MATH GURU ONLY
bootsy77
_______________________________________________________________
_______________________________________________________________ Report Information from ProQuest July 02 2015 00:24 _______________________________________________________________
02 July 2015 ProQuest
Table of contents
1. Performance pay and employee turnover.................................................................................................... 1
02 July 2015 ii ProQuest
Document 1 of 1 Performance pay and employee turnover Author: O'Halloran, Patrick L ProQuest document link Abstract: Purpose - The purpose of this paper is to explore how various performance related pay (PRP) schemes influence employee turnover. It also tests whether profit sharing has a differential impact on turnover in comparison to other forms of PRP. Design/methodology/approach - Utilizing a nationally representative longitudinal dataset of individuals, analysis begins with a parsimonious specification of the determinants of turnover and then progressively adds various sets of controls known to influence turnover decisions to observe how their inclusion influences PRP coefficients. Estimations employ both standard probits and panel data models. Findings - Empirical evidence reveals a negative relationship between an aggregate measure of PRP and turnover. Disaggregating performance pay measures by type reveals a robust negative relationship between profit sharing and turnover. Although one would expect the influence of other PRP schemes to mimic that of profit sharing, evidence suggests otherwise. Research limitations/implications - Data lack information on how much earnings are based on PRP. Consequently, estimates may be biased when combining those who receive little earnings from PRP with those who receive substantial amounts of PRP into a single PRP measure. Practical implications - Although PRP schemes are often introduced to improve incentives and productivity, profit sharing based on firm profitability may allow labor costs to vary with firm profits hence enhancing retention and reducing the incidence of unemployment during recession. Originality/value - This paper adds to the literature and fulfils an identified need to study how other types of PRP besides profit sharing influence turnover. Links: Check Article Linker for full-text, Click here to request the full text article Full text: I. Introduction Despite vast literatures on both employee turnover and the many impacts of performance related pay (PRP), very few studies explicitly investigate how employee turnover is affected by other PRP schemes besides profit sharing. Prior research suggests that workers receiving individual PRP and profit sharing are more satisfied with their jobs ([33] Heywood and Wei, 2006; [28] Green and Heywood, 2008; [37] Kruse et al. , 2010) than those receiving pay based on traditional time-rates, even after accounting for the higher pay levels associated with PRP. Moreover, it seems clear that there exists positive selection on PRP whereby workers who are relatively less risk averse, more confident and more able receive a return or rent on these characteristics in PRP jobs that they cannot obtain in a standard time-rate job ([15] Curme and Stefanec, 2007). Consequently, if PRP workers are more satisfied with their jobs, they may experience lower turnover than traditional time-rate workers ([16] Clark et al. , 1998) making a result thought limited to workers on profit sharing apply more broadly to all workers receiving PRP. Furthermore, prior studies find mixed support for [51] Weitzman's (1985) hypothesis that stock options and profit sharing enhance job security by allowing marginal labor costs to vary with profitability ([38] Kruse, 1993; [37] Kruse et al. , 2010). Also, comparing turnover propensities between PRP and time-rate workers provides further evidence as to which of the two broad models of PRP may be most applicable; the classic agency theory or the sorting theory of [40] Lazear (1981, 1983). According to classic agency theory, PRP workers are fully compensated for the inherent higher risks associated with PRP, leaving them indifferent between PRP jobs and standard time-rate jobs, implying no difference in turnover. Alternatively, according to the sorting theory, PRP tends to attract the less risk averse and more able, who receive a rent they would not obtain in a time-rate position, implying lower turnover among PRP workers. Research presented herein estimates the impact various forms of PRP has on US employee turnover including
02 July 2015 Page 1 of 15 ProQuest
both quits and layoffs (those who report job termination due to firing, layoff, or plant closing), by analyzing data from six waves of the National Longitudinal Survey of Youth 1979 (NLSY79). Although there is an abundance of research on how profit sharing affects job turnover, very little research focuses on how other PRP schemes such as piece rates or bonuses influence job turnover. Specifically, the empirical analysis focuses on whether workers receiving PRP, both aggregated and disaggregated by type, experience differing rates of turnover than those paid time-rates. Critically, few studies explicitly explore how other types of PRP besides profit sharing influence job turnover. There are several different PRP schemes. PRP can be based on individual performance as is typical with piece rates and commissions or based on collective performance as is typical with profit sharing and stock options. Furthermore, PRP can be based on subjective measures of effort such as how hard one appears to be working, or based on objective measures of effort such as the number and quality of units produced. Given the varied incentives provided from different PRP schemes, one would expect each to affect employee turnover differently. Empirical analysis of the nationally representative sample reveals that those who receive any form of PRP experience lower rates of job turnover than those who do not receive any PRP, even after controlling for many commonly known determinants of turnover. Most importantly, when PRP is disaggregated by type, significant differences emerge. Workers who receive pay in the form of stock options and profit sharing experience significantly lower rates of turnover than those who do not, supporting the Weitzman hypothesis. Conversely, there are no significant differences in turnover between non-PRP workers and those receiving piece rates, commissions, and tips. Also, there is weak evidence that those who receive bonuses experience fewer layoffs. Consequently, the lower turnover rates observed using the aggregated PRP measure are mainly driven by stock options and profit sharing, suggesting that those forms of PRP may be unique. Splitting turnover into quits and layoffs reveals that workers participating in profit-sharing plans are significantly less likely to experience a layoff or quit while workers receiving stock options are significantly less likely to quit. Findings also corroborate those of [2] Azfar and Danninger (2001) and [29] Green and Heywood (2010), who theorize that profit sharing allows for increased expected returns on firm-specific human capital investments such as on-the-job training due to higher expected tenure. Although PRP schemes are typically introduced to increase worker productivity, employers utilizing profit sharing or stock option schemes may experience lower labor force turnover. The paper proceeds as follows: Section II will provide background on the relationship