ABSTRACT

This chapter investigates performance pay in German manufacturing establishments. It provides information about the conditions under which payment schemes succeed and about the mechanism through which payment schemes influence firm performance. The chapter focuses on pay-for-performance schemes for blue collar workers. It describes performance pay such as piece rates and premium pay. The chapter discusses the theoretical determinants of performance pay and reviews German empirical studies estimating those determinants. The chapter shows that the pattern of observed payment schemes need not be efficient. Individual-based performance pay presupposes that individual output can be identified. When the organization of work is characterized by team production, identifying a worker’s individual contribution is difficult. The relationship between job security and performance pay depends critically on the type of payment scheme. Pay-for-performance schemes based on “objective” performance measures may also suffer from employer opportunism. Collective bargaining agreements play a different role both in determining pay and in the presence of performance pay.