Management Accounting Research 47 (2020) 100649

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Management Accounting Research

journal homepage: www.elsevier.com/locate/mar

Does performance pay increase productivity? Evidence from a medical T

typing unit
Oliver Ungera, , Andrea Szczesnyb, Martin Holderriedc
⁎

a
Faculty of Business Management and Economics, Julius-Maximilians-University, Würzburg, Germany
b
Faculty of Business Management and Economics, Julius-Maximilians-University, Würzburg, Germany
c
Division of Economics & Management of Social Services, Hohenheim University, Germany

ARTICLE INFO ABSTRACT

JEL classification: Using unique data from a medical typing unit (2011–2014), this paper empirically explores the influence of
I11 performance pay on employee productivity in a risk-less low incentive intensity environment. We analyze a
M41 routine task performed by lower-level employees. We analyze a setting with strong sectoral agreements and thus
M52 a clear (and comparatively high) basic wage level set by the general collective bargaining agreement. We find
that despite the risk-less design and low incentive intensity of the setting, switching employees from fixed wages
Keywords:
to partially performance-based compensation (PPBC) significantly increases the number of typed pages by
Performance pay
9.53%. Over a one-year period, this rate of increase translates into approximately one additional month of
Piece rates
Incentive effects output at a fraction of the usual cost. We also find that these results do not disappear over time. In contrast, the
Effort choice observed gains split into an initial increase in productivity following the switch to PPBC (+3.25%) and addi-
Performance measurement tional gains while an employee remains on PPBC. Therefore, we assume that a type of learning begins once an
Productivity employee switches to PPBC and that this learning is the most pronounced during the first months following the
change in compensation. Furthermore, we find no evidence of potentially misplaced incentives in the selection of
tasks by the employees (i.e., cherry picking) and no indications of reduced quality.

1. Introduction
The research question we address concerns the impact of perfor-
mance pay on productivity in a low incentive intensity environment.
We analyze a setting with strong sectoral agreements and thus a clear
(and comparatively high) basic wage level that is supplemented by
bonus payments tied to the individual productivity of employees. Mixed
or partially performance-based compensation (henceforth PPBC)
schemes are arguably the most frequently used incentive system applied
in many industries and professions in Germany and also worldwide.1
Whereas the theoretical implications of (monetary) incentives2 have
been analyzed comprehensively (Fama, 1980; Hart and Holmström,
1987; Laffont and Tirole, 1988; Lazear, 1986; Milgrom and Roberts,
1992; Prendergast, 1999; Stiglitz, 1975), prior empirical studies (Fernie
and Metcalf, 1999; Lazear, 2000; Oettinger, 2001; Shearer, 2004)
mostly focus on settings with purely performance-based pay. We
therefore analyze a setting with an arguably much lower incentive in-
tensity than in previous studies. Furthermore, the change from a fixed
compensation to a PPBC in our setting does not imply risk to the em-
ployee because the previous fixed wage is guaranteed and an additional
bonus can be achieved based on individual performance.
We base our inferences on unique data from a medical typing unit
(2011–2014). We obtained data on employees experiencing a change to
PPBC as well as employees already working under PPBC. These data
allow for both an analysis of PPBC that is not affected by potential
sorting effects and a control for general improvements made over the

Corresponding author.
⁎

E-mail address: oliver.unger@uni-wuerzburg.de (O. Unger).

1
For Germany, a representative survey for companies with more than 50 employees (Linked Employer-Employee Data of the IAB 2013) shows that in 2013 58 % of
all companies used performance-based systems. Of these firms, 75 % used incentives for employees at the staff level (i.e., a group where strong sectoral agreements
constitute an important impact). For more than two thirds of these employees, the variable remuneration component was less than 10 % (e.g., BMAS, 2013). A recent
survey by Kienbaum (Gehalts- und Vergütungsstudie Spezialisten & Fachkräfte 2017, https://gehaltsreporter.de/variables-gehalt/) further confirms these findings
and shows that for skilled workers the variable remuneration component is often only 4 % to 8 %.
2
If output can easily be measured, the neoclassical theory of contracts suggests paying employees based on their performance (Akerlof, 1982). Many papers address
such performance pay in terms of executive compensation (e.g., Leonard, 1990; Murphy, 1985, 1986), teacher performance (e.g., Ballou, 2001; Lavy, 2002; Lazear,
2003) and staff satisfaction levels (e.g., Heywood and Weei, 2006).