between PRP, job satisfaction, and turnover; Section III will review the data and provide rationales for covariate selection; Section IV will summarize the empirical results; and Section V offers conclusions. II. Past research A. The relationship between PRP, job satisfaction and turnover There are two broad models of PRP. The classic agency model of PRP presumes that firms pay workers just enough to compensate them for the greater variability in pay that is associated with PRP jobs, as well as rewarding greater effort typically put forth in PRP jobs. This model implies that, since workers are fully compensated for the greater risk and effort PRP entails, workers retain the same level of utility that they would have had in a standard time-rate position. Consequently, according to agency theory, job satisfaction would be no different in a PRP job as opposed to a time-rate job. Hence, one would expect similar rates of job turnover between PRP workers and time-rate workers. Alternatively, [40] Lazear (1981, 1983) argues that firms face a zero profit constraint and workers sort to capture rents they would not be able to obtain in a standard time-rate position. These rents arise because PRP is thought to attract those workers who are less risk averse and more able, and who will be more satisfied in jobs where their additional effort is commensurately rewarded. If workers cannot obtain similar rents in a time-rate position, one would expect to observe lower rates of turnover in jobs associated with PRP. Recent research by [14] Cornelissen et al. (2011) make it clear that while the Lazear theory of PRP implies rents, other models such
02 July 2015 Page 2 of 15 ProQuest
as the classic agency model do not. Accordingly, this paper provides further evidence as to which theory is most appropriate in modeling workers' reactions to PRP. If PRP is associated with lower turnover, the Lazear sorting model would better depict how PRP influences workers. If PRP is not associated with lower turnover, the classic agency theory of worker response to PRP would appear a better depiction of reality. A growing body of literature finds that PRP tends to increase overall job satisfaction. [33] Heywood and Wei (2006) find that both individual performance pay and profit sharing are positively related to job satisfaction while [28] Green and Heywood (2008) find that PRP workers are more satisfied with their jobs, pay level, job security and hours than non-PRP workers. These findings support the theory that PRP allows workers to more freely optimize on various dimensions without crowding out intrinsic motivation, thereby generating positive rents for workers unavailable in non-PRP jobs. Furthermore, [12] Brown and Sessions (2006) argue that workers prefer work environments where their earnings equal their marginal revenue product, which they find improves optimism concerning future employment relationships. Additionally, both [25] Goddard (2001) and [4] Bauer (2004) find that PRP schemes are often part of a larger package of human resource management practices that are known to improve job satisfaction. Critically, prior evidence demonstrates that less satisfied workers typically experience more job turnover than more satisfied workers ([21] Freeman, 1978; [1] Akerlof et al. , 1988; [16] Clark et al. , 1998; [23] Garboua et al. , 2007). Therefore, presuming more satisfied workers are less likely to experience turnover, one would expect to observe a negative relationship between PRP and job turnover. It is also well known that introducing PRP schemes causes large amounts of self-selection to occur, whereby workers preferring PRP schemes self-select into jobs that offer PRP schemes. [50] Sliwka and Grund (2006) find the higher inherent risk associated with PRP schemes attract a disproportionate number of less risk-averse workers who are more satisfied accepting greater pay variability in return for higher pay levels. Many studies identify a positive correlation between PRP and earnings ([45] Pencavel, 1972; [49] Seiler, 1984; [10] Brown, 1990; [20] Ewing, 1996; [8] Booth and Frank, 1999; [44] Parent, 1999). Indeed, [51] Weitzman (1985) and [38] Kruse (1993) argue that PRP schemes such as profit sharing and stock options may result in a decreased probability of layoffs, since firms are able to decrease payments when profitability is lower. Consequently, the increased job security associated with PRP based on firm performance may result in greater job satisfaction, especially satisfaction with job security previously observed by [28] Green and Heywood (2008). However, much research focuses on how PRP decreases job satisfaction. In particular, [3] Baker (1992) finds that PRP fails to increase job satisfaction when performance measures are overly subjective and when evaluations are poorly tied to actual performance. Also, PRP decreases job satisfaction if used solely to intensify low skilled or menial workers' effort. This is especially true when increased efforts are not rewarded with higher earnings due to ratcheting or when the PRP scheme does not permit greater flexibility to optimize ([42] McCausland et al. , 2005). In these situations, workers will be less satisfied under the PRP scheme, since they exert more effort without commensurate rewards. Furthermore, when PRP is sensitive to external phenomenon beyond the worker's control, job satisfaction declines because of uncontrollable pay variability ([43] Milgrom and Roberts, 1992). Additionally, [34] Kennedy (1995) finds PRP typically increases pay dispersion, creating a disincentive to workers receiving less than their peers, reducing satisfaction with pay ([11] Brown, 2001). Psychological studies also reveal that PRP is a form of extrinsic motivation which may crowd out intrinsic motivation to perform well, resulting in lower satisfaction among PRP workers ([22] Frey, 1997; [36] Kreps, 1997; [5] Benabou and Tirole, 2003). Therefore, presuming less satisfied workers are more likely to experience job turnover, one would expect to observe a positive relationship between PRP and turnover. Consequently, whether PRP increases or diminishes satisfaction is theoretically ambiguous. Therefore, assuming that job satisfaction influences turnover, PRP could be associated with either higher or lower turnover. Observing lower turnover among those working in PRP jobs would tend to support the sorting hypothesis, while observing no difference in turnover or higher turnover would tend to support classic agency theory. B. The effect of specific PRP plans on turnover
02 July 2015 Page 3 of 15 ProQuest
