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Performance pay and employee

turnover

Performance pay
and employee
turnover

Patrick L. OHalloran
Department of Economics, Finance and Real Estate, Leon Hess Business School,
Monmouth University, West Long Branch, New Jersey, USA

653
Received 19 March 2011
Accepted 24 October 2011

Abstract
Purpose The purpose of this paper is to explore how various performance related pay (PRP)
schemes influence employee turnover. It also tests whether profit sharing has a differential impact on
turnover in comparison to other forms of PRP.
Design/methodology/approach Utilizing a nationally representative longitudinal dataset of
individuals, analysis begins with a parsimonious specification of the determinants of turnover and then
progressively adds various sets of controls known to influence turnover decisions to observe how their
inclusion influences PRP coefficients. Estimations employ both standard probits and panel data models.
Findings Empirical evidence reveals a negative relationship between an aggregate measure of PRP
and turnover. Disaggregating performance pay measures by type reveals a robust negative
relationship between profit sharing and turnover. Although one would expect the influence of other
PRP schemes to mimic that of profit sharing, evidence suggests otherwise.
Research limitations/implications Data lack information on how much earnings are based on
PRP. Consequently, estimates may be biased when combining those who receive little earnings from
PRP with those who receive substantial amounts of PRP into a single PRP measure.
Practical implications Although PRP schemes are often introduced to improve incentives and
productivity, profit sharing based on firm profitability may allow labor costs to vary with firm profits
hence enhancing retention and reducing the incidence of unemployment during recession.
Originality/value This paper adds to the literature and fulfils an identified need to study how
other types of PRP besides profit sharing influence turnover.
Keywords Performance pay, Turnover, Job satisfaction, Profit sharing, Performance management,
Company profit sharing schemes
Paper type Research paper

I. Introduction
Despite vast literatures on both employee turnover and the many impacts of
performance related pay (PRP), very few studies explicitly investigate how employee
turnover is affected by other PRP schemes besides profit sharing. Prior research
suggests that workers receiving individual PRP and profit sharing are more satisfied
with their jobs (Heywood and Wei, 2006; Green and Heywood, 2008; Kruse et al., 2010)
than those receiving pay based on traditional time-rates, even after accounting for the
higher pay levels associated with PRP. Moreover, it seems clear that there exists
positive selection on PRP whereby workers who are relatively less risk averse, more
The author would like to thank Dr John S. Heywood for his continued guidance and support
as well as an anonymous referee for constructive comments. The author would also like to thank
his beloved wife Susanne for her continual encouragement. All remaining errors are the authors
own.

Journal of Economic Studies

Vol. 39 No. 6, 2012
pp. 653-674
q Emerald Group Publishing Limited
0144-3585
DOI 10.1108/01443581211274601

JES
39,6

654

confident and more able receive a return or rent on these characteristics in PRP jobs that
they cannot obtain in a standard time-rate job (Curme and Stefanec, 2007).
Consequently, if PRP workers are more satisfied with their jobs, they may
experience lower turnover than traditional time-rate workers (Clark et al., 1998)
making a result thought limited to workers on profit sharing apply more broadly to all
workers receiving PRP. Furthermore, prior studies find mixed support for Weitzmans
(1985) hypothesis that stock options and profit sharing enhance job security by
allowing marginal labor costs to vary with profitability (Kruse, 1993; Kruse et al., 2010).
Also, comparing turnover propensities between PRP and time-rate workers provides
further evidence as to which of the two broad models of PRP may be most applicable;
the classic agency theory or the sorting theory of Lazear (1981, 1983). According to
classic agency theory, PRP workers are fully compensated for the inherent higher risks
associated with PRP, leaving them indifferent between PRP jobs and standard time-rate
jobs, implying no difference in turnover. Alternatively, according to the sorting theory,
PRP tends to attract the less risk averse and more able, who receive a rent they would
not obtain in a time-rate position, implying lower turnover among PRP workers.
Research presented herein estimates the impact various forms of PRP has on US
employee turnover including both quits and layoffs (those who report job termination
due to firing, layoff, or plant closing), by analyzing data from six waves of the National
Longitudinal Survey of Youth 1979 (NLSY79). Although there is an abundance of
research on how profit sharing affects job turnover, very little research focuses on how
other PRP schemes such as piece rates or bonuses influence job turnover. Specifically,
the empirical analysis focuses on whether workers receiving PRP, both aggregated and
disaggregated by type, experience differing rates of turnover than those paid
time-rates. Critically, few studies explicitly explore how other types of PRP besides
profit sharing influence job turnover.
There are several different PRP schemes. PRP can be based on individual
performance as is typical with piece rates and commissions or based on collective
performance as is typical with profit sharing and stock options. Furthermore, PRP can be
based on subjective measures of effort such as how hard one appears to be working, or
based on objective measures of effort such as the number and quality of units produced.
Given the varied incentives provided from different PRP schemes, one would expect
each to affect employee turnover differently.
Empirical analysis of the nationally representative sample reveals that those who
receive any form of PRP experience lower rates of job turnover than those who do not
receive any PRP, even after controlling for many commonly known determinants of
turnover. Most importantly, when PRP is disaggregated by type, significant differences
emerge. Workers who receive pay in the form of stock options and profit sharing
experience significantly lower rates of turnover than those who do not, supporting the
Weitzman hypothesis. Conversely, there are no significant differences in turnover between
non-PRP workers and those receiving piece rates, commissions, and tips. Also, there is
weak evidence that those who receive bonuses experience fewer layoffs. Consequently, the
lower turnover rates observed using the aggregated PRP measure are mainly driven by
stock options and profit sharing, suggesting that those forms of PRP may be unique.
Splitting turnover into quits and layoffs reveals that workers participating in
profit-sharing plans are significantly less likely to experience a layoff or quit while
workers receiving stock options are significantly less likely to quit. Findings also

corroborate those of Azfar and Danninger (2001) and Green and Heywood (2010), who
theorize that profit sharing allows for increased expected returns on firm-specific human
capital investments such as on-the-job training due to higher expected tenure. Although
PRP schemes are typically introduced to increase worker productivity, employers utilizing
profit sharing or stock option schemes may experience lower labor force turnover.
The paper proceeds as follows: Section II will provide background on the relationship
between PRP, job satisfaction, and turnover; Section III will review the data and provide
rationales for covariate selection; Section IV will summarize the empirical results;
and Section V offers conclusions.
II. Past research
A. The relationship between PRP, job satisfaction and turnover
There are two broad models of PRP. The classic agency model of PRP presumes that
firms pay workers just enough to compensate them for the greater variability in pay that
is associated with PRP jobs, as well as rewarding greater effort typically put forth in PRP
jobs. This model implies that, since workers are fully compensated for the greater risk
and effort PRP entails, workers retain the same level of utility that they would have had
in a standard time-rate position. Consequently, according to agency theory, job
satisfaction would be no different in a PRP job as opposed to a time-rate job. Hence, one
would expect similar rates of job turnover between PRP workers and time-rate workers.
Alternatively, Lazear (1981, 1983) argues that firms face a zero profit constraint and
workers sort to capture rents they would not be able to obtain in a standard time-rate
position. These rents arise because PRP is thought to attract those workers who are
less risk averse and more able, and who will be more satisfied in jobs where their
additional effort is commensurately rewarded. If workers cannot obtain similar rents in
a time-rate position, one would expect to observe lower rates of turnover in jobs
associated with PRP. Recent research by Cornelissen et al. (2011) make it clear that
while the Lazear theory of PRP implies rents, other models such as the classic agency
model do not. Accordingly, this paper provides further evidence as to which theory is
most appropriate in modeling workers reactions to PRP. If PRP is associated with
lower turnover, the Lazear sorting model would better depict how PRP influences
workers. If PRP is not associated with lower turnover, the classic agency theory of
worker response to PRP would appear a better depiction of reality.
A growing body of literature finds that PRP tends to increase overall job
satisfaction. Heywood and Wei (2006) find that both individual performance pay and
profit sharing are positively related to job satisfaction while Green and Heywood (2008)
find that PRP workers are more satisfied with their jobs, pay level, job security and
hours than non-PRP workers. These findings support the theory that PRP allows
workers to more freely optimize on various dimensions without crowding out intrinsic
motivation, thereby generating positive rents for workers unavailable in non-PRP jobs.
Furthermore, Brown and Sessions (2006) argue that workers prefer work environments
where their earnings equal their marginal revenue product, which they find improves
optimism concerning future employment relationships. Additionally, both Goddard
(2001) and Bauer (2004) find that PRP schemes are often part of a larger package of
human resource management practices that are known to improve job satisfaction.
Critically, prior evidence demonstrates that less satisfied workers typically experience
more job turnover than more satisfied workers (Freeman, 1978; Akerlof et al., 1988;