https://doi.org/10.1016/j.mar.2019.100649
Received 15 November 2016; Received in revised form 26 September 2019; Accepted 27 September 2019
Available online 05 October 2019
1044-5005/ © 2019 Elsevier Ltd. All rights reserved.
O. Unger, et al.
observational period (i.e., an overall increase in productivity unaffected
by the switch to PPBC).
We first examine the influence of PPBC on productivity. We find
that despite the risk-less design and low incentive intensity of the set-
ting, employees switching to PPBC show a significant increase of 9.53%
in productivity measured as the average number of typed pages per
workday. Over a one-year period, this translates into approximately one
additional month of output at a much lower cost than the usual salary
of employees. Furthermore, we find that the observed productivity
gains are persistent over time. Thus, we do not find evidence of the
existence of a Hawthorne effect,3 in which any modification or ad-
justment is likely to lead to short-term increases in productivity that
vanish over time (Lazear, 2000; Roethlisberger and Dickson, 1947).
Regarding long-term development, we find that productivity increases
over the time an employee participates in PPBC but with a decreasing
slope. Once employees switch to PPBC, they seem to find ways of
working faster and more efficiently. These learning effects, which are
most pronounced in the first months after the switch to PPBC, follow
the basic principles of the traditional learning curve analysis outlined
by Treplitz (1991). Notably, we see no reversal of the positive trend in
productivity within our observational period; instead, we observe sta-
bilization at higher levels.
We next examine potentially misplaced incentives regarding the
quality and selection of more favorable work (i.e., cherry picking).
First, when conducting expert interviews with physicians, we find no
evidence of quality-related issues after the switch to PPBC. Second, by
using the average letter length of the typed dictations, we shed light on
unintended incentives regarding the selection of more favorable work
(i.e., cherry picking). Cherry picking does not affect the quality of the
discharge letters. However, it might lead to greater increases in the
productivity (and therefore bonus) of employees participating in PPBC,
at the expense of non-participating employees who might ultimately
type the remaining longer and therefore less-attractive dictations. Such
an outcome would imply an increase in the costs of the bonus system
without an increase in the overall productivity of the typing unit. For
employees who switch to PPBC, we find no evidence of cherry picking.
For employees with no change to their compensation (sample
“Constantly PPBC” & “Constantly no PPBC”), we even find that those
participating in PPBC on average choose longer dictations than em-
ployees working solely on an hourly wage during the observation
period.4
We contribute to the literature examining performance pay in sev-
eral ways. First, we analyze a setting with an arguably much lower
incentive intensity than previous studies. Given the low average in-
centive intensity between 4.3% and 6.5% of the monthly fixed wages
and the risk-less setting with a fixed wage and a bonus for each page
written above a defined threshold such that as explained later theore-
tically even lower productivity can lead to higher pay, we believe that
despite the previously mentioned studies, it is far from obvious to as-
sume considerable productivity increases after the switch to PPBC. A
stable or even declining level of productivity could result from a
crowding out of intrinsic incentives not adequately compensated by a
large enough financial incentive. Our paper therefore provides insight
into the mode of action of performance pay in the vast number of
professions, sectors or countries where fully performance-based com-
pensation might not be feasible. Our typing unit is part of a public
hospital. Therefore, our study falls into the field of literature dealing
3
The Hawthorne effect is named after the Western Electric Hawthorne Plant
in Illinois (USA). It is worth noting that it appears that the existence of a
Hawthorne effect at the original Hawthorne plant has been debunked (Levitt
and List, 2011).
4
Employees on hourly wages mainly print dictations and only use the re-
maining time to type dictations. This might have had an influence on the ob-
served figures.
2
Management Accounting Research 47 (2020) 100649
with performance-related pay in the public sector (Perry et al., 2009;
Weibel et al., 2010). The latter is shaped by strong framework condi-
tions under collective bargaining law as mentioned before.5 Bonus
payments in this sector are usually low. At the same time, employees in
the public sector are assumed to have a high degree of intrinsic moti-
vation associated with their work (Buelens and Van den Broeck, 2007).
In this situation with low bonus payments, the risk of a crowding-out
effect dominating the extrinsic motivation (price) effect is high (Weibel
et al., 2010). Moynihan (2008) even advises blocking pay for perfor-
mance to retain other positive effects of performance management. The
results of our study contradict this finding and show that incentive
systems, including systems with low performance pay, are effective.
This result may be linked to another strand of the literature that deals
with the difference between simple tasks and complex (interesting)
tasks, where the latter are probably related to higher intrinsic motiva-
tion. Research concludes that task type is an important moderator. In
the case of simple tasks, the price effect might dominate a possible
crowding-out effect due to relatively lower intrinsic motivation and
generally better measurability of individual performance. Intrinsic
motivation in simple tasks might be relatively low and transparency or
observability high (Perry et al., 2006). In both public and private
companies, there are numerous classic administrative tasks that are
quite simple, such as those in our typing unit. Our study can make a
valuable contribution to this literature since field studies in real en-
vironments like Shearer (2004) and Lazear (2000) or in a team context
like Friebel et al. (2017) remain rare and have limitations.
Closely related to this is the discussion about how pay for perfor-
mance works at the staff level. At the staff level, tasks are relatively
simple with the aforementioned associated characteristics, whereas at
the management level, tasks are comparatively complex. At the staff
level, performance-related pay has a long tradition among manual
workers in manufacturing and has gained importance for non-manual
staff in services (Schmidt et al., 2011).
In addition, our study is interesting from a methodological point of
view. We provide a controlled “clean room”-style analysis of the short-
and long-term effects of incentives on performance. Due to the structure
of our samples, our analysis is not affected by sorting effects or general
improvements (i.e., productivity increases unrelated to PPBC) over
time. We use a well-documented routine task in which all employees
work on their own, and thus the number of typed pages serves as a good
measure of individual output. Moreover, the typing unit provides its
service to only two clinics, therefore reducing the variation in covered
medical cases. Furthermore, the dictations follow a clearly structured
design and are thus subject to only minor fluctuations.
Finally, previous studies (Fernie and Metcalf, 1999; Lazear, 2000;
Oettinger, 2001; Shearer, 2004) have stressed the importance of
holding working conditions consistent but have been incapable of
testing for potential cherry picking. We are able to analyze such po-
tentially misplaced incentives.
Our paper is organized as follows. Section 2 provides more in-
formation regarding the institutional details of hospital discharge let-
ters. Section 3 embeds our analysis in the extant literature and develops
our hypotheses. Section 4 presents our data set, explains our perfor-
mance measure, describes our estimation models and explains our
controls. Section 5 presents and discusses the results of our empirical
analysis. Section 6 addresses robustness issues. Section 7 discusses
limitations and concludes.
5
For example, in German public services, prior to the “Collective Agreement
for the Public Service” (TVöD), which came into effect in 2005, there had been
only limited experience with variable pay components. Now within TVöD and
all its specific collective agreements based on it, performance-related pay is
possible, albeit still at a very modest level. See for example Marsden et al.
(2000) and Schmidt et al. (2011).
O. Unger, et al.
Fig. 2. Histogram of PAGES pre and post PPBC (sample “switch to PPBC”).
2. Institutional setting
Despite technological progress, hospital discharge letters remain the
primary means of communication between hospitals and registered
doctors (e.g., Kripalani et al., 2007; Medlock et al., 2011). The main
functions of discharge letters include informing treating physicians
within and outside the hospital, communicating between the referring
and treating physicians and assuring revenue in the case of drop tests by
the Medical Service of Health Funds (MDK) (Jauch, 2013). Other
functions of discharge reports include representing the hospital and its
overall quality of care as well as serving as important documents in case
of legal claims.
Between 2011 and 2014, the central medical typing unit provided
services for two clinics. The unit is led by a supervisor with the main
tasks of organizing the workload, planning and staffing the employees
and securing the quality of the dictations. The process of typing dis-
charge letters at the typing unit is organized as follows (see. Fig. 1):
The treating physician creates a digital dictation, which follows a
clearly structured design. The digital dictation is then typed by one of
the typists. Therefore, the employees choose from a pool of pending
dictations but are required to select according to the first-in first-out
method (FIFO). Exceptions to this rule are urgent inquiries by the MDK.
The typed dictation is then sent back electronically to the treating
physician for correction and passed to a senior physician for final ap-
proval. Once the dictation is approved, employees from the typing unit
print it and prepare it to be mailed. Dictations are printed by certain
employees of the typing unit who only type dictations in their re-
maining time. Due to the resulting (multitasking) problems in evalu-
ating their performance, these employees cannot participate in PPBC.
Typing discharge letters requires both a fundamental understanding of
medical terms and decent speed in using the keyboard. New employees
are thus trained and very closely monitored during their first 12 months
at the typing unit. The individual productivity level of the employees is
determined by their ability, the level of their effort and, to some degree,
3
Management Accounting Research 47 (2020) 100649
Fig. 1. Process of creating discharge letters.
by the characteristics of the dictation to be typed. For example, shorter
dictations are comparatively easier (i.e., faster) to type because a
header and basic information (which together cover approximately half
a page) are pulled automatically when opening a new dictation.
Employees at the typing unit receive a fixed wage A based on a
collective agreement in that sector. Monthly gross wages (2011–2014)
for employees are derived from a general collective bargaining agree-
ment for a full-time employee and can vary from approximately 2000 €
to 3000 € depending on the qualifications and seniority of the em-
ployee. In addition to the fixed wages, employees were given the
chance to switch to PPBC, allowing them to earn a bonus B. Employees
can earn an additional 1 € for every page typed above a certain
threshold, depending on their working hours. For example, full-time
employees must exceed 50 pages per workday to begin receiving bonus
payments. Employees who switched to PPBC averaged 17.07 workdays
a month and 57.62 pages per day after switching to PPBC, resulting in a
monthly gross bonus payment B of 130.07 €. This translates into a
bonus of only 4.3%–6.5% of the monthly fixed wage. The bonus cut-off,
which was agreed to by signing a contract with employee re-
presentatives prior to our observation period, remained at 50 pages per
workday (for a full-time employee) for the entire period. To obtain the
necessary approval of the employee representatives, the threshold for
bonus payments was deliberately set at a level that was feasible for the
employees (i.e., no “stretching target”). Thus, the transition to a PPBC
was practically riskless.
Even prior to switching to PPBC, employees of sample “Switch to
PPBC” missed the target in only 4 of 45 months. After the switch to
PPBC, this group (slightly) missed the threshold in only 1 of 118 months
(see Fig. 2). Employees constantly on PPBC exceeded the threshold in
303 of 334 months. Monthly results are not netted over the course of a
year. Hence, one month above the threshold already guarantees a bonus
for this particular month. The firm set the bonus level below what most
employees were already achieving in order to be able to establish a
PPBC. This for the first time allowed the typing unit to reward
O. Unger, et al.
Table 1
Four scenarios of pre and post PPBC productivity and related pay.
Scenario Number of Pages Pre PPBC Number of Pages Post PPBC
# 1 50 40
# 2 60 55
# 3 40 45
# 4 52 58
performance in a setting where other rewards (for example promotions)
are not available. Based on anecdotal evidence, the typing unit decided
on a linear bonus because of its simple intelligibility and easy com-
municability. Due to the binding agreement, there is no reason for the
agents to hold back performance due to a potential ratchet effect. Our
setting of a PPBC describes a framework that is characteristic of the
working conditions in many countries and professions where pay
cannot be fully performance based due to collectively agreed wages,
strong regulation and/or well-protected worker rights. The functional
form of the contract defines compensation S as follows:
Before switch to PPBC:S = A
After the switch to PPBC:S = A + bV, with bV = 0 if volume V ≤ 50
pages per day
It is important to note that no person can be paid less under the new
compensation scheme. Furthermore, there is no minimum output that
must be attained. In Scenario #1 (Table 1), even if the Output falls, the
employee still receives wage A as prior to switching to PPBC. Wage A
can therefore be described as a guaranteed wage not linked to pro-
ductivity. Employees already above the target (let us assume an average
of 60 pages) could theoretically keep their effort constant or even
slightly reduce their effort (to an average outcome of 55 pages) and still
receive A + bV; therefore, such employees ultimately receive a higher
pay with less effort (scenario #2). Hence, there is no obvious financial
risk to the employee. The main risk of the compensation system to the
employee is providing extra effort and still (perhaps due to particularly
difficult letters or bad luck regarding the selection of extremely long
letters) not or merely exceeding the threshold (scenario #3). This
would result in receiving no (or just a very small) extra compensation
for the provided effort that comes at a cost in the form of disutility of
labor for the employee.
However, looking at the data, prior to switching to PPBC, 4 of 5
employees were slightly above the target, and one employee was
slightly below the target, with an average productivity of 51.77 pages.
After switching to PPBC, all employees increased their productivity
with an average of 57.62 pages (scenario #4). Furthermore, as shown in
Table 2, the standard deviation of the pages increased from 2.21 to 3.89
once the employees switched to PPBC. Therefore, even a small bonus
can lead to both increased productivity as well as greater differentiation
in employee productivity. Of course, a fully performance-based system
or a higher target (for example associated with a higher variable
compensation b) could lead to stronger incentives and rule out the
possibility of lower effort yet higher pay. However, if the threshold is
above the prior performance level, employees might avoid the cost of
extra effort (until they reach the threshold) while not receiving any
compensation for this effort.
3. Related literature and hypothesis development
The extensive literature on performance pay covers various aspects
of financial and non-financial6 incentives. For example, there are nu-
merous works in the area of executive compensation (e.g., Abowd,
6
Promotions and terminations can be non-financial incentives for strong
performance.
4
Management Accounting Research 47 (2020) 100649
Pay Pre PPBC Pay Post PPBC
A A
A A + (55-50)
A A
A A + (58-50)
1990; Bebchuk and Fried, 2003; Leonard, 1990; Murphy, 1985, 1986).
Examining 153 manufacturing firms in 1979–1980, Mehran (1995)
finds that managers are motivated by the compensation method rather
than the absolute value of the remuneration. In his work, Murphy
(1999) provides empirical evidence on the relationship between pay
and executive performance. In doing so, he examines different aspects
of CEO compensation and describes the increasing use of stock-option
incentives. Based on a dataset ranging from 1936 to 2005, Frydman and
Saks (2010) find an increasing correlation between performance and
executive pay over the last 30 years of their sample period. Another
strand of research examines the compensation of teachers and its in-
fluence on their performance (e.g., (Ballou, 2001; Lavy, 2002; Lazear,
2003; Podgursky and Springer, 2007). Survey data were gathered from
teachers in England and Wales who faced “annual goal setting perfor-
mance reviews” in the state school sector beginning in 2000. Marsden
and Belfield (2006) use this data to demonstrate that incentives can
work well even in occupations such as teaching, where output is diffi-
cult to measure. However, the results are mixed; in particular, it re-
mains unclear whether potential results are caused by the actual in-
centive effect (i.e., existing teachers improving their performance) or by
sorting effects (i.e., more able teachers applying due to the changes in
remuneration offered) (Lazear, 2003). Other strands of research analyze
performance pay and its influence on job satisfaction. Using a re-
presentative sample of US workers, Heywood and Wei (2006) find that
performance pay is often correlated with higher levels of staff sa-
tisfaction. Green and Heywood (2008) reach the same conclusion when
using the British Household Panel Survey (BHPS).
Our paper contributes to the literature on performance pay in sev-
eral ways. Whereas the aforementioned strands of the literature as well
as the theoretical implications of (monetary) incentives have been
analyzed in great detail (Fama, 1980; Hart and Holmström, 1987;
Laffont and Tirole, 1988; Lazear, 1986; Milgrom and Roberts, 1992;
Prendergast, 1999; Stiglitz, 1975), only a few studies have analyzed the
actual influence of financial incentives on the performance of agents at
a staff level.
Shearer (2004) uses data from a field experiment of nine tree
planters in British Columbia working under both fixed wages and piece
rates to estimate productivity gains of approximately 20%. Planting
conditions at the firm were held constant, and quality was monitored.
Oettinger (2001) uses data from US stadium vendors paid based
solely on commissions from sales. Although the commission rate of each
vendor remained the same over the entire season, individual rates
differed based on vendor seniority. There were three different com-
mission rates, each differing by approximately 10%. Oettinger finds
evidence that at the margin, the incentives on effort caused by varying
demand conditions (i.e., weekday vs. weekend games) differed between
vendors receiving different levels of commission rates.
Fernie and Metcalf (1999) use data from jockeys working under two
different compensation schemes to analyze possible links between pay
and performance. Jockeys’ compensation typically consists of a small
fixed amount per race plus a share of the prize money won. However,
seven jockeys also worked for some time for very high fixed payments
(up to £1 million per year) paid by the royal families of Dubai and Saudi
Arabia. The authors provide evidence that these large retainer fees had
negative effects on the performance of the majority of these jockeys.
Closest to the methodology of our analysis is Lazear (2000). Based
O. Unger, et al. Management Accounting Research 47 (2020) 100649

