Are Performance-Based Incentives Related to Effort? Evidence from Large-Scale Survey Data

Abstract

This paper evaluates the relationship of implicit and explicit incentives with effort for a sample of some 5,800 rank-and-file employees in 1,100 U.K. for-profit workplaces. Explicit incentives are performance-based rewards, while implicit incentives reflect actual and potential permanent increases from merit pay, promotion opportunities, and at a very basic level not losing one’s job. As effort indicator we use the self-reported amount of unpaid overtime. We find limited and inconsistent evidence that effort increases with the use of performance-based incentives, while it is strongly positively related with basic pay level and promotion requirements. Reciprocity effects seem less important: pay satisfaction is negatively related with overtime. This suggests that implicit incentives from career opportunities are more conducive to higher effort than performance-based incentives.