Different PRP schemes likely impart contrasting incentives and hence may result in dissimilar impacts on satisfaction and turnover. Unsurprisingly, prior findings reveal a mixed picture concerning the relationship between various PRP schemes and turnover. Prior evidence reveals that piece rates and commissions are associated with higher turnover ([39] Lazear, 1986; [26] Golden, 1986; [24] Geddes and Heywood, 2003), while bonuses are typically associated with lower turnover ([32] Hashimoto, 1979; [6] Blakemore et al. , 1987; [31] Guthrie, 2000). In particular, [32] Hashimoto (1979) provides evidence that flexible bonus payments enhance investments in on-the-job training, which is known to reduce turnover. [6] Blakemore et al. (1987) observe lower turnover among those paid a two-part compensation scheme composed of fixed pay plus flexible bonuses. Additionally, [31] Guthrie (2000), drawing on organizational economics literature, shows that firms using skill- based pay systems such as bonuses improve employee retention. Prior evidence reveals that PRP based on firm profitability is negatively associated with turnover. [35] Klein and Hall (1988) and [47] Saneyoshi (2001) observe that participation in Employee Stock Ownership Plans (ESOP) reduce turnover. Saneyoshi observes that ESOP workers are 71 percent more likely to stay with their current employer than those without any ESOP. [2] Azfar and Danninger (2001) find that profit-sharing plans are negatively associated with quits and layoffs, using a subset of the data analyzed below. Furthermore, they observe increased skill accumulation among profit sharing workers since they receive more intensive on-the-job training, leading to higher future wage growth. Analyzing UK data, [28] Green and Heywood (2008) find that profit sharing increases the incidence of on-the-job training which is known to reduce turnover ([46] Royalty, 1996). Others also identify a negative relation between various PRP schemes and turnover. [13] Chelius and Smith (1990) provide suggestive evidence that profit sharing reduces the incidence of layoffs in the face of decreased product demand. Furthermore, [48] Scoppa (2003) theorizes that firms employ PRP when the costs associated with turnover are high and fixed pay when the costs associated with turnover are low. [17] Dale- Olsen (2004) finds evidence in Norway of a negative association between turnover costs and the use of alternative forms of remuneration such as fringe benefits. He finds that fringe benefits have a stronger negative impact on turnover than what would be indicated by the fringe benefit's monetary value, supporting the idea that fringe benefits have an independent influence on turnover. In sum, literature reveals a strong negative relationship between aggregate measures of PRP and turnover, lower turnover among those receiving stock options, profit sharing and bonuses, and higher turnover among those receiving piece rates and commissions. The analysis below will attempt to add to this literature by further exploring which PRP schemes most significantly influence turnover. III. Data and the determinants of labor market turnover The NLSY79 contains information on both worker turnover and PRP as well other information on workers' job market experiences. Analysis will focus on a nationally representative sample of 6,111 men and women who were between the ages of 14-22 years old as of their initial interview in 1979. These individuals were interviewed annually up to 1994 and biennially thereafter. The NLSY79 includes information on respondents' labor force experiences and attachment, demographics, earnings and investments in both education and training, as well as information on job satisfaction. Only six waves contain PRP data: 1988, 1989, and 1990, as well as 1996, 1998, and 2000. Although data provides information on up to five jobs per respondent, focus will be on each respondent's main CPS job. Weights are not employed when reporting means or performing estimations since elimination of the supplemental over-samples of poor, Hispanic, black and military personnel result in a nationally representative cross-section. However, sample size decreases due to attrition, missing data and the elimination of those who report being self-employed or in the active military. Those in the active military are eliminated since turnover decisions are likely much different than in the civilian sector, while the self- employed are eliminated since "job turnover" likely has a much different meaning. Lastly, dropping observations with missing data leaves an unbalanced panel of 17,114 observations across 4,925 individuals. The NLSY asks respondents the following question: "The earnings on some jobs are based all or in part on how
02 July 2015 Page 4 of 15 ProQuest
a person performs the job. On this card are some examples of earnings that are based on job performance. Please tell me if any of the earnings on your job are/were based on any of these types of compensation." for the years 1988-1990 and, "On this card are some examples of earnings that are based on job performance. Please tell me if any of the earnings on your job are/were based on any of these types of compensation." for the years 1996-2000. Possible responses were piece rates, commissions, bonuses, stock options, tips and "other". Furthermore, the survey collected information on participation in profit sharing and pension plans. PRP workers are those who receive any earnings in the form of piece rates, commissions, bonuses, stock options, tips, profit sharing and "other" forms of PRP. Although respondents were asked about participation in various payment schemes, no information was collected about how much of their earnings were based on these schemes. Earnings could be entirely based on PRP or only marginally affected by PRP. Another problematic issue is what constitutes "other" forms of PRP. Fully 2.4 percent of the sample employed in analysis report receiving "other" forms of PRP. Although it is impossible to interpret what these "other" types of PRP entail, they will be included when constructing the aggregated PRP variable and also included as a separate PRP scheme in the disaggregated estimations. Given these restrictions, it is impossible determine to what extent earnings are PRP based. The lack of more detailed PRP information limits the ability to effectively assess the relation between job turnover and PRP. This becomes even more problematic if some jobs entail combinations of PRP schemes. Restrictions aside, one can arguably use the incidence of PRP to examine the relationship between PRP and other labor market outcomes. The survey also asks respondents why their job terminated[1] . The survey asks respondents "which of the reasons on this card best describes why you happened to leave this job?" Listed reasons include layoffs, plant closing, end of temporary/seasonal job, firing, program ending, quitting for family reasons, quitting to find or take another job, and quitting for other reasons. From these questions, the aggregate indicator of turnover equals one if the respondent reported a quit or layoff for any reason, zero otherwise. Analogously, indicator variables for quits and layoffs are created to distinguish between reasons for turnover. Layoffs are equal to one if the respondent reports a layoffs, plant closing, end of temporary/seasonal job, firing, or program ending. Many other individual and firm level characteristics are available in the NLSY79 and are summarized by payment scheme in Table I [Figure omitted. See Article Image.]. Since PRP is known to attract more educated and able workers, measures of human capital and ability are included as controls. Education is measured as the highest grade completed as of May 1 of each survey year. Ability is proxied by each individual's percentile score on the Armed Forces Qualification Test. As Table I [Figure omitted. See Article Image.] displays, educational levels and ability are slightly higher among PRP workers, except among those receiving piece rates and tips. Given the close relationship between earnings, satisfaction and turnover, analysis will include an earnings measure created by taking the logarithm of the individual's real wage. The real wage is obtained by dividing the individual's nominal hourly rate of pay by the respondent's regions' Consumer Price Index - All Urban Consumers using 1982-1984 as the base period. Furthermore, because on-the-job training and turnover are strongly negatively correlated ([46] Royalty, 1996), an indicator in the estimations denoting whether the respondent received any form of on-the-job training since their last interview is included. Female workers often experience higher turnover than males for reasons such as childbirth and rearing ([26], [27] Golden 1986, 1990). Within the sample, 16 percent of those who report leaving an employer quit for pregnancy or family reasons. Hence it seems essential to control for the influence gender and family status have on turnover. Besides an indicator for gender, six other indicator variables are created to represent an individual's current family situation. These six indicators include: unmarried without children; unmarried with children under six years of age; unmarried with children six years of age or older; married without children;
