Between-Worker Variability in Output under Piece-Rate versus Hourly Pay Systems

This study re-examined the earlier conclusion by F. Schmidt and J. Hunter (1983) that incentive pay reduces between-worker differences in output, based on their finding that the standard deviation of employee output as a percentage of mean output (SDp) is smaller under piece-rate compensation than under hourly pay. Results of the present study indicate that while the average observed SDp is larger under hourly conditions, this difference disappears after correcting for unreliability in the output measures. It appears that the difference in mean observed SDp values is due to the fact that there is more measurement error in measures of output for employees working under nonincentive-based compensation conditions. This finding suggests that incentive pay may reduce random response variability in employee output but does not reduce differences between employees in work effort and motivation. This finding also suggests that type of compensation system does not affect the percentage output increases produced through improved selection. These findings have implications for theories of job performance.