Does Fair Share Capitalism Improve Firm Performance?

Funded by: Department of Trade and Industry


March 2006 to July 2006

PSI researchers:

Background, summary and aims

Background and Aims

Despite theoretical predictions that incentive payments can enhance productivity and thus company performance, there is conflicting empirical evidence substantiating a link. Using cross-sectional and panel evidence from British establishments in the Workplace Employment Relations Survey 2004, this paper tests the following propositions: (i) that group pay incentives, coupled to group decision-making, is associated with (a) improved employee well-being (b) increased organizational loyalty and (c) workplace performance; (ii) the presence of group pay incentives or group decision-making in isolation has non-significant effects on (b) and (c) and may be detrimental to (a); (iii) the performance effects of group incentive pay coupled to group decision-making are greatest where the criteria for judging performance combine ‘soft’ and ‘hard’ measures of performance.

Project Design

The study uses the linked employer-employee feature of the 2004 data. Payment methods and workplace performance criteria (productivity and performance) will be measured using data from the Managerial Questionnaire. Employee measures of well-being will be taken from the SEQ. We shall test the sensitivity of results to the use of managerial and employee measures of employee involvement in decision-making. We will also analyse the impact of 1998 pay for performance regimes, and changes in those regimes, on changes in performance of panel workplaces over the period 1998-2004. The team are Richard Freeman, Harvard, NBER and CEP, and Alex Bryson, PSI

Importance of Research

In 1999, the Chancellor of the Exchequer stated: “Share ownership offers employees a real stake in their company…I want, through targeted reform, to reward long term commitment by employees. I want to encourage the new enterprise culture of team work in which everyone contributes and everyone benefits from success.” Since then, deferred profit-sharing schemes have been outlawed, payments made under PRP schemes have become fully taxable, and there has been a shift towards tax breaks for share ownership schemes such as the Share Inventive Plan. This study assesses the independent effects of these and other pay reward schemes in conjunction with group-working and other labour usage practices in Britain in 2004. It will also assess the effects of pay reward systems in 1998 on performance among continuing workplaces over the period 1998-2004. Accordingly, it will furnish policy-makers with evidence regarding the circumstances under which these schemes may be beneficial to firms and their employees. The study explores the effect of incentive pay schemes on a variety of performance outcomes and tries to identify channels or mechanisms by which these schemes have their effects. This information will inform policy-advisers when considering whether, and if so, how, government policy should promote pay reward schemes.


Doing the right thing? Does fair share capitalism improve workplace performance? [pdf]