Table 2
Summary statistics.
Obs Mean Std. Dev. Min Max t-Test P-value

Sample “Switch to PPBC”

BONUS 163 0.72 0.45 0 1
CONTRACT 163 0.67 0.12 0.5 0.75
CONTRACT (BONUS = 1) 118 0.71 0.09 0.5 0.75
CONTRACT (BONUS = 0) 45 0.55 0.10 0.5 0.75
Mean (BONUS = 0) – Mean (BONUS = 1) = 0 −0.16 −9.89 0.000
LETTER_LENGTH 163 3.80 0.37 3.16 4.70
LETTER_LENGTH (BONUS = 1) 118 3.81 0.38 3.16 4.70
LETTER_LENGTH (BONUS = 0) 45 3.78 0.36 3.19 4.48
Mean (BONUS = 0) – Mean (BONUS = 1) = 0 −0.03 −0.395 0.694
PAGES 163 56.00 4.37 43.43 66.93
PAGES (BONUS = 1) 118 57.62 3.89 49.33 66.93
PAGES (BONUS = 0) 45 51.77 2.21 43.43 58.24
Mean (BONUS = 0) – Mean (BONUS = 1) = 0 −5.85 −9.51 0.000
WORKDAYS 163 17.03 3.80 6 23
WORKDAYS (BONUS = 1) 118 17.07 3.84 6 23
WORKDAYS (BONUS = 0) 45 16.93 3.76 8 23
Mean (BONUS = 0) – Mean (bonus = 1) = 0 −0.14 −0.21 0.836

Samples “Constantly PPBC” and “Constantly no PPBC”

BONUS 631 0.64 0.48 0 1
CONTRACT 631 0.71 0.22 0.4 1
CONTRACT (BONUS = 1) 404 0.75 0.21 0.4 1
CONTRACT (BONUS = 0) 227 0.63 0.20 0.5 1
Mean (BONUS = 0) – Mean (BONUS = 1) = 0 −0.12 −7.27 0.000
LETTER_LENGTH 631 4.13 0.62 2.2 6.63
LETTER_LENGTH (BONUS = 1) 404 4,40 0.54 3.25 6.63
LETTER_LENGTH (BONUS = 0) 227 3.66 0.45 2.2 4.98
Mean (BONUS = 0) – Mean (BONUS = 1) = 0 −0.74 −17.49 0.000
PAGES*) 351 57,96 9.60 35.6 139.5
WORKDAYS*) 351 17.45 3.86 5 23

All variables are defined in Table 5. *) PAGES and WORKDAYS are mostly not available for the “Constantly no PPBC” sample. Therefore, no mean comparison tests
are presented. Columns 7 and 8 report the two-sided t-test of equality of the means.