Performance pay
and employee
turnover
655

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656

Clark et al., 1998; Garboua et al., 2007). Therefore, presuming more satisfied workers
are less likely to experience turnover, one would expect to observe a negative
relationship between PRP and job turnover.
It is also well known that introducing PRP schemes causes large amounts of
self-selection to occur, whereby workers preferring PRP schemes self-select into jobs that
offer PRP schemes. Sliwka and Grund (2006) find the higher inherent risk associated with
PRP schemes attract a disproportionate number of less risk-averse workers who are
more satisfied accepting greater pay variability in return for higher pay levels. Many
studies identify a positive correlation between PRP and earnings (Pencavel, 1972; Seiler,
1984; Brown, 1990; Ewing, 1996; Booth and Frank, 1999; Parent, 1999). Indeed, Weitzman
(1985) and Kruse (1993) argue that PRP schemes such as profit sharing and stock options
may result in a decreased probability of layoffs, since firms are able to decrease payments
when profitability is lower. Consequently, the increased job security associated with PRP
based on firm performance may result in greater job satisfaction, especially satisfaction
with job security previously observed by Green and Heywood (2008).
However, much research focuses on how PRP decreases job satisfaction. In particular,
Baker (1992) finds that PRP fails to increase job satisfaction when performance
measures are overly subjective and when evaluations are poorly tied to actual
performance. Also, PRP decreases job satisfaction if used solely to intensify low skilled
or menial workers effort. This is especially true when increased efforts are not rewarded
with higher earnings due to ratcheting or when the PRP scheme does not permit greater
flexibility to optimize (McCausland et al., 2005). In these situations, workers will be less
satisfied under the PRP scheme, since they exert more effort without commensurate
rewards. Furthermore, when PRP is sensitive to external phenomenon beyond the
workers control, job satisfaction declines because of uncontrollable pay variability
(Milgrom and Roberts, 1992). Additionally, Kennedy (1995) finds PRP typically
increases pay dispersion, creating a disincentive to workers receiving less than their
peers, reducing satisfaction with pay (Brown, 2001). Psychological studies also reveal
that PRP is a form of extrinsic motivation which may crowd out intrinsic motivation to
perform well, resulting in lower satisfaction among PRP workers (Frey, 1997; Kreps,
1997; Benabou and Tirole, 2003). Therefore, presuming less satisfied workers are more
likely to experience job turnover, one would expect to observe a positive relationship
between PRP and turnover.
Consequently, whether PRP increases or diminishes satisfaction is theoretically
ambiguous. Therefore, assuming that job satisfaction influences turnover, PRP could be
associated with either higher or lower turnover. Observing lower turnover among those
working in PRP jobs would tend to support the sorting hypothesis, while observing no
difference in turnover or higher turnover would tend to support classic agency theory.
B. The effect of specific PRP plans on turnover
Different PRP schemes likely impart contrasting incentives and hence may result in
dissimilar impacts on satisfaction and turnover. Unsurprisingly, prior findings reveal a
mixed picture concerning the relationship between various PRP schemes and turnover.
Prior evidence reveals that piece rates and commissions are associated with higher
turnover (Lazear, 1986; Golden, 1986; Geddes and Heywood, 2003), while bonuses are
typically associated with lower turnover (Hashimoto, 1979; Blakemore et al., 1987;
Guthrie, 2000). In particular, Hashimoto (1979) provides evidence that flexible bonus

payments enhance investments in on-the-job training, which is known to reduce

turnover. Blakemore et al. (1987) observe lower turnover among those paid a two-part
compensation scheme composed of fixed pay plus flexible bonuses. Additionally,
Guthrie (2000), drawing on organizational economics literature, shows that firms using
skill-based pay systems such as bonuses improve employee retention.
Prior evidence reveals that PRP based on firm profitability is negatively associated
with turnover. Klein and Hall (1988) and Saneyoshi (2001) observe that participation in
Employee Stock Ownership Plans (ESOP) reduce turnover. Saneyoshi observes that
ESOP workers are 71 percent more likely to stay with their current employer than those
without any ESOP. Azfar and Danninger (2001) find that profit-sharing plans are
negatively associated with quits and layoffs, using a subset of the data analyzed below.
Furthermore, they observe increased skill accumulation among profit sharing workers
since they receive more intensive on-the-job training, leading to higher future wage
growth. Analyzing UK data, Green and Heywood (2008) find that profit sharing increases
the incidence of on-the-job training which is known to reduce turnover (Royalty, 1996).
Others also identify a negative relation between various PRP schemes and turnover.
Chelius and Smith (1990) provide suggestive evidence that profit sharing reduces the
incidence of layoffs in the face of decreased product demand. Furthermore, Scoppa (2003)
theorizes that firms employ PRP when the costs associated with turnover are high and
fixed pay when the costs associated with turnover are low. Dale-Olsen (2004) finds
evidence in Norway of a negative association between turnover costs and the use of
alternative forms of remuneration such as fringe benefits. He finds that fringe benefits
have a stronger negative impact on turnover than what would be indicated by the fringe
benefits monetary value, supporting the idea that fringe benefits have an independent
influence on turnover. In sum, literature reveals a strong negative relationship between
aggregate measures of PRP and turnover, lower turnover among those receiving stock
options, profit sharing and bonuses, and higher turnover among those receiving
piece rates and commissions. The analysis below will attempt to add to this literature by
further exploring which PRP schemes most significantly influence turnover.
III. Data and the determinants of labor market turnover
The NLSY79 contains information on both worker turnover and PRP as well other
information on workers job market experiences. Analysis will focus on a nationally
representative sample of 6,111 men and women who were between the ages of
14-22 years old as of their initial interview in 1979. These individuals were interviewed
annually up to 1994 and biennially thereafter. The NLSY79 includes information on
respondents labor force experiences and attachment, demographics, earnings and
investments in both education and training, as well as information on job satisfaction.
Only six waves contain PRP data: 1988, 1989, and 1990, as well as 1996, 1998, and 2000.
Although data provides information on up to five jobs per respondent, focus will be on
each respondents main CPS job. Weights are not employed when reporting means or
performing estimations since elimination of the supplemental over-samples of poor,
Hispanic, black and military personnel result in a nationally representative
cross-section. However, sample size decreases due to attrition, missing data and the
elimination of those who report being self-employed or in the active military. Those in
the active military are eliminated since turnover decisions are likely much different
than in the civilian sector, while the self-employed are eliminated since job turnover

Performance pay
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turnover
657

