Abstract
Despite a growing interest in performance-related pay (PRP) schemes for employee outcomes (i.e. productivity and performance), the hidden costs (i.e. psychological or emotional) of PRP for employees are still under-researched, and the existing evidence shows mixed results. To fill this gap, we draw on the microdata of 9,774 employees in large private firms in Europe to investigate the interplay between PRP and employee (mental) wellbeing (EW) and see how such relationship varies depending on the level of human capital possessed by employees. Our findings suggest that while individual PRP (i.e. piece-rate and productivity payments) negatively affects EW, collective PRP (i.e. group bonus and profit-sharing) is positively associated with EW. Interestingly, our results also reveal that the positive effect of collective PRP on EW is stronger for employees with lower levels of human capital, whereas the negative effect of individual PRP is alleviated for employees with higher levels of human capital.
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