on internal data from 3000 workers at a large auto glass company in-
stalling windshields over a 19-month period (1994–1995), Lazear
analyzes the influence of a switch in the compensation method from
hourly and thus fixed wages to piece rates. He finds that switching to
performance pay increased the average output per installer by ap-
proximately 44%. Approximately half of this effect was due to sorting
(i.e., more productive workers applying to work at the company be-
cause of the change in compensation and less productive workers
leaving the company in greater numbers than before), and the other
half was induced by existing workers producing more output. None of
the effects were temporary (i.e., no Hawthorne effect), and there was no
evidence of quality problems. This somewhat confutes the assumption
that payment on the basis of output may lead to lower quality (Baker,
1992; Freeman and Kleiner, 2005; Lazear, 2000; Stiglitz, 1975).
Unlike most of these studies, which mainly discuss the results of
purely performance-based pay in countries or professions with greater
design freedoms regarding payment structures, we analyze the influ-
ence of a PPBC in a setting with strong sectoral agreements and thus
much smaller discretion regarding the design of a compensation system.
The fixed compensation that remains unchanged after switching to
PPBC provides a risk-less setting for the affected employees. Scenarios
#1 and #2 listed in Table 1 show that the design of the PPBC theore-
tically allows for even lower employee productivity but constant or
even increasing pay. Additionally, the setting works with a much lower
incentive intensity and, therefore, may lead to no or negative effects of
the financial incentive on the agents' effort. Such phenomena are
known as crowding out (Frey, 1997). In a broad survey of empirical
evidence, Frey and Jegen (2001) show that crowding-out effects are an
empirically relevant phenomenon that, under certain circumstances
even, dominates the traditional relative price effects. Their result is
based on circumstantial insight, laboratory studies by both psycholo-
gists and economists as well as field research in econometric studies. In
a controlled laboratory experiment, Gneezy and Rustichini (2000) find
that student output in answering questions from an IQ test fell when an
arguably small bonus per question answered was added compared to
the situation in which the students received only fixed pay. Larger
bonus payments, however, led to an increase in the number of questions
answered. The authors state that the introduction of financial incentives
might have reduced the intrinsic motivation of the participants while
(due to the small size of the offered bonus) failing to offset these losses
with a corresponding increase in extrinsic motivation. Pokorny (2008)
also reports evidence that extrinsic incentives influence effort in a non-
monotonic way. The author finds an inverse U-shaped effect and thus
the highest effort choices with an intermediary incentive payment.
According to Weibel et al. (2010), the performance impact depends on
the relative strength of the price effect and the crowding-out effect. The
price effect is likely to be weaker in the public sector than in the private
sector because of smaller incentives. At the same time, the crowding-
out effect might be larger, since the previous literature, like Buelens and
Van den Broeck (2007), has shown that public sector employees tend to
be more intrinsically motivated than private sector employees. Based
on the previous literature, it is therefore far from obvious to assume
that a situation with an arguably low incentive intensity leads to pro-
ductivity gains.
On the other hand, typing a letter is a relatively simple task for
which intrinsic motivation might be smaller and performance is mea-
surable in an easy way.
However, despite the much smaller intensity of the incentive com-
pared to that in previous studies and the risk-less setting described in
Section 2, this design still allows for the differentiation of performance
and, therefore, pay. For our sample of employees constantly on PPBC,
we observe a daily productivity (averaged over a month) of 58.36
pages, with a standard deviation of 9.66 pages. The 10th percentile is at
50.08 pages, and the 90th percentile is at 70.06 pages. In summary,
despite the risk-less and comparatively low incentive intensity of our
setting, paying employees based on a clearly defined output should