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658

likely has a much different meaning. Lastly, dropping observations with missing data
leaves an unbalanced panel of 17,114 observations across 4,925 individuals.
The NLSY asks respondents the following question: The earnings on some jobs are
based all or in part on how a person performs the job. On this card are some examples of
earnings that are based on job performance. Please tell me if any of the earnings on your
job are/were based on any of these types of compensation. for the years 1988-1990 and,
On this card are some examples of earnings that are based on job performance.
Please tell me if any of the earnings on your job are/were based on any of these types
of compensation. for the years 1996-2000. Possible responses were piece rates,
commissions, bonuses, stock options, tips and other. Furthermore, the survey collected
information on participation in profit sharing and pension plans. PRP workers are those
who receive any earnings in the form of piece rates, commissions, bonuses, stock
options, tips, profit sharing and other forms of PRP.
Although respondents were asked about participation in various payment schemes,
no information was collected about how much of their earnings were based on these
schemes. Earnings could be entirely based on PRP or only marginally affected by PRP.
Another problematic issue is what constitutes other forms of PRP. Fully 2.4 percent
of the sample employed in analysis report receiving other forms of PRP. Although it
is impossible to interpret what these other types of PRP entail, they will be included
when constructing the aggregated PRP variable and also included as a separate PRP
scheme in the disaggregated estimations. Given these restrictions, it is impossible
determine to what extent earnings are PRP based. The lack of more detailed PRP
information limits the ability to effectively assess the relation between job turnover
and PRP. This becomes even more problematic if some jobs entail combinations of PRP
schemes. Restrictions aside, one can arguably use the incidence of PRP to examine the
relationship between PRP and other labor market outcomes.
The survey also asks respondents why their job terminated[1]. The survey asks
respondents which of the reasons on this card best describes why you happened to
leave this job? Listed reasons include layoffs, plant closing, end of temporary/seasonal
job, firing, program ending, quitting for family reasons, quitting to find or take another
job, and quitting for other reasons. From these questions, the aggregate indicator of
turnover equals one if the respondent reported a quit or layoff for any reason, zero
otherwise. Analogously, indicator variables for quits and layoffs are created to
distinguish between reasons for turnover. Layoffs are equal to one if the respondent
reports a layoffs, plant closing, end of temporary/seasonal job, firing, or program ending.
Many other individual and firm level characteristics are available in the NLSY79
and are summarized by payment scheme in Table I. Since PRP is known to attract
more educated and able workers, measures of human capital and ability are included
as controls. Education is measured as the highest grade completed as of May 1 of each
survey year. Ability is proxied by each individuals percentile score on the Armed
Forces Qualification Test. As Table I displays, educational levels and ability are
slightly higher among PRP workers, except among those receiving piece rates and tips.
Given the close relationship between earnings, satisfaction and turnover, analysis
will include an earnings measure created by taking the logarithm of the individuals real
wage. The real wage is obtained by dividing the individuals nominal hourly rate of pay
by the respondents regions Consumer Price Index All Urban Consumers using
1982-1984 as the base period. Furthermore, because on-the-job training and turnover are

Turnover
Quit
Layoff
Like job very much
Like job fairly well
Dislike job somewhat
Dislike job very much
Tenure (in weeks)
AFQT
Education
Real Wage
Log Real Wage
On-the-Job Training
Female
Nonwhite
Black
Hispanic
Age
Unmarried w/o Children
Unmarried w/Children , 6 years
Unmarried w/Children . 6 years
Married w/o Children
Married w/Children , 6 years
Married w/Children . 6 years

Variable
6.59%
4.46%
2.12%
45.78%
46.31%
6.10%
1.82%
255.31
50.42
13.44
$9.64
$2.09
22.58%
48.54%
18.23%
11.61%
6.63%
32.29
28.76%
4.20%
6.93%
15.19%
27.24%
17.68%

PRP

Piece
rates

10.51% 81.27 11.03%

6.69% 38.90
5.13%
3.82% 40.71
5.90%
44.81%
1.58 34.87%
45.21%
2.05 52.56%
7.11%
6.92
9.49%
2.87% 19.81
3.08%
236.79
24.36 233.50
46.53
79.43 36.44
13.28
20.02 12.01
$8.00
294.71 $8.31
$1.94
350.97 $1.90
18.38% 46.03 14.36%
51.52% 15.03 44.62%
19.78%
6.55 21.28%
12.87%
6.19 13.08%
6.92%
0.56
8.21%
32.66
22.25 32.06
28.91%
0.04 27.69%
5.12%
8.06
5.64%
7.74%
4.04
9.74%
13.48% 10.13 10.00%
25.67%
5.36 23.59%
19.07%
5.47 23.33%

Non-PRP F-ratio
7.82%
5.06%
2.76%
52.53%
40.46%
5.86%
1.15%
199.90
55.22
13.79
$10.73
$2.16
26.21%
37.24%
11.15%
5.86%
5.29%
31.99
32.30%
3.56%
4.02%
17.82%
27.59%
14.71%

Commissions
14.71%
10.87%
3.84%
39.23%
50.32%
8.74%
1.71%
137.70
40.36
12.43
$5.88
$1.58
12.37%
65.88%
20.26%
10.45%
9.81%
31.42
42.22%
6.61%
9.59%
10.66%
15.14%
15.78%

Tips

Stock
opts

5.28%
1.91%
3.90%
1.67%
1.38%
0.24%
50.45% 55.26%
43.99% 40.19%
4.22%
4.07%
1.34%
0.48%
262.00
311.64
56.18
63.01
13.97
14.69
$11.12
$15.51
$2.23
$2.56
27.25% 27.99%
41.43% 33.49%
16.94% 12.20%
10.15%
6.94%
6.78%
5.26%
32.4212 34.60
30.06% 28.95%
3.05%
2.63%
5.08%
4.55%
16.37% 11.24%
29.65% 33.25%
15.80% 19.38%

Bonuses
5.13%
3.38%
1.74%
45.54%
46.43%
6.02%
2.01%
274.46
50.29
13.46
$9.75
$2.13
22.91%
50.12%
18.68%
12.34%
6.34%
32.17
26.52%
4.40%
7.01%
15.68%
28.48%
17.91%

Profit
sharing

4.63%
3.37%
1.26%
50.91%
43.01%
4.68%
1.41%
264.64
54.90
13.88
$11.48
$2.25
27.92%
40.74%
16.15%
9.46%
6.69%
32.44
28.87%
3.67%
4.88%
15.59%
30.38%
16.60%
(continued)

Multiple PRP
schemes

Performance pay
and employee
turnover
659

Table I.
Descriptive statistics

Table I.

