Performance Related Pay Coverage in the UK

A simple model of firms' decisions to pay workers performance related pay (PRP) is tested using company level data for 1,001 UK private sector businesses.

From the basic sample statistics we observe that, on average, 26.5 per cent of workers are covered by PRP systems. Yet this hides the fact that only 50.5 per cent of businesses have any workers at all covered by PRP.

Our empirical analysis offers support for the key hypotheses drawn from Lazear type PRP models, which emphasise the relations between firm size and implementation costs, and ease of measurement, as medium and large firms are more likely to have PRP systems.

However, these results are overturned when we consider the extent of workers covered by firm level PRP systems if they are in place. Here we observe that more workers are covered by PRP in micro and small firms.