5
O. Unger, et al.
increase their average productivity (Fernie and Metcalf, 1999; Lazear,
2000; Oettinger, 2001; Shearer, 2004). Following theory in personnel
economics and the presented empirical results, we therefore hypothe-
size the following:
H1. Switching employees from fixed-wage compensation to partially
performance-based compensation increases the average productivity.
Our next hypothesis addresses the long-term development of pro-
ductivity after switching to a compensation system (partially) based on
piece rates. The Hawthorne effect states that any modification or ad-
justment is likely to increase productivity in the short run (Lazear,
2000; Roethlisberger and Dickson, 1947). This would imply the dis-
appearance of any short-term productivity effects over time. However,
Lazear (2000) finds evidence of an increase in worker productivity
during the time they were on the new compensation system. After
switching to piece rates, employees eventually seem to try to find ways
of working faster and more efficiently and thus further increase their
productivity over time. This leads us to the following hypothesis:
H2. Effects on productivity caused by a change in the compensation
method do not disappear over the long run.
Lazear (2000) describes the upward trend in employee productivity
after switching to the performance pay plan as a type of learning but
only models whether the initial rise in productivity after switching to
the performance pay plan vanishes (i.e., whether the Hawthorne effect
applies). We broaden this approach by analyzing the detailed devel-
opment of productivity after the employees switch their compensation
method. Anecdotal evidence suggests that employees adjust their
workflow in order to improve productivity, such as by booting the
computer first thing in the morning and meanwhile organizing the
workplace or by using the time the finished dictation takes to be saved
to choose and load the next dictation. This development follows the
basic principles of the traditional learning curve analysis of Treplitz
(1991). Therefore, we hypothesize the following:
H3. Effects on productivity caused by a change in the compensation
method increase over time but with a decreasing slope.
Thus far, we have focused on the intended effects of performance
pay (i.e., increased productivity). However, financial incentives might
also have unintended effects. One potential downside of performance
pay schemes that is often discussed in the literature and among prac-
titioners is that quality might suffer due to the increased focus on
quantity (Freeman and Kleiner, 2005; Lazear, 1986; Stiglitz, 1975). In
his analytical work on salaries and piece rates, Lazear (1986) concludes
that if output quality (and quantity) is difficult to measure, pay should
be linked to observable inputs such as hours worked. Freeman and
Kleiner (2005) also examine this problem and describe the need for
thorough quality control to avoid undesirable effects. Both Lazear
(2000) and Shearer (2004) address these issues by describing close-
meshed quality controls in their work. The quality of discharge letters
plays an important role for the further treatment of patients and the
external image of a medical facility (Jauch, 2013). As described in
Section 2, the process of typing discharge letters therefore involves
various controls by physicians of differing levels of seniority to main-
tain high quality standards. Due to this system of strict quality controls,
we expect no negative effects from financial incentives directed at
output (i.e., number of pages typed). This assumption is supported by
the results of expert interviews with physicians of the concerned clinics.
In a broader sense, unintended effects might also include dis-
advantageous behavior, such as trying to game the system or cherry
picking. The famous Lincoln Electric case (Fast and Berg, 1975) de-
scribes a typist gaming the piece rates system by eating lunch at the
workplace and, while doing this, “(…) punching the most convenient
key on the typewriter as fast as she could (…)” (Irrgang, 1972, p. 13). In
cherry picking, employees may undertake selective choices within their
workflow to choose work pieces with characteristics that increase their
6
Management Accounting Research 47 (2020) 100649
piece rate while ignoring or dismissing any work pieces with char-
acteristics dropping their piece rate. Lazear (2000) picks up on this
problem and states that the piece rates paid for every installed glass
unit varied somewhat depending on the type of windshield used. This
difference was likely used to account for differences in time and effort
needed to install the windshields. However, depending on the accuracy
of these adjustments, it is conceivable that some types of windshields
could still be more favorable, which might incentivize employees to
select more profitable windshields to be processed. Shearer (2004)
notes that worker productivity is not only determined by the individual
effort level of the employee but also by the state of the concerned area.
By assigning employees to comparable blocks of land, Shearer tries to
hold general planting conditions constant. However, it is possible that
planting conditions still varied within the assigned blocks, which might
have also led to incentives for the employees to select more convenient
sections of the area to be processed. Oettinger (2001) explains that the
stadium vendors he studies do not have clearly associated sections
within the assigned locations of the stadium. However, he notes that
“(…) there may have been a workplace norm in which less senior
vendors ceded the more desirable sections to their more senior cow-
orkers.” (Oettinger, 2001, p. 121). Cherry picking therefore might have
influenced the productivity of the employees. All previous studies stress
the influence of the working conditions (i.e., comparable pieces of
work) on productivity and try to hold these conditions stable. However,
they fail to test for the existence of cherry picking.
In our setting, such an unintended effect might consist of selecting
shorter dictations that are therefore quicker to transcribe (i.e., cherry
picking). The productivity of typing dictations is determined by the
ability of the employee (which we control for), the effort level and, to
some extent, the characteristics of the dictations to be typed. It is im-
portant to note that shorter dictations can be processed comparatively
faster because a header and basic information (about half a page
combined) are pulled automatically when opening a new dictation in
the system.
This potential behavior does not affect the quality of the discharge
letters. However, it might lead to greater increases in the performance
of employees participating in PPBC. This increase comes at the expense
of employees who are not participating in PPBC, who might end up
typing the remaining (on average) longer and therefore less-attractive
dictations. This would imply increasing the costs of the bonus system
without an increase in the overall productivity of the typing unit.
Furthermore, the selection of favorable (i.e., shorter) dictations is said
to be closely monitored and strictly sanctioned by the supervisor.
However, anecdotal evidence of the typing units management and the
highly significant difference in the letter length between the employees
“Constantly on PPBC” and “Constantly no PPBC” (Table 2) suggests that
within certain limits, employees still attempt to select work that is more
favorable and blame potential differences on random influences beyond
their individual control. The very fact that the possibility to cherry pick
was discussed in the typing unit obliges us to test this issue. In this
context, random influences can include that whenever an employee
finishes one letter and enters the system to choose the next one to type,
this next letter may (if she/he is lucky) be a short letter. This shorter
letter would therefore reduce the employee's average letter length and
provide an indication of cherry picking to the supervisor despite the
fact that the employee adhered to the rule of picking the oldest letter in
the clinic. Additionally, the clinic can only monitor the average letter
length and is unable to precisely monitor whether the employee always
chooses the oldest or only one favorable of many letters with the same
maturity. By choosing favorable letters among the letters with the
highest resting times (which only vary by minutes due to the high
workload and total number of letters in many cases), detecting a modest
form of cherry picking is very difficult. It would be virtually impossible
for supervisors to determine whether an employee is simply lucky or
attempting to game the system to some degree. This uncertainty
therefore provides the employee with chances/degrees of freedom to
O. Unger, et al.
game the system. While cherry picking in our setting is not easy to
achieve given the structuring and monitoring of the work, we still ex-
pect the financial incentives to have an influence on the selection of the
individual work to be processed and hypothesize the following:
H4. Paying on the basis of output creates incentives regarding the
selection of more favorable (i.e., shorter) letters by employees.
4. Data sampling and estimation models
4.1. Data description and sampling
Prior to the investigation period, a bonus system for employees in
the typing unit was established. In the following years, all existing
employees (except for those mainly printing dictations or close to re-
tirement) switched to PPBC. The employees who switched to PPBC
during our observation period did not switch at the same time but were
phased in at different times (2011–2013). The typing unit adjusted the
compensation system because of a general increase in the volume of
dictations and lower-than-expected productivity levels. In the absence
of opportunities for promotions, which according to Stiglitz (1975) can
serve as a reward for good performance, the typing unit wanted to
create a financial incentive for strong performance.
During the observation period, we observed a total of 21 people.7
Some of the employees experienced a change to PPBC, and others either
permanently worked on PPBC or never switched to PPBC. Based on
these different employee characteristics and according to our hy-
potheses, we built three different samples. See Table 2 for the summary
statistics of the different samples and mean-comparison tests within our
Sample “Switch to PPBC”.
The sample “Switch to PPBC” consists of a total of five employees
(two of whom were shifted from other departments) who were hired,
trained and later switched to PPBC during our observation period. In
this sample, we thus have data on the individual output of typists
working both under fixed wages and PPBC. Using this sample, our re-
sults are therefore not influenced by potential sorting effects, e.g., new
employees who are attracted by PPBC being more productive compared
to current employees. Excluding months without any data (no records,
illnesses and months before employment at the typing unit) as well as
months spent training and months with fewer than five workdays, we
have 163 observations. The overall daily mean of PAGES for this sample