Occupation
Professional
Managerial
Sales
Clerical
Craft
Operative
Transport Operative
Laborer
Farm
Farm Laborer
Service
Private Household
Industry
Agriculture
Mining
Construction
Manufacturing
Transportation
Wholesale
Finance
Business Services
Personal Services
Entertainment
Professional Services
Public Administration
Hours per Week
Union
Small Employer (less than ten
employees)
2.08%
0.89%
8.54%
15.87%
6.41%
13.80%
4.38%
6.38%
2.53%
1.36%
29.35%
8.17%
40.76
18.05%
26.38% 120.21

1.57%
0.58%
4.24%
25.48%
7.98%
23.01%
10.29%
7.76%
3.20%
1.09%
12.52%
1.74%
42.69
9.12%
19.27%

6.02
5.16
126.55
246.18
15.87
247.37
229.78
12.38
7.02
2.47
726.59
351.94
178.05
281.63

23.80% 124.19
11.20% 227.24
2.14% 281.71
18.90%
6.82
12.69% 25.52
8.11% 19.84
3.77%
0.73
5.47% 34.34
0.09%
2.66
0.72%
8.31
12.75% 32.19
0.31% 20.98

Non-PRP F-ratio

16.87%
20.33%
7.44%
17.34%
10.20%
10.07%
3.52%
3.57%
0.19%
0.39%
9.93%
0.01%

PRP

22.56%

2.82%
0.00%
10.77%
45.13%
6.92%
14.62%
2.56%
8.72%
1.54%
1.28%
3.08%
2.56%
42.78
19.49%

3.59%
3.85%
1.79%
9.49%
21.54%
40.51%
5.90%
8.97%
0.26%
1.03%
3.08%
0.00%

Piece
rates

39.89%

0.69%
0.00%
3.56%
12.07%
7.59%
32.53%
16.90%
12.30%
9.08%
1.72%
3.10%
0.11%
44.19
1.95%

6.67%
24.14%
35.06%
7.24%
8.97%
2.18%
5.29%
1.15%
0.00%
0.00%
8.85%
0.00%

Commissions

31.56%

0.64%
0.21%
0.64%
0.85%
2.77%
63.97%
1.28%
2.77%
22.39%
4.05%
0.43%
0.00%
36.88
3.62%

1.71%
8.32%
0.64%
2.99%
1.49%
0.85%
4.90%
2.99%
0.00%
0.21%
75.91%
0.00%

Tips

22.75%

2.27%
0.65%
5.24%
21.28%
8.08%
21.36%
11.37%
9.99%
2.36%
1.14%
13.48%
2.11%
44.76
6.17%

19.90%
30.50%
8.16%
13.24%
8.37%
6.54%
3.13%
2.92%
0.28%
0.77%
5.93%
0.04%

Bonuses

12.20%

0.96%
0.24%
1.67%
30.38%
12.68%
21.53%
12.44%
11.48%
1.44%
0.48%
5.98%
0.00%
46.53
5.50%

22.01%
40.43%
6.22%
9.09%
6.70%
7.42%
2.39%
1.20%
0.48%
0.00%
3.83%
0.00%

Stock
opts

14.20%

1.34%
0.69%
3.46%
29.78%
8.71%
21.37%
10.78%
6.87%
1.56%
0.75%
13.11%
1.05%
42.71
9.68%

17.79%
20.38%
6.58%
21.15%
10.19%
10.86%
3.24%
3.46%
0.18%
0.18%
5.79%
0.00%

Profit
sharing

660

Variable

22.43%
(continued)

1.56%
0.40%
3.62%
23.49%
9.26%
25.91%
12.07%
9.41%
4.02%
1.11%
8.20%
0.45%
44.64
5.68%

15.64%
28.77%
12.17%
11.87%
8.10%
8.45%
3.67%
2.46%
0.25%
0.30%
8.00%
0.00%

Multiple PRP
schemes

JES
39,6

PRP

Non-PRP F-ratio

Piece
rates

Medium Employer (between ten

and 49 employees)
23.48%
25.07%
5.81 17.69%
Large Employer (between 50 and
200 employees)
25.94%
24.73%
3.26 21.53%
Very Large Employer (above 200
employees)
31.31%
23.82% 120.65 38.20%
Promotion
25.78%
17.05% 196.58 13.59%
Fringe Benefits
96.87%
88.48% 420.88 89.23%
Experience (in weeks)
636.84
616.27
26.77 601.11
No. of Jobs
5.58
5.79
21.94
5.58
Unemployment Rate (categorical)
2.29
2.37
45.82
2.36
Urban
75.52%
71.67% 32.09 60.26%
Year 1988
14.01%
12.44%
9.15 16.15%
Year 1989
17.61%
17.14%
0.64 19.23%
Year 1990
18.41%
17.25%
3.88 20.00%
Year 1996
18.31%
19.26%
2.48 15.90%
Year 1998
16.71%
17.51%
1.91 16.67%
Year 2000
14.95%
16.40%
6.67 12.05%
No. of obs.
7,530
9,584
390

Variable

25.84%

29.48%
30.53%
98.59%
664.98
5.71
2.24
77.52%
13.38%
16.60%
17.66%
18.76%
17.40%
16.20%
1,988

25.06%

9.17%
27.01% 44.49%
36.71%
17.70%
32.29% 34.69%
26.90%
84.65%
97.85% 100.00%
99.70%
530.78
655.51
780.63
643.01
6.74
5.62
5.91
5.36
2.41
2.26
2.11
2.26
80.38%
78.11% 79.19%
75.59%
13.01%
13.69%
7.42%
14.79%
23.24%
16.37%
9.57%
17.75%
22.81%
18.12%
8.85%
18.48%
16.63%
17.55% 18.66%
17.87%
13.01%
17.51% 28.71%
16.23%
11.30%
16.77% 26.79%
14.89%
469
2,462
418
4,936

7.47%
20.80%
94.48%
628.09
6.21
2.29
80.80%
13.79%
19.89%
21.84%
17.47%
14.83%
12.18%
870

Multiple PRP
schemes

24.65%

Profit
sharing

28.40%

21.96%

17.59%

17.46%

Stock
opts

23.44%

25.18%

Bonuses
20.68%

37.31%

Tips

35.06%

Commissions

Performance pay
and employee
turnover
661

Table I.

JES
39,6

662

strongly negatively correlated (Royalty, 1996), an indicator in the estimations denoting

whether the respondent received any form of on-the-job training since their last
interview is included.
Female workers often experience higher turnover than males for reasons such as
childbirth and rearing (Golden 1986, 1990). Within the sample, 16 percent of those who
report leaving an employer quit for pregnancy or family reasons. Hence it seems
essential to control for the influence gender and family status have on turnover.
Besides an indicator for gender, six other indicator variables are created to represent an
individuals current family situation. These six indicators include:
(1) unmarried without children;
(2) unmarried with children under six years of age;
(3) unmarried with children six years of age or older;
(4) married without children;
(5) married with children under six years of age; and
(6) married with children six years of age or over.
Furthermore, since larger establishments are more likely to make use of PRP schemes
(Brown, 1990) and have lower turnover (Evan and MacPhearson, 1996), four firm size
indicators are included. A firm is categorized as small if it employs less than
ten workers, medium if it employs between ten and 49 employees, large if it employs
between 50 and 200 employees, and very large if it employs more than 200 workers[2].
Respondents are also asked:
How (do/did) you feel about (the job you have now/your most recent job)? (Do/Did) you like it
very much, like it fairly well, dislike it somewhat, or dislike it very much?

Since job satisfaction is known to influence turnover decisions, four different indicators
to control for global job satisfaction are created from the four possible responses above.
Within the sample, 7 percent of those who report liking their job very much experience
turnover while those who report disliking their job very much have a turnover rate of
28 percent. Also, quits are more numerous than layoffs among workers who report
disliking their job very much.
Firms with internal labor markets typically experience lower turnover. This is
because an alternative external wage offer is typically lower than the internal wage offer
since the worker has accumulated firm specific knowledge that would not affect
pay levels elsewhere. Also, fringe benefits such as insurance or pensions typically lower
turnover. Consequently, to proxy for the presence of an internal labor market, I create an
indicator that equals one if a position change within an employer was a promotion, zero
otherwise. The fringe benefit indicator takes a value equal to one if the individual
receives either employer provided insurance (medical, dental, and life), maternity leave,
firm sponsored training and education, or employer-provided child care, and zero if
they receive none of these benefits.
Also, the nature of production critically determines whether various PRP schemes are
practicable. Much of the prior literature points to the fact that PRP jobs are not available
in every occupation or industry. Elliott and Murphy (1986) observed that workers may not
have the option to choose whether to obtain a PRP job. For example, they find that manual
workers are much more likely to be paid based on some performance measure in

