Reward Systems and the Distribution of Wages

Output-related payment systems, such as piece rates, production bonuses, and commissions, are common in many jobs and are typically thought to serve two primary purposes: first, to induce workers to expend more effort; second, to allocate some or all of the risks at the point of production to the workers. In the literature on agency problems, the first purpose is referred to as the incentive purpose (see, e.g., Stiglitz); whereas in the Marxist labor-process literature, it is referred to as the purpose of extracting labor power (e.g., Burawoy:chaps. 3-4; Lazonick:chaps. 1-2). In terms of wages, workers employed under an output-related payment system tend on the average to earn more than workers paid by the hour. This is so because incentive-rated workers in part are compensated for working harder and in part they are compensated for the risks they have to carry. One part of the expected pay differential between the two groups is due to effort compensation and another to compensation for risks. Against this background, the article has two goals. The first is to assess the extent to which, and the magnitude by which, incentive-rated workers on the average earn more than time-rated workers. This analysis provides an assessment of the role of output-related payment systems in generating wage in-