is 56. Prior to PPBC, we have a mean of 51.77, which significantly
increases to 57.62 after the employees switch to PPBC.
While all employees show significant increases in their productivity
(see Fig. 3), these effects seem to be the most pronounced among em-
ployees with a lower pre-PPBC performance.
The overall mean of CONTRACT8 is 0.67. Prior to PPBC, we have a
mean of 0.55, which significantly increases to 0.71 after the employees
switch to PPBC. Employees on PPBC therefore work longer shifts on
average. However, no employee in the observed sample works full time.
Based on a 38 -h workweek, this translates into roughly six additional
hours per week for which we account. Regarding LETTER_LENGTH and
WORKDAYS, we observe no significant difference between the pre-and
post-PPBC groups. Following Lazear (2000), each observation consists
of one entire month, potentially leading to less variation between the
individual observations of each employee.
7
The typing unit included a total of 23 employees. However, no data were
available for one employee. For reasons of thoroughness, we also excluded
another employee who immediately switched to PPBC and therefore had no
observations during the fixed wage compensation.
8
The employees in our sample work different hours. This difference is re-
flected in the variable CONTRACT. A value of 1.0 for CONTRACT indicates that
an employee works full time. A value of 0.7 for CONTRACT indicates that an
employee works 70 % of regular hours.
7
Management Accounting Research 47 (2020) 100649
Fig. 3. Means of PAGES per employee pre and post PPBC (sample “switch to
PPBC”).
The sample “Constantly PPBC” consists of a group of employees who
were hired and switched to PPBC before 2011 and therefore are on
PPBC for the entire observational period. We use the productivity de-
velopment of these employees to analyze whether there is a general
upward trend in the number of typed pages per workday within the
observation period. We do this in order to control for general im-
provements regarding processes or the general structure of the central
typing. Such improvements could positively affect the productivity of
all employees and thus bias the actual effect of the switch to PPBC on
productivity. Again excluding months without any data as well as
months with less than five workdays leaves a total of 334 observations.
The overall daily mean of PAGES for this sample is 58.34.
Finally, the sample “Constantly no PPBC” consists of employees who
are not participating in PPBC for the entire observational period. The
employees who do not participate in PPBC mainly print dictations and
only type in their remaining time. Excluding months without any data,
we have a total of 631 observations.
Regarding Hypothesis H4 , we use the sample “Switch to PPBC” to
analyze whether the average letter length significantly decreases once
the employees are on PPBC (Model 4a). Furthermore, we use the
samples “Constantly PPBC” and “Constantly no PPBC” together to
analyze differences in average letter length between employees con-
stantly participating or never participating in PPBC (Model 4b).
This type of actual field data on the performance of employees in a
remarkably controlled setting is very rare and therefore worth studying.
Specifically, unlike most previous work, our dataset allows for a long-
term analysis of an incentive scheme with low incentive intensity re-
garding both intended and unintended behavior. One would expect the
lower incentive intensity to limit the possibilities and outcomes of fi-
nancial incentives. However, as we are able to demonstrate, the pro-
ductivity effects associated with a switch to PPBC are highly significant,
substantial in size and do not vanish over time.
4.2. Performance measure and cherry picking
Neely et al. (1995, p. 80) state that “[a] performance measure can be
defined as a metric used to quantify the efficiency and/or effectiveness of an
action”. For hypotheses 1–3, we use the sample “Switch to PPBC”. The
daily number of typed pages (averaged over a month) of an employee
weighted by the size of the contract is our dependent variable.9 We
therefore assume a linear relation between the hours worked and the
number of pages typed. Fixed-cost degression effects (employees, for
example, need to boot their PCs only once a day, regardless of how
many hours they work) could potentially lead to a disproportionate
increase in productivity after a rise in the average hours worked per
day. However, this potential increase in productivity is confronted by a
potential reduction caused by an increase in the disutility of labor over
9
We divide the monthly number of typed pages by CONTRACT to make the
outputs of the employees with different hours comparable.
O. Unger, et al.
the hours worked per day (Milgrom and Roberts, 1992).10 Furthermore,
the bonus system of the typing unit described in Section 2 is also based
on a linear threshold based on the employment level of the employee.11
A meaningful analysis of productivity requires both the outputs (i.e.,
number of typed pages) and inputs (i.e., number of worked hours/days) to
be appropriately defined and easily measured (McLaughlin and Coffey,
1990). As previously mentioned, the job of typing dictations is well-suited
to studying the effects of performance pay on productivity. The studied
typists all work on their own, and the number of typed pages thus serves as
a good measure of individual employee productivity (Shearer, 2004).
Furthermore, the dictations follow a clearly structured design and are thus
only subject to minor fluctuations. Moreover, the typing unit provides its
service to only two clinics, therefore leading to lower variation in the
covered cases. The “Degree of Interaction & Customization” described by
(Schmenner, 1986) in his “Service Process Matrix”12 can therefore be
classified as low. Less interaction with clients and lower levels of custo-
mization increase the calculability of service outputs and therefore improve
the reliability of the productivity measures. Therefore, the productivity of
the employees is mainly determined by their effort as well as their ability
(which we control for). We therefore believe that our monthly observations
of typist productivity in the highly controlled and standardized process of
typing discharge letters at a hospital allow a clean measure of performance.
For hypothesis 4, we use the average letter length of the dictation as
our dependent variable. As stated in Section 2, shorter dictations are easier
(i.e., faster) to type. We therefore analyze the average letter length of
employees before and after switching to PPBC. To provide more insights
into cherry picking, we use our samples “Constantly PPBC” and “Con-
stantly no PPBC” and examine the letter length of employees who either
did or did not participate in PPBC for the entire observational period.
4.3. Estimation models
Due to the structure of our sample (low number of individuals ob-
served over a long time – i.e., long panel) and the associated concerns
regarding autocorrelation,13 we use ordinary least squares (OLS) re-
gressions for all our Models and cluster by TIME to adjust for auto-
correlation. Our estimation approach follows hypotheses 1–4.
ln PAGESi = ß0 + ß1 BONUSi + ßn CONTROLSn; i + i The demand regarding the service of the central typing unit fluc-
Model (1)
Model 1 tests H1 and studies the impact of a switch in the com-
pensation method, represented by the binary variable BONUS (which
equals 1 if the employee is on PPBC in the given month and zero
otherwise), on the productivity of the employees. As discussed above,
all employees in the “Switch to PPBC” sample have worked under both
compensation schemes. This allows for a clean analysis of the observed
incentive effects. The normally distributed error term is represented by
i.
ln PAGESi = ß0 + ß1 BONUSi + ß2 TIME _BONUSi + ßn
CONTROLSn;i + i Model (2)
Models 2 and 3 test H2 and H3 and study the long-term effects of the
switch in compensation method on the productivity of the employees. In
Model 2, we therefore include the variable TIME_BONUS, which equals
10
In our data, a total of five employees increase their hours but with no
significant changes in productivity.
11
For example, a full-time employee must exceed 50 pages per day to start
receiving a piece rate of 1 € for every additional page typed above that
threshold, whereas an employee working half-time (CONTRACT = 0.5) must
exceed 25 pages per day.
12
Schmenner (1986) characterizes service businesses by the “Degree of In-
teraction & Customization” and “The Degree of Labor Intensity”.
13
We performed a Wooldridge test for autocorrelation in panel data that
rejects the null hypothesis of no first-order autocorrelation.
8
Management Accounting Research 47 (2020) 100649
zero if the employee is not on PPBC. Once the employee switches to PPBC,
TIME_BONUS equals 1 and increases by one for every additional month
on PPBC.14 As one would expect, a negative coefficient of TIME_BONUS
implies that the initial performance effects of a switch to PPBC vanish
over time, which would be a strong indication of a Hawthorne effect
(Lazear, 2000; Roethlisberger and Dickson, 1947). A positive coefficient
of TIME_BONUS would imply an increased impact of the initial switch to
the bonus system over the time an employee is on PPBC.
ln PAGESi= ß0 + ß1 BONUSi + ß2 TIME _BONUSi
+ ß3 TIME _BONUSi2 + ßn CONTROLSn; i + i
Model (3)
In Model 3, we additionally include the variable TIME_BONUS²,
which is the square of the variable TIME_BONUS, to describe in more
detail the long-term development of productivity after switching to
PPBC. Here, we seek to provide more detail regarding the slope of
productivity development over the time an employee is on PPBC. For
example, a positive coefficient for TIME_BONUS and a negative coef-
ficient for TIME_BONUS² would indicate an inverted U-shaped devel-
opment of productivity over the time an employee is on PPBC. Pro-
ductivity would therefore rise with increasing tenure on the new
compensation plan, but the incremental gains would decline over time
and eventually cause productivity to fall again.15
ln LETTER LENGTHi = ß0 + ß1 BONUSi + ßn CONTROLSn; i + i
Model (4)
Model 4 tests H4 and studies the effects of a switch in the compen-
sation method on the average length of the typed dictations. In Model 4,
we therefore include the dependent variable LnLETTER LENGTH, which
is the logarithm of the average monthly letter length of the dictations of
an employee. To test H4 , we examine both Model 4 (a), which compares
the Ln LETTER LENGTH of employees before and after switching to PPBC,
and Model 4 (b), which compares the Ln LETTER LENGTH of the two
groups of employees with no change in compensation system.
4.4. Controls
tuates with the general volume of work in the covered hospital clinics.
We therefore include dummies for every month of the year to control
for seasonality in demand affecting the number of dictations to be
processed. To illustrate, an unusually small number of dictations in the
system as well as overall IT problems might potentially cause inter-
ruptions of the typist’s workflow and therefore reduce the productivity
for all employees in a given month. The coefficients of the months must