comparison to non-manual workers. Similarly, Parent (1999) observes that PRP in the
form of piece rates are concentrated in particular occupations such as sales and operative
occupations, while bonuses tend to be more evenly spread across occupations. This is due
to the nature of the job and the difficulty involved in structuring the PRP scheme in
situations where effort or output are extremely difficult or impossible to measure.
Consequently, to proxy for the nature of production, I include occupational/industrial
indicators at the one-digit level. Estimations also include an indicator for union
affiliation, as well as a count variable for the unemployment rate for the workers current
residence[3]. Additionally, since it is well known that older, more experienced workers
are much less likely to experience job turnover, we include a measure of the respondents
age. Lastly, estimations also include the respondents tenure in weeks with a particular
employer, average hours per week worked, urban status, number of jobs held, and
indicators for each year of the panel.
Table I displays summary statistics combining all six years of data in which PRP
questions were administered. Absent controls, PRP workers experience statistically
significant lower mean levels of job turnover in the form of quits and layoffs than workers
who do not receive any PRP. Among PRP workers, an average of 6.6 percent report job
turnover over the period considered, while the average turnover rate of those who do not
receive any PRP is 10.5 percent. Furthermore, F-tests for the difference in the means are
statistically significant. PRP workers experience on average 1.7 percent fewer layoffs and
2.2 percent fewer quits than non-PRP workers. Differentiating between PRP schemes
reveals that layoffs and quits are much lower for workers receiving stock options, profit
sharing, bonuses, commissions, and those covered by multiple PRP schemes. Comparing
means, piece rate workers are no different in terms of turnover rates than workers not
receiving PRP, while tip workers have higher rates of turnover than non-PRP workers.
The statistics in Table I are roughly consistent with those reported by Bonars and
Moores (1995) analyze of PRP within the 1988-1990 waves of the NLSY79. Confirming
their observations, PRP workers receive higher wages and have higher levels of
education in comparison to non-PRP workers. Additionally, piece rate, commission and
tip workers have shorter average tenures, while all other PRP workers have longer
average tenures. However, contrary to their findings, Table I reveals that PRP workers
have longer tenures than non-PRP workers. This is likely due to their exclusion of
group-based PRP plans from their measure of performance pay.
Furthermore, summary statistics reveal that PRP workers are more satisfied,
receive more promotions, are more likely to be employed in larger establishments, and
are more likely to receive fringe benefits than non-PRP workers. Turnover rates are
highest among piece rate workers and lowest among workers receiving stock options,
followed by multiple schemes, profit sharing and bonuses. Among those who receive
any PRP, 26.4 percent report receiving more than one type of PRP. Among those who
receive multiple types of PRP, the most common forms are profit sharing and bonuses
with many fewer workers receiving tips piece rates or multiple forms of PRP. Within
the sample 80 percent receive profit sharing and some other form of PRP while
72 percent receive bonuses and some other form of PRP. Among the various forms of
PRP, stock options and bonuses have the highest correlation coefficient at 0.25,
followed by stock options and bonuses at 0.14, and profit sharing and bonuses at 0.12.
As one would expect, the vast majority of piece rate workers are found in craft and
operative occupations. Commissions are most prevalent in sales occupations. Tips are

Performance pay
and employee
turnover
663

JES
39,6

664

concentrated in service occupations while bonuses and stock options are prevalent
among managerial occupations. Profit sharing appears to be spread evenly over
professional, managerial, and clerical workers. Workers receiving multiple forms of PRP
appear to be most prevalent among professional, managerial, sales and clerical
occupations. Furthermore, summary statistics reveal women are less likely to be paid
PRP and are less likely to receive bonuses, commissions and stock options as well
receiving multiple forms of PRP in comparison to men. With regard to firm size, piece
rates are most prevalent among the largest employers, while tips and commissions are
more common among smaller firms. Also, bonuses are more predominant among the
largest employers. Additionally, summary statistics show that unionized employees are
most likely to be paid either piece rates or profit sharing. Over time, the incidence of PRP
among this cohort increased from 14 percent in 1988 to a high of 18 percent in 1990, then
fell back down to 15 percent in 2000. Within the different PRP schemes, the percent
receiving stock options increased from 7 percent in 1988 to 29 percent in 1996 before
tapering off slightly in 2000.
IV. Empirical results
Analysis begins with a parsimonious specification of employee turnover and
progressively adds various sets of controls known to influence turnover to observe how
their inclusion influences the PRP coefficients. The base specification includes controls for
the presence of PRP, plus basic demographics such as race, gender, human capital and
ability, as well as industry and occupation. Specification 2 adds non-compensation
variables known to influence turnover including employer size, usual hours of work per
week, tenure and its square, union affiliation (whether member or covered), age, urban
status, number of jobs ever held, the local unemployment rate and family status indicators.
Specification 3 adds compensation variables such as the log hourly real wage, as well as
indicators for fringe benefits and promotions. Lastly, measures of global job satisfaction
are included in Specification 4. Adding additional controls reduces size and significance of
the PRP coefficient but increases the goodness of fit. Results of probit estimations on
turnover, quits and layoffs are presented in Tables II-IV[4].
Table II presents probit results where the dependent variable is the turnover
indicator and the independent variable of interest is the aggregate measure of PRP. The
parsimonious specification presented in Table II, Specification 1, reveals that PRP
workers are 3.9 percent less likely to experience turnover than non-PRP workers. Most of
the covariates included in this specification appear as expected. Females and nonwhites
have greater turnover, while those who accumulate more human capital in the form of
education and on-the-job training experience less turnover. Workers in professional,
managerial, clerical and craft occupations experience lower turnover, as do those
working in manufacturing, transportation, finance, professional services and public
administration industries.
Table II, Specification 2 adds non-compensation related variables known to influence
turnover. Adding these non-compensation variables reduces the PRP coefficient from
3.9 to 2.7 percent. Once non-compensation variables are controlled for, the size and
significance of several variables in Specification 1 are reduced. Inclusion of firm size
reveals that workers at smaller employers have higher turnover rates, while being
covered by a collective bargaining contract reduces turnover. As expected, higher
unemployment rates are associated with higher turnover. Unmarried and married

(1)
PRPa
Femalea
Nonwhitea
OJTa
AFQTa
Education
Professionala
Managera
Salesa
Clerica
Crafta
Operativea
Laborera
Transport operativea
Farm laborera
Private householda
Aga
Mininga
Constructiona
Mfga
Transportationa
Financea
Businessa
Personal serv.a
Entertainmenta
Prof. servicea
Pub admn.a
1989a
1990a
1996a
1998a
2000a
Small empa
Medium empa
Large empa
Hrs work per week
Tenure
Tenure squared
Uniona
Age
Urbana
Num. of jobs ever
held
Unemployment rate
Unmarried w/chd. ,
6 yrsa
Unmarried w/chd. .
6 yrsa
Married w/o chd. a

2 0.039
0.051
0.012
2 0.028
2 0.000
2 0.003
2 0.029
2 0.036
2 0.015
2 0.023
2 0.022
0.007
0.021
2 0.006
0.019
2 0.012
2 0.022
2 0.021
2 0.007
2 0.023
2 0.032
2 0.018
0.009
0.012
2 0.004
2 0.039
2 0.059
0.039
0.013
0.023
0.026
0.020

(9.20) * *
(10.80) * *
(2.14) *
(5.39) * *
(4.51) * *
(2.51) *
(4.02) * *
(5.21) * *
(1.39)
(3.52) * *
(2.70) * *
(0.76)
(1.88)
(0.52)
(0.65)
(0.35)
(1.45)
(1.04)
(0.83)
(3.55) * *
(4.00) * *
(2.19) *
(1.05)
(1.02)
(0.27)
(6.27) * *
(7.26) * *
(4.69) * *
(1.60)
(2.92) * *
(3.12) * *
(2.39) *