02 July 2015 Page 5 of 15 ProQuest
married with children under six years of age; and married with children six years of age or over. Furthermore, since larger establishments are more likely to make use of PRP schemes ([10] Brown, 1990) and have lower turnover ([19] Evan and MacPhearson, 1996), four firm size indicators are included. A firm is categorized as small if it employs less than ten workers, medium if it employs between ten and 49 employees, large if it employs between 50 and 200 employees, and very large if it employs more than 200 workers[2] . Respondents are also asked: How (do/did) you feel about (the job you have now/your most recent job)? (Do/Did) you like it very much, like it fairly well, dislike it somewhat, or dislike it very much? Since job satisfaction is known to influence turnover decisions, four different indicators to control for global job satisfaction are created from the four possible responses above. Within the sample, 7 percent of those who report liking their job very much experience turnover while those who report disliking their job very much have a turnover rate of 28 percent. Also, quits are more numerous than layoffs among workers who report disliking their job very much. Firms with internal labor markets typically experience lower turnover. This is because an alternative external wage offer is typically lower than the internal wage offer since the worker has accumulated firm specific knowledge that would not affect pay levels elsewhere. Also, fringe benefits such as insurance or pensions typically lower turnover. Consequently, to proxy for the presence of an internal labor market, I create an indicator that equals one if a position change within an employer was a promotion, zero otherwise. The fringe benefit indicator takes a value equal to one if the individual receives either employer provided insurance (medical, dental, and life), maternity leave, firm sponsored training and education, or employer-provided child care, and zero if they receive none of these benefits. Also, the nature of production critically determines whether various PRP schemes are practicable. Much of the prior literature points to the fact that PRP jobs are not available in every occupation or industry. [18] Elliott and Murphy (1986) observed that workers may not have the option to choose whether to obtain a PRP job. For example, they find that manual workers are much more likely to be paid based on some performance measure in comparison to non-manual workers. Similarly, [44] Parent (1999) observes that PRP in the form of piece rates are concentrated in particular occupations such as sales and operative occupations, while bonuses tend to be more evenly spread across occupations. This is due to the nature of the job and the difficulty involved in structuring the PRP scheme in situations where effort or output are extremely difficult or impossible to measure. Consequently, to proxy for the nature of production, I include occupational/industrial indicators at the one-digit level. Estimations also include an indicator for union affiliation, as well as a count variable for the unemployment rate for the worker's current residence[3] . Additionally, since it is well known that older, more experienced workers are much less likely to experience job turnover, we include a measure of the respondent's age. Lastly, estimations also include the respondent's tenure in weeks with a particular employer, average hours per week worked, urban status, number of jobs held, and indicators for each year of the panel. Table I [Figure omitted. See Article Image.] displays summary statistics combining all six years of data in which PRP questions were administered. Absent controls, PRP workers experience statistically significant lower mean levels of job turnover in the form of quits and layoffs than workers who do not receive any PRP. Among PRP workers, an average of 6.6 percent report job turnover over the period considered, while the average turnover rate of those who do not receive any PRP is 10.5 percent. Furthermore, F -tests for the difference in the means are statistically significant. PRP workers experience on average 1.7 percent fewer layoffs and 2.2 percent fewer quits than non-PRP workers. Differentiating between PRP schemes reveals that layoffs and quits are much lower for workers receiving stock options, profit sharing, bonuses, commissions, and those covered by multiple PRP schemes. Comparing means, piece rate workers are no different in terms of turnover rates than workers not receiving PRP, while tip workers have higher rates of turnover than non-PRP workers.
02 July 2015 Page 6 of 15 ProQuest
The statistics in Table I [Figure omitted. See Article Image.] are roughly consistent with those reported by [9] Bonars and Moore's (1995) analyze of PRP within the 1988-1990 waves of the NLSY79. Confirming their observations, PRP workers receive higher wages and have higher levels of education in comparison to non- PRP workers. Additionally, piece rate, commission and tip workers have shorter average tenures, while all other PRP workers have longer average tenures. However, contrary to their findings, Table I [Figure omitted. See Article Image.] reveals that PRP workers have longer tenures than non-PRP workers. This is likely due to their exclusion of group-based PRP plans from their measure of performance pay. Furthermore, summary statistics reveal that PRP workers are more satisfied, receive more promotions, are more likely to be employed in larger establishments, and are more likely to receive fringe benefits than non-PRP workers. Turnover rates are highest among piece rate workers and lowest among workers receiving stock options, followed by multiple schemes, profit sharing and bonuses. Among those who receive any PRP, 26.4 percent report receiving more than one type of PRP. Among those who receive multiple types of PRP, the most common forms are profit sharing and bonuses with many fewer workers receiving tips piece rates or multiple forms of PRP. Within the sample 80 percent receive profit sharing and some other form of PRP while 72 percent receive bonuses and some other form of PRP. Among the various forms of PRP, stock options and bonuses have the highest correlation coefficient at 0.25, followed by stock options and bonuses at 0.14, and profit sharing and bonuses at 0.12. As one would expect, the vast majority of piece rate workers are found in craft and operative occupations. Commissions are most prevalent in sales occupations. Tips are concentrated in service occupations while bonuses and stock options are prevalent among managerial occupations. Profit sharing