The Recognition and Reward of Employee Performance

TLDR

The study investigates how an employee’s relative wage is affected by productivity compared to peers in the same role. The results show that initial wages depend on background and training costs but not relative productivity, while one‑year‑later wages are modestly affected by productivity; wage elasticity is .2 in small firms and zero in large firms, indicating that wages do not fully reflect performance, especially in small labor markets.

Abstract

This paper examines when and to what extent an individual's relative wage depends on his/her productivity relative to others doing the same job. Starting wages were influenced by background characteristics and training cost realizations but not by relative productivity. Wages one year later were influenced by productivity but the effects were small. The wage elasticity was .2 at small establishments and 0 at establishments with over 400 employees. The wage response to relative productivity and training costs was weaker in small labor markets, suggesting that wages do not fully respond to performance because of the firm specificity of job performance differentials.