(2)
20.027
0.050
0.011
20.027
20.000
20.003
20.019
20.024
20.013
20.016
20.011
0.017
0.024
20.007
0.018
20.015
20.021
0.002
20.013
20.006
20.018
20.012
0.001
0.007
20.000
20.025
20.039
0.030
0.009
0.019
0.031
0.032
0.021
0.016
0.014
0.000
20.000
0.000
20.011
0.001
0.009

(6.81) * *
(10.76) * *
(2.14) *
(5.63) * *
(2.63) * *
(3.16) * *
(2.80) * *
(3.58) * *
(1.32)
(2.61) * *
(1.30)
(1.86)
(2.28) *
(0.70)
(0.64)
(0.51)
(1.58)
(0.11)
(1.58)
(0.97)
(2.28) *
(1.49)
(0.08)
(0.68)
(0.01)
(4.28) * *
(4.36) * *
(3.94) * *
(1.19)
(1.81)
(2.44) *
(2.18) *
(3.57) * *
(2.83) * *
(2.38) *
(0.10)
(13.26) * *
(8.36) * *
(1.97) *
(1.23)
(2.04) *

(3)
20.015
0.042
0.008
20.021
20.000
20.002
20.007
20.006
20.002
20.009
20.001
0.017
0.020
20.007
0.001
20.027
20.020
0.017
20.003
0.001
20.010
20.002
0.005
0.005
20.003
20.018
20.032
0.017
20.000
0.010
0.023
0.025
0.005
0.009
0.011
0.000
20.000
0.000
20.001
0.001
0.011

(3.75) * *
(9.22) * *
(1.57)
(4.43) * *
(0.60)
(1.88)
(0.95)
(0.79)
(0.20)
(1.39)
(0.14)
(1.98) *
(2.01) *
(0.65)
(0.05)
(1.05)
(1.51)
(0.78)
(0.30)
(0.22)
(1.21)
(0.21)
(0.62)
(0.54)
(0.18)
(3.06) * *
(3.48) * *
(2.40) *
(0.06)
(1.05)
(1.96)
(1.81)
(0.84)
(1.67)
(2.08) *
(0.75)
(10.35) * *
(6.29) * *
(0.20)
(0.67)
(2.72) * *

(4)
2 0.013 (3.31) * *
0.042 (9.30) * *
0.009 (1.75)
2 0.020 (4.29) * *
2 0.000 (0.69)
2 0.002 (2.25) *
2 0.004 (0.55)
2 0.005 (0.70)
2 0.002 (0.17)
2 0.007 (1.20)
0.002 (0.21)
0.016 (1.90)
0.020 (1.99) *
2 0.005 (0.52)
0.006 (0.23)
2 0.023 (0.92)
2 0.019 (1.50)
0.017 (0.78)
2 0.003 (0.31)
0.001 (0.23)
2 0.010 (1.20)
2 0.002 (0.23)
0.002 (0.25)
0.005 (0.55)
0.002 (0.12)
2 0.015 (2.57) *
2 0.029 (3.27) * *
0.020 (2.80) * *
0.002 (0.30)
0.015 (1.52)
0.029 (2.39) *
0.034 (2.39) *
0.009 (1.69)
0.011 (2.09) *
0.013 (2.41) *
0.000 (0.67)
2 0.000 (10.51) * *
0.000 (6.18) * *
2 0.001 (0.11)
0.000 (0.56)
0.009 (2.38) *

0.002 (2.26) *
0.008 (3.59) * *

0.002 (2.53) *
0.007 (3.39) * *

0.002 (2.11) *
0.008 (3.49) * *

0.020 (2.36) *

0.018 (2.12) *

0.018 (2.18) *

20.017 (2.56) *
20.021 (3.60) * *

20.016 (2.44) *
20.017 (3.04) * *

2 0.016 (2.59) * *
2 0.017 (2.97) * *
(continued)

Performance pay
and employee
turnover
665

Table II.
Determinants of
turnover probit
analysis marginal
effects shown

JES
39,6

666

Table II.

Table III.
Determinants of quits
and layoffs probit
analysis marginal
effects shown

(1)
Married w/chd.
, 6 yrsa
Married w/chd.
. 6 yrsa
Log real wage
Fringe benefitsa
Promotiona
Like job very mucha
Dislike job
somewhata
Dislike job very
mucha
Log likelihood
Pseudo R 2
Observations

(2)

(3)

(4)

0.013 (2.60) * *

0.016 (3.20) * *

0.018 (3.67) * *

20.022 (3.89) * *

20.018
20.034
20.076
20.036

(3.34) * *
(8.12) * *
(10.35) * *
(7.88) * *

2 0.017
2 0.031
2 0.067
2 0.032
2 0.007

(3.20) * *
(7.44) * *
(9.45) * *
(7.06) * *
(1.83)

0.062 (7.88) * *

24,722.817
0.072
17,114

2 4,463.95
0.123
17,114

24,333.17
0.149
17,114

0.125 (9.25) * *
24,255.37
0.164
17,114

Notes: Significant at: *5 and * *1 percent; adF/dx is for discrete change of dummy variable from 0 to 1;
z and P . jzj correspond to the test of the underlying coefficient being 0; absolute value of z-statistics
in parentheses

Quits
PRPa
Log likelihood
Pseudo R 2
Observations
Layoffs
PRPa
Log likelihood
Pseudo R 2
Observations

(1)

(2)

(3)

(4)

20.021 (6.38) * *
2 3,498.14
0.066
17,114

2 0.014 (4.53) * *
23,342.45
0.108
17,114

20.007 (2.12) *
2 3,265.38
0.128
17,114

20.005 (1.69)
23,194.54
0.147
17,114

20.015 (6.32) * *
2 2,192.83
0.067
17,114

2 0.010 (4.82) * *
22,080.94
0.114
17,114

20.007 (3.18) * *
2 2,038.99
0.132
17,114

20.006 (3.05) * *
22,031.31
0.135
17,114

Notes: Significant at: *5 and * *1 percent; adF/dx is for discrete change of dummy variable from 0 to 1;
z and P . jzj correspond to the test of the underlying coefficient being 0; absolute value of z-statistics
in parentheses; regressions (1)-(4) include the same set of controls displayed in Table II (1)-(4)

workers with young children are more likely to experience turnover, while parents with
older children and those without children are less likely to experience turnover.
Adding the log hourly real wage, fringe benefits, and promotions further reduces the
PRP coefficient reported in Table II, Specification 3, from 2.7 to 1.5 percent. The large
reduction in the PRP coefficient between Specifications 2 and 3 is likely due to the large
impact compensation has on job satisfaction and turnover. Adding the compensation
variables turns many of the previously significant covariates insignificant. For example,
coefficients for professional and managerial occupation fall to insignificance between
2 and 3. A likely explanation is that professional and managerial professions pay
relatively more than other occupations. Once controls for compensation are added,
the coefficients for managerial and professional occupations become insignificant.