appears to be spread evenly over professional, managerial, and clerical workers. Workers receiving multiple forms of PRP appear to be most prevalent among professional, managerial, sales and clerical occupations. Furthermore, summary statistics reveal women are less likely to be paid PRP and are less likely to receive bonuses, commissions and stock options as well receiving multiple forms of PRP in comparison to men. With regard to firm size, piece rates are most prevalent among the largest employers, while tips and commissions are more common among smaller firms. Also, bonuses are more predominant among the largest employers. Additionally, summary statistics show that unionized employees are most likely to be paid either piece rates or profit sharing. Over time, the incidence of PRP among this cohort increased from 14 percent in 1988 to a high of 18 percent in 1990, then fell back down to 15 percent in 2000. Within the different PRP schemes, the percent receiving stock options increased from 7 percent in 1988 to 29 percent in 1996 before tapering off slightly in 2000. IV. Empirical results Analysis begins with a parsimonious specification of employee turnover and progressively adds various sets of controls known to influence turnover to observe how their inclusion influences the PRP coefficients. The base specification includes controls for the presence of PRP, plus basic demographics such as race, gender, human capital and ability, as well as industry and occupation. Specification 2 adds non-compensation variables known to influence turnover including employer size, usual hours of work per week, tenure and its square, union affiliation (whether member or covered), age, urban status, number of jobs ever held, the local unemployment rate and family status indicators. Specification 3 adds compensation variables such as the log hourly real wage, as well as indicators for fringe benefits and promotions. Lastly, measures of global job satisfaction are included in Specification 4. Adding additional controls reduces size and significance of the PRP coefficient but increases the goodness of fit. Results of probit estimations on turnover, quits and layoffs are presented in Tables II-IV [Figure omitted. See Article Image.][4] . Table II [Figure omitted. See Article Image.] presents probit results where the dependent variable is the turnover indicator and the independent variable of interest is the aggregate measure of PRP. The parsimonious specification presented in Table II [Figure omitted. See Article Image.], Specification 1, reveals that PRP workers are 3.9 percent less likely to experience turnover than non-PRP workers. Most of the covariates
02 July 2015 Page 7 of 15 ProQuest
included in this specification appear as expected. Females and nonwhites have greater turnover, while those who accumulate more human capital in the form of education and on-the-job training experience less turnover. Workers in professional, managerial, clerical and craft occupations experience lower turnover, as do those working in manufacturing, transportation, finance, professional services and public administration industries. Table II [Figure omitted. See Article Image.], Specification 2 adds non-compensation related variables known to influence turnover. Adding these non-compensation variables reduces the PRP coefficient from 3.9 to 2.7 percent. Once non-compensation variables are controlled for, the size and significance of several variables in Specification 1 are reduced. Inclusion of firm size reveals that workers at smaller employers have higher turnover rates, while being covered by a collective bargaining contract reduces turnover. As expected, higher unemployment rates are associated with higher turnover. Unmarried and married workers with young children are more likely to experience turnover, while parents with older children and those without children are less likely to experience turnover. Adding the log hourly real wage, fringe benefits, and promotions further reduces the PRP coefficient reported in Table II [Figure omitted. See Article Image.], Specification 3, from 2.7 to 1.5 percent. The large reduction in the PRP coefficient between Specifications 2 and 3 is likely due to the large impact compensation has on job satisfaction and turnover. Adding the compensation variables turns many of the previously significant covariates insignificant. For example, coefficients for professional and managerial occupation fall to insignificance between 2 and 3. A likely explanation is that professional and managerial professions pay relatively more than other occupations. Once controls for compensation are added, the coefficients for managerial and professional occupations become insignificant. The same types of interactions also cause other coefficients to become insignificant due to the high correlation between pay and other aspects of job quality. However, the PRP coefficient remains statistically significant. As shown in Table II [Figure omitted. See Article Image.] Specification 3, a higher log real wage is associated with lower turnover, while the presence of other fringe benefits or a recent promotion reduces the probability of turnover. Lastly, adding job satisfaction controls causes the PRP coefficient to fall from 1.5 to 1.3 percent, as displayed in Table II [Figure omitted. See Article Image.], Specification 4. Those that state that they either dislike their job somewhat or very much have higher rates of turnover. Consequently, initial estimations reveal that PRP generally reduces turnover, despite the inclusion of many known major determinants of turnover. Moreover, female workers remain more likely to experience turnover as do those at larger employers and those caring for young children. Workers who receive on-the-job training, work in public administration, or do not have young children are less likely to experience turnover. Also, the compensatory variables remain negatively significant, but at slightly reduced magnitudes. Does the aggregated PRP measure have a different impact on quits than layoffs? Table III [Figure omitted. See Article Image.] separates turnover into quits and layoffs while including identical controls as those presented in Table II [Figure omitted. See Article Image.][5] . As previously observed, adding additional sets of variables known to influence turnover reduces the PRP coefficient on both quits and layoffs. Adding non-compensation and compensation-related variables in Table III [Figure omitted. See Article Image.] Specifications 1-3 reduce the PRP coefficient on quits from 2.1 to 0.7 percent. However, adding job satisfaction variables reduces the PRP coefficient to insignificance as shown in Specification 4 for quits. With regards to layoffs, the PRP coefficient falls from 1.5 percent in Specification 1 to 0.6 percent in Specification 4. Nonetheless, the PRP coefficient remains negatively significant even after inclusion of measures of job satisfaction, as well as non- pecuniary and pecuniary aspects of the job. Consequently, estimations support the hypothesis that PRP participation results in reduced turnover, especially layoffs. However, the observed negative correlation between PRP and turnover does not provide any evidence concerning which specific PRP schemes matter most in influencing turnover decisions. Including indicators for the various PRP schemes as well as an indicator for participation in multiple PRP
02 July 2015 Page 8 of 15 ProQuest