be interpreted in relation to the reference group of December. This
approach is in line with Misterek et al. (1992), who argue that declining
demand or increases in the overall capacity of a unit, such as by hiring
more employees or increasing the numbers of hours worked per em-
ployee, can negatively affect productivity measures. We therefore in-
clude dummies for every employee to account for potential (overall)
differences in the individual ability of the employees unrelated to
participation in PPBC.16 These dummies ensure that the individual
abilities of the employees remain constant. The coefficients of the em-
ployees have to be interpreted in relation to the reference group EMP1.
By separately examining the estimation results for our “Constantly on
PPBC” sample, we furthermore control for potential efficiency gains
14
This approach follows Lazear (2000), who created a variable called “Time
since PPP”. PPP stands for Pay for Performance Plan.
15
Especially if the coefficient of TIME_BONUS² is very small compared to the
coefficient of TIME_BONUS, as is the case here, the maximum (and the de-
clining sections of the graph) can lie outside the available observations and thus
cannot be interpreted.
16
Some employees “naturally” type faster.
O. Unger, et al.
Table 3
Results concerning performance measurement.
ln(PAGES) Model 1
CONS 3.977*** (211.23)
BONUS 0.091*** (9.00)
TIME_BONUS
TIME_BONUS²
Month fixed effects are controlled for
Employee fixed effects are controlled for
N 163
F 22.43
R-squared 0.5516
All variables are defined in Table 5. This table presents the results of the estimation models concerning the performance measurement based on the sample “Switch to
PPBC”. * indicates significance ≤ 0.1, ** indicates significance ≤ 0.05 and *** indicates significance ≤ 0.01 of the coefficients presented with t-values in brackets.
during the observation period. To illustrate, consider general im-
provements regarding processes or the general structure of the central
typing unit that might positively affect the productivity of employees
and thus possibly lead to bias in the effect of the change in the com-
pensation method on productivity. As stated in Section 6, we see no
such general increase in the overall productivity of all employees.
5. Empirical results
Table 3 contains the results for the performance measure ln PAGES.
Model 1 tests H1 and explores whether switching to PPBC has an
effect on the productivity of employees. For the performance measure
of typed pages per workday, we find that switching to PPBC has a
highly significant (1% level of significance) positive effect on pro-
ductivity, increasing the logarithmic number of daily typed dictations
by 9.53%.17 Model 1 shows an R² of 55.16%.
Compared with previous studies (Lazear, 2000; Shearer, 2004) re-
porting increases in productivity of 22% and 21%, we observe a smaller
but no less significant and considerable increase in productivity in our
risk-less setting. The much smaller scale of the incentive effects ob-
served in our data could be caused by only using a PPBC and therefore
working with an arguably much lower incentive intensity. Fully per-
formance-based compensation schemes provide a much higher in-
centive to the employee and, therefore, are linked to greater perfor-
mance increases. Regarding the productivity of employees, our results
appear to strongly support H1.
Over a one-year period, the observed increase in productivity
(9.53%) adds an output equivalent to more than one month of em-
ployment but at a fraction of the usual costs.18 Employees in the sample
“Switch to PPBC” on average write 51.77 pages per day before
switching to PPBC. The average number of workdays per month in this
sample is 16.93.19 Over the course of a month, this results in, on
average, 876 pages per employee. Given the monthly gross wages of
2000 € to 3000 €, this translates into labor costs of 2.28 € to 3.42 € per
page. The bonus payment of 1 € per page is well below these costs.
Model 2 tests H2 and therefore investigates whether a shift to PPBC
leads to long-term (i.e., sustainable) changes in the productivity of
employees or a reduction of short-term gains over time. In Model 2, we
therefore include the variable TIME_BONUS, which equals zero for the
months the employee is not yet on PPBC and increases by one unit for
each month spent on PPBC. The positive and highly significant coeffi-
cient (1% level of significance) strongly supports our assumption that
productivity tends to rise over the duration of an employee on PPBC.
This finding follows those of Lazear (2000), who identified a learning
17
%Δy = [e ß2 1] x 100 = [e 0.091 1] x100 = 9.53 %.
18
The sample “Switch to PPBC” average of 876 pages per month multiplied
by the observed increase in productivity adds 963 additional pages over the
course of a year.
19
See Table 2.
Management Accounting Research 47 (2020) 100649
Model 2 Model 3
3.978*** (289.12) 3.979*** (283.08)
0.064*** (4.88) 0.032* (1.93)
0.002*** (3.12) 0.007*** (3.76)
−0.0001*** (-3.36)
163 163
31.36 35.24
0.6008 0.6268
process (finding ways to work faster and more efficiently) that begins
after employees switch to the new compensation scheme as a possible
reason. An additional reason for the non-disappearing productivity
gains of PPBC is that the effort levels remain higher than before the
introduction of the incentives. With regard to the long-term pro-
ductivity of employees after switching to PPBC, our results appear to
strongly support H2 . Model 2 shows a notable increase in R² to 60.08%.
In Model 3, we also add the variable TIME_BONUS², which is the
square of TIME_BONUS, to more closely examine the development of
productivity over time. The positive and highly significant coefficient
for TIME_BONUS indicates that the productivity of employees increases
over an employee's tenure on PPBC, whereas the very small but nega-
tive and highly significant (1% level of significance) coefficient for
TIME_BONUS² indicates that this increase in productivity wanes over
time. Note that including TIME_BONUS² leads to an approximately
threefold increase in the coefficient of TIME_BONUS. This seems to
suggest that finding ways to work faster and more efficiently is most
pronounced in the first months after switching to PPBC. Over time, we
see a slowdown (indicated by the small negative coefficient of
TIME_BONUS²) in the increase in productivity. Due to the substantial
difference between the coefficients of TIME_BONUS and TIME_BONUS²,
we do not observe a reversal of the described upward trend of pro-
ductivity within the observation period. Regarding the long-term trend
of productivity after switching to PPBC, our results appear to support
H3 . We view this result as complementary to previous studies because
we further analyze the long-term productivity development and provide
evidence that productivity is rising over time but with a decreasing
slope. The coefficient for BONUS is approximately halved compared to
Model 2. Parts of this effect are picked up by the threefold increase in
the coefficient of TIME_BONUS. We find an initial positive and sig-
nificant effect on productivity of 3.3%20 from switching to PPBC, which
further increases over the time an employee is on the incentive. Model
3, which includes both TIME_BONUS and TIME_BONUS² in addition to
BONUS and our controls, offers the highest R² of 62.68%.
One much discussed downside of piece rates is that quality might
suffer (Baker, 1992; Lazear, 1986, 2000). Stiglitz (1975) states that
compensation schemes based on piece rates reward higher speed and
thus higher quantities. This increase in output potentially comes at the
cost of neglecting quality. Notably, typing discharge letters is strictly
monitored by both the supervisor of the central typing unit and the
physicians and senior physicians who correct and approve the dicta-
tions. Additionally, every dictation includes the abbreviation of the
typist and can thus be traced back in cases of quality issues. Based on
expert interviews with physicians at the clinics, we find no evidence for
potential quality problems. The workflow of close-meshed quality
controls seems to prevent negligence of quality by employees. The
medical experts surveyed were resident physicians, senior physicians
20
%Δy = [e ß2 1] x 100 = [e 0.032 1] x100 = 3.3 %.
9
O. Unger, et al.
Table 4
Results concerning letter length.
ln(LETTER LENGTH) Model 4 (a) Model 4 (b)
CONS 1.274*** (60.19) 1.334***
BONUS −0.013 (-0.91) 0.126***
Month fixed effects are controlled for
Employee fixed effects are controlled for
N 163 631
F 36.15*** 141.49***
R_squared 0.6276 0.6838
All variables are defined in Table 5. This table presents the results of the esti-
mation models concerning the letter length. The estimation of Model 4a is
based on the sample “Switch to PPBC”, whereas the estimation of Model 4b is
based on the combined samples “Constantly PPBC” and “Constantly no PPBC”. *
indicates significance ≤ 0.1, ** indicates significance ≤ 0.05 and *** indicates
significance ≤ 0.01 of the coefficients presented with t-values in brackets.
and a chief physician. All experts had between 3 and 16 years of ex-
perience with discharge letters and worked at the two clinics within the
observation period. Three of five physicians noticed a reduction in the
number of mistakes or improvements in the overall quality of the dic-
tations within the observation period. Two physicians noticed no dif-
ferences. This is in line with previous studies that have either used
customer satisfaction scores or strict monitoring by managers to show
that rigid quality controls are able to offset potentially negative effects
on quality (Lazear, 2000; Shearer, 2004).
Another potential downside discussed in Section 3 is the unintended
incentives regarding the selection of more favorable (i.e., shorter) dic-
tations. Model 4 (a) tests H4 and investigates whether we observe a
difference in the average letter length of dictations before and after
employees switch to PPBC. We therefore include the dependent variable
LETTER LENGTH, which is the logarithm of the average monthly page
length of an employee’s dictations. The insignificant coefficient of
BONUS indicates that the average length of the typed discharge letters
does not change after the employees switch to PPBC (see Table 4).
Model 4 (b) differs from Model 4 (a) by looking at employees either
constantly on PPBC or constantly not on PPBC and tests if there are
differences in the selection of letters between these two groups. When
examining Model 4 (b), we even find that employees constantly on
PPBC on average choose 13.4%21 (1% level of significance) longer
dictations compared to employees who are not participating in PPBC
during the entire observation period (see Table 4). These somewhat
conflicting results might be partially caused by the organization of
processes at the central typing unit. Most employees not participating in
PPBC primarily print the typed dictations of their colleagues and only
use time remaining after printing to type dictations themselves. This
additional time constraint might cause these employees to choose on
average shorter and therefore faster dictations that can more easily be
executed within their normal work routine. However, this significant