Turnover
Bonusesa
Stock optionsa
Other PRPa
Profit sharinga
Log likelihood
Pseudo R 2
Quits
Bonusesa
Stock optionsa
Other PRPa
Profit sharinga
Log likelihood
Pseudo R 2
Layoffs
Bonusesa
Stock optionsa
Other PRPa
Profit sharinga
Log likelihood
Pseudo R 2
Observations

(1)

(2)

(3)

(4)

2 0.017 (2.76) * *
2 0.041 (2.57) *
2 0.009 (0.68)
2 0.043 (9.67) * *
24,700.63
0.077

20.013 (2.32) *
20.037 (2.54) *
20.009 (0.75)
20.029 (6.70) * *
2 4,451.31
0.126

2 0.005 (0.80)
2 0.032 (2.22) *
2 0.004 (0.38)
2 0.018 (4.06) * *
2 4,326.30
0.150

2 0.003 (0.47)
2 0.032 (2.19) *
2 0.002 (0.19)
2 0.017 (3.92) * *
24,248.40
0.166

2 0.004 (0.89)
2 0.022 (1.80)
0.008 (0.72)
2 0.027 (7.53) * *
23,482.35
0.070

20.002 (0.54)
20.020 (1.81)
0.007 (0.67)
20.018 (5.30) * *
2 3,333.23
0.110

0.003 (0.73)
2 0.017 (1.49)
0.009 (0.95)
2 0.011 (3.29) * *
2 3,259.11
0.129

0.005 (1.07)
2 0.016 (1.43)
0.011 (1.18)
2 0.010 (3.16) * *
23,187.83
0.149

2 0.011 (3.31) * *
2 0.019 (1.87)
2 0.014 (2.07) *
2 0.014 (5.50) * *
22,180.52
0.072
17,114

20.009 (3.15) * *
20.015 (1.78)
20.011 (2.02) *
20.008 (3.59) * *
2 2,071.27
0.118
17,114

2 0.007 (2.42) *
2 0.014 (1.70)
2 0.010 (1.85)
2 0.005 (2.09) *
2 2,031.73
0.135
17,114

2 0.007 (2.34) *
2 0.014 (1.70)
2 0.010 (1.81)
2 0.005 (2.03) *
22,024.26
0.138
17,114

Notes: Significant at: *5 and * *1 percent; adF/dx is for discrete change of dummy variable from 0 to
1; z and P . jzj correspond to the test of the underlying coefficient being 0; absolute value of z
statistics in parentheses; regressions (1)-(4) include the same set of controls displayed in Table II,
(1)-(4); also, coefficients for piece rates, commissions and tips were omitted from the above table for
brevity since they were not significantly different from zero in any of the above estimations

The same types of interactions also cause other coefficients to become insignificant due
to the high correlation between pay and other aspects of job quality. However, the PRP
coefficient remains statistically significant. As shown in Table II Specification 3, a higher
log real wage is associated with lower turnover, while the presence of other fringe
benefits or a recent promotion reduces the probability of turnover.
Lastly, adding job satisfaction controls causes the PRP coefficient to fall from
1.5 to 1.3 percent, as displayed in Table II, Specification 4. Those that state that they either
dislike their job somewhat or very much have higher rates of turnover. Consequently,
initial estimations reveal that PRP generally reduces turnover, despite the inclusion of
many known major determinants of turnover. Moreover, female workers remain more
likely to experience turnover as do those at larger employers and those caring for young
children. Workers who receive on-the-job training, work in public administration, or do
not have young children are less likely to experience turnover. Also, the compensatory
variables remain negatively significant, but at slightly reduced magnitudes.
Does the aggregated PRP measure have a different impact on quits than layoffs?
Table III separates turnover into quits and layoffs while including identical controls as
those presented in Table II[5]. As previously observed, adding additional sets of
variables known to influence turnover reduces the PRP coefficient on both quits
and layoffs. Adding non-compensation and compensation-related variables in Table III
Specifications 1-3 reduce the PRP coefficient on quits from 2.1 to 0.7 percent.

Performance pay
and employee
turnover
667

Table IV.
Turnover by PRP
type probit
analysis marginal
effects shown

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668

However, adding job satisfaction variables reduces the PRP coefficient to

insignificance as shown in Specification 4 for quits. With regards to layoffs, the
PRP coefficient falls from 1.5 percent in Specification 1 to 0.6 percent in Specification 4.
Nonetheless, the PRP coefficient remains negatively significant even after inclusion of
measures of job satisfaction, as well as non-pecuniary and pecuniary aspects of the job.
Consequently, estimations support the hypothesis that PRP participation results in
reduced turnover, especially layoffs. However, the observed negative correlation
between PRP and turnover does not provide any evidence concerning which specific
PRP schemes matter most in influencing turnover decisions.
Including indicators for the various PRP schemes as well as an indicator for
participation in multiple PRP schemes reveal that profit sharing tends to reduce
turnover, especially quits. Table IV displays the effect of the different PRP schemes on
turnover when all PRP schemes are added into the specification together[6]. Profit
sharing and stock options significantly reduce turnover, even after inclusion of all
available controls in Specification 4. Bonuses initially reduce turnover, but this falls
to insignificance with inclusion of the compensatory covariates. Moreover, piece rates,
commissions, tips, and other forms of PRP have no significant impact on turnover.
Also, the coefficient for multiple PRP plans is insignificant. Thus, except for profit
sharing and stock options, there may be correlated omitted variables that, when included,
cause the negative correlation between the other PRP schemes and turnover to vanish.
Separating turnover into quits and layoffs reveal a slightly different pattern where
stock options no longer appear to significantly influence quits. However, profit sharing
remains negatively significant, suggesting it has an influence distinct from the other
PRP schemes. Additionally, bonuses have a slight negative impact on layoffs which
fails to vanish in the full specification. Moreover, including profit sharing alone in
Specification 4 without the other PRP variables reveals that profit sharing significantly
reduces the probability of both quits and layoffs, while stock options have a weak
negative impact on layoffs. All other PRP coefficients remain insignificantly different
from zero when added separately into the fullest specification. Consequently, the profit
sharing result is unlikely to be due to multi-collinearity; however, the other results
could be insignificant due to multi-collinearity. If one expected the profit sharing result
to arise out of multi-collinearity, one would expect the profit sharing result to be
significant when included with the other PRP schemes, but insignificant when included
individually. Whether included individually or together with the other PRP schemes,
the level of significance and size of profit sharing coefficient do not change.
Consequently, the aggregated PRP measure appears to generally reduce turnover. Yet,
breaking down the PRP measure by type, I find that PRP schemes dependent on a
firms profitability such as profit sharing have a consistently significant negative
impact on turnover and layoffs, and to some extent, quits.
Given the large amount of self-selection known to be associated with PRP, it is essential
to control for individual effects. This is done by estimating fixed and random-effects
probit models including all available determinants of turnover. The fixed-effect probit
models are estimated using LIMDEPs fixed-effects probit procedure[7].
When estimating fixed-effects models, sample sizes shrink because workers with no
variation in status are dropped from the sample. Additionally, coefficients for time
invariant determinants such as gender, race, and AFQT score cannot be estimated.
Furthermore, fixed-effects estimates increase measurement error which often makes it

difficult to obtain precise and statistically significant results. Initially, to check the
robustness of earlier results, all prior estimations were repeated using a fixed-effects
procedure. These estimations reveal a similar pattern as shown in Tables II-IV, except for
a few minor deviations in magnitude and significance[8]. In the fixed-effects estimations,
the size of the fixed-effects is not of great consequence since they are individual
components of turnover propensity not associated with the independent variables and
hence will not be discussed.
Another difficulty inherent in the fixed-effects estimations is that these estimations
may be picking up movement between the differing forms of PRP as opposed to
capturing the intended influence of movement from non-PRP to PRP jobs on turnover
proclivities. If moving from a non-PRP to a PRP job is associated with positive rents,
one would expect to see lower turnover among PRP workers. However, if one is moving
from one PRP scheme to another, there may be no rents and hence no difference in
turnover associated with the PRP scheme. Consequently, the fixed-effects estimations
should ideally only identify movements from a non-PRP job to a PRP job. Since the
fixed-effects estimations involve a small and select sample, I do not expect there to be
much movement across PRP schemes. Nevertheless, to further limit the possibility of
capturing movement across PRP schemes, I created three categories: profit sharing,
all other PRP besides profit sharing, and those who have neither, and then included
them in the fixed-effects estimations. This should minimize the possibility of capturing
movement from one PRP scheme to another since there are now only two schemes,
profit sharing and all other PRP schemes besides profit sharing.
As shown in Specifications 1-3 in Table V, controlling for individual effects reveals
that PRP workers remain less likely to experience job turnover and layoffs, but not
significantly less likely to quit. Disaggregating PRP by scheme as described above
reveals that those receiving profit sharing are less likely to experience turnover in the
form of both quits and layoffs (Table V, Specifications 4-6)[9]. The magnitude of
the marginal effect in each case actually increases after controlling for fixed-effects in
the estimations. Although not shown in Table V, the marginal effect for the PRP
coefficient in Specification 3 is now larger in magnitude (2 0.006 vs 2 0.046) than in the

