive characteristics of workers. We conclude that the growing incidence of performance pay accounts for 25 percent of the growth in male wage inequality between the late 1970s and the early 1990s, and for most of the growth in top-end wage inequality (above the 80th percentile) during this period.
This economist deserves…um…a bonus.