difference also indicates the potential of the employees to actually
cherry pick. We find no evidence regarding potential negative effects on
the selection of more favorable (i.e., easier) dictations by employees
after joining PPBC, and therefore H4 is not supported. Notably, given
the described controls in our setting and the danger of potential sanc-
tions, the scope for potential cherry picking is rather small. Therefore,
our analysis is not a strong test of the PPBC effects on cherry picking in
general.
6. Robustness
We conducted several robustness tests of our results. First, we note
that among employees constantly on PPBC, we find no evidence of an
overall positive trend regarding the productivity of employees. By
21
%Δy = [e ß2 1] x 100 = [e 0.126 1] x 100 = 13.4 %.
Management Accounting Research 47 (2020) 100649
examining employees with no change in compensation, we control for
potential efficiency gains or relevant process improvements during the
observation period that otherwise might explain parts of the observed
productivity gains described in Section 5. The absence of such poten-
(56.21) tially distorting effects reinforces our hypothesis that switching to PPBC
(6.28) leads to increased productivity among employees.
For technical robustness, we use both a cross-sectional time series
feasible generalized least squares (FGLS) regression as well as an or-
dinary least squares (OLS) regression. For Models 1–3 and Model 4 (b),
we see no differences in the results. All relevant coefficients are sig-
nificant (5% level of significance) or highly significant (1% level of
significance) and follow the results described in Section 5. However,
when performing the FGLS regression for Model 4 (a), we find a ne-
gative and significant (10% level of significance) coefficient for BONUS,
which indicates that the average length of the typed discharge letters
slightly decreases (2%) after switching to PPBC. Having said this, the
scale of the decrease in the average letter length (2%) is notably very
small and does not even translate into the equivalent of one full line on
a regular sheet. Other robustness tests included the gradual expansion
of our estimation models, the inclusion of the previously excluded
employees with no data prior to switching to PPBC, and the use of
different thresholds regarding the minimal number of workdays per
month. The results of these tests followed those provided in Section 5.
Furthermore, each of our observations consists of one entire month of
output, thus leading to lower variation between the individual ob-
servations of each employee.
7. Conclusion
Based on data from a medical typing unit where PPBC was estab-
lished, the present study addressed the question of the influence of
performance pay on productivity in a risk-less setting with a low in-
centive intensity. Our examined characteristics included productivity
measures (average number of typed pages per workday) as well as
measures regarding potentially misplaced incentives (average letter
length), described as cherry picking. Our analysis also discussed the
further development of productivity after employees switched to PPBC.
Our first result was that switching to PPBC led to a highly significant
(1% level of significance) increase in the productivity of employees
measured by the average number of typed pages per workday of 9.53%.
Compared with the previous literature in this field (Lazear, 2000;
Shearer, 2004), which reported increases in productivity of 22% and
21%, respectively, we observe a distinctly smaller though significant
increase in productivity. In a comprehensive meta-analysis of 46 highly
controlled experiments and field experiments, Weibel et al. (2010)
confirmed the results of the two aforementioned studies. They reported
an overall performance effect of 23%. In the present study, the depicted
increase over a one-year period adds the output of slightly more than
one month but at a fraction of the usual costs. The much smaller scale of
the incentive effects in our data could be caused by analyzing a PPBC in
a risk-less setting with a high fixed wage plus an average bonus of 4.3%
to 6.5% of this fixed wage. However, one could also expect that in a
risk-free setting, there will be no performance increases at all. In con-
trast, this scenario is not the case. It is possible that the performance-
oriented remuneration caused the employees to become aware of the
fact that performance plays a role. This change in perception could have
changed their behavior towards more performance.
However, in contrast to previous studies, we worked with an ar-
guably much lower incentive intensity and therefore are able to provide
insight into performance pay for a large number of professions, sectors
and countries for which fully performance-based compensation might
not be feasible. This is particularly the case for the public sector. In a
“review of reviews”, Perry et al. (2006) even showed that pay-for-
performance systems in the public sector have generally been un-
successful. The observation of an increase in performance in our study,
despite the low incentive intensity, may be because typing is a simple
10
O. Unger, et al.
Table 5
Definition of variables.
Variables Description
BONUS 1 if employee is on the new compensation system in the particular month and 0 otherwise.
CONTRACT Reflects the level of employment in the relevant month. A value of 1.0 indicates that an employee is working full time. A value of 0.7 indicates that an
employee is working 70 % of regular hours.
ln(PAGES) Logarithmic number of PAGES.
ln(LETTER LENGTH) Logarithmic letter length of dictations.
PAGES Weighted monthly average of the typed pages per workday. Calculated by dividing the monthly average of the typed pages per workday by CONTRACT.
TIME 1 in the first month of the observation period. Increases in increments of one to a maximum value of 48 in the last month of the observation period.
TIME_BONUS 1 in the first month of participation in PPBC. Increases in increments of one for every additional month.
TIME_BONUS² Squared result of TIME_BONUS.
WORKDAYS Number of days worked in the particular month.
task. Weibel et al. (2010) provided evidence for this assumption. In
their meta-analysis, they showed that the impact of pay-for-perfor-
mance on performance is dependent on the nature of the task. In the
case of non-interesting tasks, pay-for-performance increases perfor-
mance considerably, whereas it reduces performance in the case of
interesting tasks.
Our second result concerned a potential Hawthorne effect, which
would imply that productivity levels declined after the initial switch of
employees to PPBC. However, we found that the observed productivity
gains of employees did not vanish over the time an employee was on
PPBC.
Our third result expands upon previous studies that either have not
addressed this topic (Oettinger, 2001; Shearer, 2004) or did not analyze
the further course of productivity once employees switched to perfor-
mance-based compensation (Lazear, 2000). We find that the observed
productivity gains do not merely persist but rather seem to grow over
the time an employee is on PPBC, although with a decreasing slope. The
employees in our sample seemed to find ways of working faster and/or
more efficiently once they were exposed to financial incentives based
on their output. These productivity gains seemed to be largest following
the months after the initial switch to PPBC.
In contrast to previous studies in this field (Lazear, 2000; Oettinger,
2001; Shearer, 2004) that stressed the importance of keeping working
conditions stable but failed to test for potential cherry picking, we were
able to perform an analysis regarding these undesired incentives. We
found no evidence of negative effects regarding the selection of more
favorable (i.e., shorter) dictations by the employees (i.e., cherry
picking) after switching to PPBC. The average letter length for em-
ployees with a change to their compensation method did not differ
significantly once they switched to PPBC. When additionally comparing
the two groups of employees with no change in compensation system,
we even find that employees constantly on PPBC on average select
11.18% (1% level of significance) longer letters than the group of
employees constantly not participating in PPBC. These somewhat con-
flicting results might be due to the organization of the processes at the
central typing unit. Employees who mainly printing the typed dicta-
tions of their colleagues and only use time remaining after printing to
type dictations themselves cannot participate in PPBC. This additional
time constraint might partially cause the selection of, on average,
shorter and therefore faster dictations that can presumably be more
easily executed within their normal work routine. However, this sig-
nificant difference also indicates the potential of the employees to ac-
tually cherry pick. By conducting expert interviews with the affected
physicians, we further found no evidence of reduced quality of the
dictations following the switch to PPBC.
There are several limitations to our results. First, the studied sample
of employees with a switch to PPBC was quite small, with only 163
observations. The majority of the employees at the central typing unit
had already transferred to PPBC before the observation period. Others
did not participate in PPBC at all due to other work priorities (i.e., the
printing of typed dictations) and accompanying difficulties in
11
Management Accounting Research 47 (2020) 100649
measuring their productivity (i.e., multitasking environment).
However, previous studies (Fernie and Metcalf, 1999; Shearer, 2004)
notably faced comparable limitations. Future research would ideally
use larger samples to allow for an even deeper analysis.
In addition, we analyzed a task (typing hospital discharge letters)
that is very well-suited to the introduction of piece rates. Lazear (2000,
p. 1358) stated that arguments for applying piece rates are particularly
well-reasoned and persuasive if “output is easily measured, quality
problems are readily detected, and blame is assignable”. The output
(and input) of typing dictations can easily be measured. Furthermore,
typing dictations is a task that is very closely controlled by concerned
physicians and senior physicians; consequently, potential quality pro-
blems can purposefully be identified, and blame is easily assignable.
Finally, in future studies, expert interviews conducted to assess
potential changes to the quality of discharge letters could be supple-
mented by a system of indicators evaluating the number of necessary
adjustments made by the physicians and senior physicians when cor-
recting and approving the dictations. Future research would ideally use
a quality indicator, such as a calculated return ratio of discharge letters
not accepted by the physician, to automatically track the quality of
typed dictations.
Declaration of Competing Interest
None.
Acknowledgements
We thank Anne Lillis, James Kavourakis, Christian Ernst and the
participants at the 2016 conference of the European Health Economics
Association for many helpful comments and suggestions.
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