PRP

(1)
Job
turnover

(2)
Quits

2 0.240
(3.44) * *

20.139
(1.63)

2 0.357
(3.16) * *

669

(4)
(5)
(6)
(3)
Job turnover by QuitsbyPRP Layoffs by
Layoffs PRP scheme
scheme
PRP scheme

2 0.376
(4.31) * *

2 0.294
(2.74) * *

20.432
(3.09) * *

2 0.092 (1.03)

0.017 (0.16)

20.268
(21.80)

1,484
21,925.26

1,080
21,338.71

574
2789.65

Profit sharing
All PRP schemes
besides profit
sharinga
Number of
individuals
Log likelihood

Performance pay
and employee
turnover

1,484
1,080
574
21,928.71 21,341.59 2 790.07

Notes: Significant at: *5 and * *1 percent; absolute value of z-statistics in parentheses; all estimation
includes the full set of controls as indicated in Table II, column 4; athis category excludes those who
simultaneously receive profit sharing as well as alternate forms of PRP

Table V.
Fixed-effects probit
analysis of job turnover,
quits, and layoffs

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670

estimations without the fixed-effects, as are the marginal effects on the profit sharing
coefficients for turnover (2 0.017 vs 2 0.027), quits (2 0.010 vs 2 0.014), and layoffs
(2 0.005 vs 20.055) in Specifications 4-6, respectively. As shown in Specifications 4-6,
all other forms of PRP besides profit sharing have no significant impact on turnover or
quits. However, the coefficient for other PRP besides profit sharing does come close to
having a significant impact on layoffs.
In addition to the fixed-effects estimations, random-effects estimations were also
performed to check the robustness of the findings. These estimations reveals that PRP
workers are less likely to experience turnover and layoffs, but not significantly less
likely to quit[10]. Breaking down PRP into different schemes, then adding them
together with all other determinants of turnover reveals that those receiving profit
sharing as a form of compensation experience lower rates of turnover as well as layoffs
and quits. In addition, those receiving stock options are significantly less likely to
experience turnover and layoffs, but not quits.
After including a multitude of factors known to influence turnover and attempting
to control for individual heterogeneity, the negative correlation between turnover and
profit based PRP remains. Therefore, profit sharing, and to some extent stock options,
appears to have an independent influence on job turnover that other forms of PRP do
not. However, other forms of PRP do not have a significant impact on turnover after
accounting for measures intended to capture the pecuniary and non-pecuniary aspects
of the job while controlling for job satisfaction. Thus, for these other PRP types,
evidence suggests that there are correlated omitted variables that, once included, cause
the negative association between PRP and turnover to vanish.
V. Conclusion
Although there is a substantial literature on the relationship between profit sharing and
turnover, there is very little research on the influence of other types of PRP on job turnover.
This paper explores how various PRP schemes influence employee turnover. It also tests
whether profit sharing has a differential impact on turnover in comparison to other forms
of PRP. Analysis of NLSY79 data suggests that PRPs impact on labor market turnover
critically depends on which type of PRP the worker receives. I find that workers receiving
some form of PRP, regardless of type, have lower rates of employee turnover than workers
who do not, within the cohorts analyzed. This finding provides more empirical support for
the sorting model of PRP than the classic agency model. Furthermore, workers receiving
some form of PRP are less likely to quit and are much less likely to be fired than those not
receiving any form of PRP. Confirming Azfar and Danninger (2001), Green and Heywood
(2008) and Kruse et al. (2010), these results appear to be mainly driven by profit based pay
schemes, especially profit sharing[11]. Although one would expect the influence of other
PRP schemes to mimic that of profit sharing, evidence suggests otherwise. When one
isolates the impact of the separate PRP schemes on turnover, only those receiving profit
sharing are significantly less likely to experience turnover.
Empirical evidence also supports the Weitzman theory (1985) that profit
sharing enables marginal labor costs to vary with profitability, hence reducing the
incentive to shed workers during downturns. Accordingly, further reliance on shared
capitalism in the form of profit sharing based on firm profitability may help mitigate
the problem of unemployment as well as enhancing productivity and incentivizing
employees.

Notes
1. Light and McGarry (1998) note the difficulty in distinguishing voluntary and involuntary job
separations within the NLSY. Specifically, they observe that a majority of workers
experiencing turnover report voluntary separations and a significant proportion (25 percent)
report separations for other reasons. However, they do note that replacing their measures
of total separations with voluntary separations other than discharges or layoffs does not
qualitatively change their inferences concerning the influence job mobility has on wage
paths. Although potentially arbitrary, I code those who report separations for reasons of
layoffs, plant closings, end of temp or seasonal jobs, firings, or program endings as
involuntary separations (layoffs) while those who report separations as quits, regardless of
reasoning, as voluntary separations (quits).
2. Although the common practice is to take the log of employer size, results are not sensitive to
whether estimations include the log of establishment size or four separate size indicators
employed here.
3. The NLS constructs the unemployment rate by using state and area labor force data from
the May publication of Employment and Earnings for the month of March of each survey
year. If a respondent resides in a metropolitan area, then the unemployment rate is the
unemployment rate for that metropolitan area. Otherwise, the unemployment rate is the
computed balance of state unemployment rates for the state in which the respondent resides.
4. Logit estimations with and without fixed effects reveal a similar pattern as that shown using
probit analysis and are available from the author upon request.
5. The full estimation results, including all covariates, are available from the author upon
request.
6. Estimations including each PRP scheme separately in the four specifications reveal a similar
pattern as when they are added jointly. These estimations are available from the author
upon request.
7. See LIMDEP Manual Version 9 (2007) Panel Data Models for Binary Choice, p. E20-1-E20-17.
8. The full estimation results are available from the author upon request.
9. Fixed-effects estimations including all the PRP measures together in a single model were also
run for turnover, quits and layoffs. These estimations reveal that profit sharing reduces job
turnover and quits, but not layoffs. However, the profit sharing coefficient would be statistically
significant at the 10 percent level, suggesting a weak negative correlation between profit sharing
and layoffs. Accounting for individual heterogeneity causes the stock option coefficient to
become statistically insignificant, although it retains sign and size. This result suggests that it
may be imprecisely estimated due to the small number of changes occurring within individuals.
In a similar vein, fixed-effects estimations reveal a weak positive correlation between piece rate
and layoffs and a weak negative correlation between commissions and quits.
10. These estimations are available from the author upon request.
11. For theoretical explanations and further background concerning the influence of profit
sharing on productivity and employment stability, readers can reference Kruse (1993) and
Kruse et al. (2010).
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Corresponding author
Patrick L. OHalloran can be contacted at: pohallor@monmouth.edu

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