schemes reveal that profit sharing tends to reduce turnover, especially quits. Table IV [Figure omitted. See Article Image.] displays the effect of the different PRP schemes on turnover when all PRP schemes are added into the specification together[6] . Profit sharing and stock options significantly reduce turnover, even after inclusion of all available controls in Specification 4. Bonuses initially reduce turnover, but this falls to insignificance with inclusion of the compensatory covariates. Moreover, piece rates, commissions, tips, and "other" forms of PRP have no significant impact on turnover. Also, the coefficient for multiple PRP plans is insignificant. Thus, except for profit sharing and stock options, there may be correlated omitted variables that, when included, cause the negative correlation between the other PRP schemes and turnover to vanish. Separating turnover into quits and layoffs reveal a slightly different pattern where stock options no longer appear to significantly influence quits. However, profit sharing remains negatively significant, suggesting it has an influence distinct from the other PRP schemes. Additionally, bonuses have a slight negative impact on layoffs which fails to vanish in the full specification. Moreover, including profit sharing alone in Specification 4 without the other PRP variables reveals that profit sharing significantly reduces the probability of both quits and layoffs, while stock options have a weak negative impact on layoffs. All other PRP coefficients remain insignificantly different from zero when added separately into the fullest specification. Consequently, the profit sharing result is unlikely to be due to multi-collinearity; however, the other results could be insignificant due to multi-collinearity. If one expected the profit sharing result to arise out of multi-collinearity, one would expect the profit sharing result to be significant when included with the other PRP schemes, but insignificant when included individually. Whether included individually or together with the other PRP schemes, the level of significance and size of profit sharing coefficient do not change. Consequently, the aggregated PRP measure appears to generally reduce turnover. Yet, breaking down the PRP measure by type, I find that PRP schemes dependent on a firm's profitability such as profit sharing have a consistently significant negative impact on turnover and layoffs, and to some extent, quits. Given the large amount of self-selection known to be associated with PRP, it is essential to control for individual effects. This is done by estimating fixed and random-effects probit models including all available determinants of turnover. The fixed-effect probit models are estimated using LIMDEP's fixed-effects probit procedure[7] . When estimating fixed-effects models, sample sizes shrink because workers with no variation in status are dropped from the sample. Additionally, coefficients for time invariant determinants such as gender, race, and AFQT score cannot be estimated. Furthermore, fixed-effects estimates increase measurement error which often makes it difficult to obtain precise and statistically significant results. Initially, to check the robustness of earlier results, all prior estimations were repeated using a fixed-effects procedure. These estimations reveal a similar pattern as shown in Tables II-IV [Figure omitted. See Article Image.], except for a few minor deviations in magnitude and significance[8] . In the fixed-effects estimations, the size of the fixed-effects is not of great consequence since they are individual components of turnover propensity not associated with the independent variables and hence will not be discussed. Another difficulty inherent in the fixed-effects estimations is that these estimations may be picking up movement between the differing forms of PRP as opposed to capturing the intended influence of movement from non-PRP to PRP jobs on turnover proclivities. If moving from a non-PRP to a PRP job is associated with positive rents, one would expect to see lower turnover among PRP workers. However, if one is moving from one PRP scheme to another, there may be no rents and hence no difference in turnover associated with the PRP scheme. Consequently, the fixed-effects estimations should ideally only identify movements from a non-PRP job to a PRP job. Since the fixed-effects estimations involve a small and select sample, I do not expect there to be much movement across PRP schemes. Nevertheless, to further limit the possibility of capturing movement across PRP schemes, I created three categories: profit sharing, all other PRP besides profit sharing, and those who have neither, and then included them in the fixed-effects estimations. This should minimize the possibility of capturing movement from one PRP scheme to another since there are now only two schemes, profit sharing
02 July 2015 Page 9 of 15 ProQuest
and all other PRP schemes besides profit sharing. As shown in Specifications 1-3 in Table V [Figure omitted. See Article Image.], controlling for individual effects reveals that PRP workers remain less likely to experience job turnover and layoffs, but not significantly less likely to quit. Disaggregating PRP by scheme as described above reveals that those receiving profit sharing are less likely to experience turnover in the form of both quits and layoffs (Table V [Figure omitted. See Article Image.], Specifications 4-6)[9] . The magnitude of the marginal effect in each case actually increases after controlling for fixed-effects in the estimations. Although not shown in Table V [Figure omitted. See Article Image.], the marginal effect for the PRP coefficient in Specification 3 is now larger in magnitude (-0.006 vs - 0.046) than in the estimations without the fixed-effects, as are the marginal effects on the profit sharing coefficients for turnover (-0.017 vs -0.027), quits (-0.010 vs -0.014), and layoffs (-0.005 vs -0.055) in Specifications 4-6, respectively. As shown in Specifications 4-6, all other forms of PRP besides profit sharing have no significant impact on turnover or quits. However, the coefficient for other PRP besides profit sharing does come close to having a significant impact on layoffs. In addition to the fixed-effects estimations, random-effects estimations were also performed to check the robustness of the findings. These estimations reveals that PRP workers are less likely to experience turnover and layoffs, but not significantly less likely to quit[10] . Breaking down PRP into different schemes, then adding them together with all other determinants of turnover reveals that those receiving profit sharing as a form of compensation experience lower rates of turnover as well as layoffs and quits. In addition, those receiving stock options are significantly less likely to experience turnover and layoffs, but not quits. After including a multitude of factors known to influence turnover and attempting to control for individual heterogeneity, the negative correlation between turnover and profit based PRP remains. Therefore, profit sharing, and to some extent stock options, appears to have an independent influence on job turnover that other forms of PRP do not. However, other forms of PRP do not have a significant impact on turnover after accounting for measures intended to capture the pecuniary and non-pecuniary aspects of the job while controlling for job satisfaction. Thus, for these other PRP types, evidence suggests that there are correlated omitted variables that, once included, cause the negative association