Media Briefings

PERFORMANCE PAY: UK evidence of its impact on rising inequality

  • Published Date: March 2015

Performance pay was one factor behind the increase in wage inequality among higher earners in the run-up to the recession. That is the central finding of research by Mark Bryan and Alex Bryson to be presented at the Royal Economic Society’s 2015 annual conference. But they also note that despite speculation that the share of jobs in the economy with performance-related pay would rise, in fact the proportion either declined slightly or stayed flat between 1998 and 2008.

The authors analyse data on 8,000 men and women in the UK about their work and pay from 1998 through to the 2008 recession. They find that:

• Around one in four women and one in three men were on performance-related pay in 1998.
• Workers on bonuses earned roughly 5% more per year – and this increased slightly over the decade to 2008.
• Performance-related pay contributed to greater inequality – raising the gap between those in the middle and the top 5% of earners by around 3-4% between 1998 and 2008.
• For men, this change was mainly driven by bonuses.

The authors point out that were it not for the fact that bonuses have become less fashionable in recent years – with employers preferring other forms of pay – inequality may well have been higher. They comment:

‘Although performance pay does lead to more inequality, the effects were smaller than they otherwise would have been owing to the fact that performance pay became less prevalent in the decade prior to recession.’

This work adds to the body of research linking performance pay and inequality, with studies among men in the United States showing a link during the 1970s and 1990s.

More…

Performance-related pay has not become more widespread in Britain in recent years, but nevertheless it was one factor behind the increase in wage inequality among higher earners in the run-up to the recession. This is the finding from a large-scale study of British employees over the period 1998-2008, conducted by Mark Bryan of the Institute for Social and Economic Research (ISER), University of Essex, and Alex Bryson of the National Institute of Economic and Social Research (NIESR).

While bankers’ bonuses have hit the headlines recently, the new study looks at performance pay across the economy as a whole. It uses data on roughly 8,000 men and women employees interviewed every year by the British Household Panel Survey (BHPS) about their employment experiences and wages.

Overall, just over 25% of women and over 35% of men were in jobs with performance-related pay in 1998, and these figures roughly doubled when other forms of bonus and profit-related pay were included. But despite speculation that performance pay may be on the rise, in fact the proportions either declined slightly or stayed flat over the period 1998-2008.

Performance pay may cause more wage inequality because it leads to a pay premium and the benefits tend to be reaped by those who were in better-paid jobs in the first place. Internationally, research has showed that performance pay contributed significantly to the growth in earnings inequality among men in the United States from the late 1970s through to the early 1990s, though with much less effect after that.

For Britain, the study finds that on average workers who were paid for performance earned roughly a 5% wage premium and this increased slightly over time. Overall, performance pay did indeed contribute to greater wage inequality among both men and women in the upper half of the pay distribution.

But the effects were quite modest, raising the gap between those in the middle and the top 5% of earners by 3-4% between 1998 and 2008. For men, most of the growth was attributable to a particular type of performance pay, namely bonuses. So although performance pay does lead to more inequality, the effects were smaller than they otherwise would have been owing to the fact that performance pay became less prevalent in the decade prior to recession.

ENDS


Contact details:
Mark Bryan
markb@essex.ac.uk