between PRP and turnover to vanish. V. Conclusion Although there is a substantial literature on the relationship between profit sharing and turnover, there is very little research on the influence of other types of PRP on job turnover. This paper explores how various PRP schemes influence employee turnover. It also tests whether profit sharing has a differential impact on turnover in comparison to other forms of PRP. Analysis of NLSY79 data suggests that PRP's impact on labor market turnover critically depends on which type of PRP the worker receives. I find that workers receiving some form of PRP, regardless of type, have lower rates of employee turnover than workers who do not, within the cohorts analyzed. This finding provides more empirical support for the sorting model of PRP than the classic agency model. Furthermore, workers receiving some form of PRP are less likely to quit and are much less likely to be fired than those not receiving any form of PRP. Confirming [2] Azfar and Danninger (2001), [28] Green and Heywood (2008) and [37] Kruse et al. (2010), these results appear to be mainly driven by profit based pay schemes, especially profit sharing[11] . Although one would expect the influence of other PRP schemes to mimic that of profit sharing, evidence suggests otherwise. When one isolates the impact of the separate PRP schemes on turnover, only those receiving profit sharing are significantly less likely to experience turnover. Empirical evidence also supports the [51] Weitzman theory (1985) that profit sharing enables marginal labor costs to vary with profitability, hence reducing the incentive to shed workers during downturns. Accordingly, further reliance on shared capitalism in the form of profit sharing based on firm profitability may help mitigate the problem of unemployment as well as enhancing productivity and incentivizing employees. The author would like to thank Dr John S. Heywood for his continued guidance and support as well as an anonymous referee for constructive comments. The author would also like to thank his beloved wife Susanne
02 July 2015 Page 10 of 15 ProQuest
for her continual encouragement. All remaining errors are the author's own. Footnote 1. [41] Light and McGarry (1998) note the difficulty in distinguishing voluntary and involuntary job separations within the NLSY. Specifically, they observe that a majority of workers experiencing turnover report voluntary separations and a significant proportion (25 percent) report separations for "other" reasons. However, they do note that replacing their measures of total separations with voluntary separations other than discharges or layoffs does not qualitatively change their inferences concerning the influence job mobility has on wage paths. Although potentially arbitrary, I code those who report separations for reasons of layoffs, plant closings, end of temp or seasonal jobs, firings, or program endings as involuntary separations (layoffs) while those who report separations as quits, regardless of reasoning, as voluntary separations (quits). 2. Although the common practice is to take the log of employer size, results are not sensitive to whether estimations include the log of establishment size or four separate size indicators employed here. 3. The NLS constructs the unemployment rate by using state and area labor force data from the May publication of Employment and Earnings for the month of March of each survey year. If a respondent resides in a metropolitan area, then the unemployment rate is the unemployment rate for that metropolitan area. Otherwise, the unemployment rate is the computed balance of state unemployment rates for the state in which the respondent resides. 4. Logit estimations with and without fixed effects reveal a similar pattern as that shown using probit analysis and are available from the author upon request. 5. The full estimation results, including all covariates, are available from the author upon request. 6. Estimations including each PRP scheme separately in the four specifications reveal a similar pattern as when they are added jointly. These estimations are available from the author upon request. 7. See LIMDEP Manual Version 9 (2007) Panel Data Models for Binary Choice, p. E20-1-E20-17. 8. The full estimation results are available from the author upon request. 9. Fixed-effects estimations including all the PRP measures together in a single model were also run for turnover, quits and layoffs. These estimations reveal that profit sharing reduces job turnover and quits, but not layoffs. However, the profit sharing coefficient would be statistically significant at the 10 percent level, suggesting a weak negative correlation between profit sharing and layoffs. Accounting for individual heterogeneity causes the stock option coefficient to become statistically insignificant, although it retains sign and size. This result suggests that it may be imprecisely estimated due to the small number of changes occurring within individuals. In a similar vein, fixed-effects estimations reveal a weak positive correlation between piece rate and layoffs and a weak negative correlation between commissions and quits. 10. These estimations are available from the author upon request. 11. For theoretical explanations and further background concerning the influence of profit sharing on productivity and employment stability, readers can reference [38] Kruse (1993) and [37] Kruse et al. (2010). References 1. Akerlof, G.A., Rose, A.K. and Yellen, J.L. (1988), "Job switching and job satisfaction in the US labor market", Brookings Papers on Economic Activity, Vol. 2, pp. 495-594. 2. Azfar, O. and Danninger, S. (2001), "Profit sharing, employment stability, and wage growth", Industrial and Labor Relations Review, Vol. 54 No. 3, pp. 619-30. 3. Baker, G.P. (1992), "Incentive contracts and performance measurement", Journal of Political Economy, Vol. 100 No. 3, pp. 598-614. 4. Bauer, T.K. (2004), "High performance workplaces and job satisfaction: evidence from Europe", IZA Discussion Paper No. 1265. 5. Benabou, R. and Tirole, J. (2003), "Intrinsic and extrinsic motivation", Review of Economic Studies, Vol. 70 No. 3, pp. 489-520.
02 July 2015 Page 11 of 15 ProQuest
6. Blakemore, A.E., Low, S.A. and Ormiston, M.B. (1987), "Employment bonuses and labor turnover", Journal of Labor Economics, Vol. 5 Nos 4, Part 2, pp. S124-35. 8. Booth, A.L. and Frank, J. (1999), "Earnings, productivity, and performance-related pay", Journal of Labor Economics, Vol. 17 No. 3, pp. 447-63. 9. Bronars, S.G. and Moore, C. (1995), "Incentive pay, information, and earnings: evidence form the NLSY", NLS Discussion Paper 95-23, US Department of Labor, Bureau of Labor Statistics. 10. Brown, C. (1990), "Firm's choice of method of pay", Industrial and Labor Relations Review, Vol. 43 No. 3, pp. 165-82. 11. Brown, M. (2001), "Unequal pay, unequal response? Pay referents and their implications for pay level satisfaction", Journal of Management Studies, Vol. 38 No. 6, pp. 879-96. 12. Brown, S. and Sessions, J.G. (2006), "Some evidence on the relationship between performance related pay and the shape of the experience-earnings profile", Southern Economic Journal, Vol. 72 No. 3, pp. 660-76. 13. Chelius, J. and Smith, R.S. (1990), "Profit sharing and employment stability", Industrial and Labor Relations Review, Vol. 43 No. 3, pp. 256S-73S. 14. Cornelissen, T., Heywood, J.S. and Jirjahn, U. (2011), "Performance pay, risk attitudes, and job satisfaction", Labour Economics, Vol. 18 No. 2, pp. 229-39. 15. Curme, M. and Stefanec, N. (2007), "Worker quality and labor market sorting", Economic Letters, Vol. 96 No. 2, pp. 202-8. 16. Clark, A., Georgellis, Y. and Sanfey, P. (1998), "Job satisfaction, wage changes, and quits: evidence from Germany", Research in Labor Economics, Vol. 17, pp. 95-121. 17. Dale-Olsen, H. (2004), "Wages, fringe benefits and worker turnover", Labour Economics, Vol. 13 No. 1, pp. 87-105. 18. Elliott, R.F. and Murphy, P.D. (1986), "The determinants of the coverage of PBR systems in Britain", Journal of Economic Studies, Vol. 13 No. 3, pp. 38-50. 19. Evan, W.E. and MacPhearson, D.A. (1996), "Firm size and employer turnover", Industrial and Labor Relations Review, Vol. 49 No. 4, pp. 707-28. 20. Ewing, B.T. (1996), "Wages and performance-based pay: evidence from the NLSY", Economic Letters, Vol. 51 No. 2, pp. 241-6. 21. Freeman, R.B. (1978), "Job satisfaction as an economic variable", American Economic Review, Vol. 68 No. 2, pp. 135-41. 22. Frey, B.S. (1997), "On the relationship between intrinsic and extrinsic work motivation", International Journal of Industrial Organization, Vol. 15 No. 4, pp. 427-39. 23. Garboua, L.L., Montmarquette, C. and Simonnet, V. (2007), "Job satisfaction and quits", Labour Economics, Vol. 14 No. 2, pp. 251-68. 24. Geddes, L.A. and Heywood, J.S. (2003), "Gender and piece rates, commissions, and bonuses", Industrial Relations, Vol. 42 No. 3, pp. 419-44. 25. Goddard, J. (2001), "High performance and the transformation of work - the implications of alternative work practices for the experience and outcomes of work", Industrial and Labor Relations Review, Vol. 54 No. 4, pp. 776-805. 26. Golden, C. (1986), "Monitoring costs and occupational segregation by sex: a historical analysis", Journal of Labor Economics, Vol. 4 No. 1, pp. 1-27. 27. Golden, C. (1990), Understanding the Gender Gap: An Economic History of American Women, Oxford University Press, New York, NY. 28. Green, C. and Heywood, J.S. (2008), "Does performance pay increase job satisfaction?", Economica, Vol. 75 No. 300, pp. 710-28. 29. Green, C. and Heywood, J.S. (2010), "Profit sharing, separation, and training", British Journal of Industrial
02 July 2015 Page 12 of 15 ProQuest
Relations, July. 31. Guthrie, J.P. (2000), "Alternative pay practices and employee turnover: an organizational economics perspective", Group &Organization Management, Vol. 25 No. 4, pp. 419-39. 32. Hashimoto, M. (1979), "Bonus payments, on-the-job training, and lifetime employment in Japan", Journal of Political Economy, Vol. 87 No. 5, pp. 1086-104. 33. Heywood, J.S. and Wei, X. (2006), "Performance pay and job satisfaction", Journal of Industrial Relations, Vol. 48 No. 4, pp. 523-40. 34. Kennedy, P.W. (1995), "Performance pay, productivity and morale", Economic Record, Vol. 71 No. 3, pp. 240-7. 35. Klein, K.J. and Hall, R.J. (1988), "Correlates of employee satisfaction with stock ownership: who likes an ESOP most?", Journal of Applied Psychology, Vol. 73 No. 4, pp. 630-8. 36. Kreps, D.M. (1997), "Intrinsic motivation and extrinsic incentives", American Economic Review, Vol. 87 No. 2, pp. 359-64. 37. Kruse, D.L., Freeman, R.B. and Blasi, J.R. (2010), "Do workers gain by sharing?", in Kruse, D.L., Freeman, R.B. and Blasi, J.R. (Eds), Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, NBER, Chicago, IL, pp. 257-89. 38. Kruse, D. (1993), Profit Sharing: Does It Make a Difference?: The Productivity and Stability Effects of Employee Profit-sharing Plans, W.E. Upjohn Institute for Employment Research, Kalamazoo, MI. 39. Lazear, E.P. (1986), "Salaries and piece rates", Journal of Business, Vol. 59 No. 3, pp. 405-31. 40. Lazear, E.P. (1981), "Agency, earnings profiles, productivity, and hours restrictions", American Economic Review, Vol. 71 No. 4, pp. 606-20. 41. Light, A. and McGarry, K. (1998), "Job change patterns and the wages of young men", Review of Economics &Statistics, Vol. 80 No. 2, pp. 276-86. 42. McCausland, W., Pouliakas, K. and Theodossiou, I. (2005), "Some are punished and some are rewarded: a study of the impact of performance pay on job satisfaction", International Journal of Manpower, Vol. 26 Nos 7/8, pp. 636-59. 43. Milgrom, P. and Roberts, J. (1992), Economics, Organization and Management, Prentice-Hall, New York, NY. 44. Parent, D. (1999), "Methods of pay and earnings: a longitudinal analysis", Industrial and Labor Relations Review, Vol. 53 No. 1, pp. 71-85. 45. Pencavel, J.H. (1972), "Wages, specific training, and labor turnover in US manufacturing industries", International Economic Review, Vol. 13 No. 1, pp. 53-64. 46. Royalty, A.B. (1996), "The effects of job turnover on the training of men and women", Industrial and Labor Relations Review, Vol. 49 No. 3, pp. 506-21. 47. Saneyoshi, Y. (2001), "Employee behavior and company stock ownership", doctoral dissertation, Harvard University, Cambridge, MA. 48. Scoppa, V. (2003), "The role of turnover costs in the enforcement of performance-related pay contracts", Metroeconomica, Vol. 51 No. 1, pp. 60-78. 49. Seiler, E. (1984), "Piece rates vs. time rates: the effect of incentives on earnings", The Review of Economics and Statistics, Vol. 66 No. 3, pp. 363-76. 50. Sliwka, D. and Grund, C. (2006), "Performance pay and risk aversion", IZA Discussion Paper No. 2012, March. 51. Weitzman, M.L. (1985), "The simple macroeconomics of profit-sharing", American Economic Review, Vol. 75 No. 5, pp. 937-53. Further Reading 1. Blinder, A.S. (1990), Paying for Productivity: A Look at the Evidence, The Brookings Institution Press,
02 July 2015 Page 13 of 15 ProQuest
Washington, DC. 2. Green, W.H. (2007), Econometric Modeling Guide: Volume 1, LIMDEP Version 9, Econometric Software, Inc., Plainview, NY. Appendix Corresponding author Patrick L. O'Halloran can be contacted at: [email protected] AuthorAffiliation Patrick L. O'Halloran, Department of Economics, Finance and Real Estate, Leon Hess Business School, Monmouth University, West Long Branch, New Jersey, USA Illustration Table I: Descriptive statistics Table II: Determinants of turnover - probit analysis - marginal effects shown Table III: Determinants of quits and layoffs - probit analysis - marginal effects shown Table IV: Turnover by PRP type - probit analysis - marginal effects shown Table V: Fixed-effects probit analysis of job turnover, quits, and layoffs Subject: Profit sharing plans; Studies; Economic models; Hypotheses; Workers; Profitability; Employee turnover; Classification: 6100: Human resource planning; 9130: Experimental/theoretical; 1130: Economic theory; 6400: Employee benefits & compensation Publication title: Journal of Economic Studies Volume: 39 Issue: 6 Pages: 653-674 Publication year: 2012 Publication date: 2012 Year: 2012 Publisher: Emerald Group Publishing, Limited Place of publication: Glasgow Country of publication: United Kingdom Publication subject: Business And Economics ISSN: 01443585 Source type: Scholarly Journals Language of publication: English Document type: Feature DOI: http://dx.doi.org/10.1108/01443581211274601 ProQuest document ID: 1086419026 Document URL: http://search.proquest.com.proxy1.ncu.edu/docview/1086419026?accountid=28180 Copyright: Copyright Emerald Group Publishing Limited 2012
02 July 2015 Page 14 of 15 ProQuest
Last updated: 2012-11-16 Database: ABI/INFORM Global
_______________________________________________________________ Contact ProQuest Copyright 2015 ProQuest LLC. All rights reserved. - Terms and Conditions
02 July 2015 Page 15 of 15 ProQuest
- Performance pay and employee turnover