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The purpose of this paper is to provide novel and rigorous evidence on the productivity effect of varying attributes of performance-related pay (PRP) and shows that the details of PRP indeed matter.

In doing so, the authors exploit the panel nature of the Finnish Linked Employer–Employee Data on the details of PRP.

The authors first establish that the omitted variable bias is serious, which makes the cross-sectional estimates on the productivity effect of the details of PRP biased upward substantially. Relying on the fixed effect estimates that account for such bias, the authors find: (first, group incentive PRP is more potent in boosting enterprise productivity than individual incentive PRP; second, group incentive PRP with profitability as a performance measure is especially powerful in raising firm productivity; third, when a narrow measure (such as cost reduction) is already used, adding another narrow measure (such as quality improvement) yields no additional productivity gain; and fourth, PRP with greater power of incentives (the share of PRP in total compensation) results in greater productivity gains, and returns to power of incentives diminishes very slowly.

Much of the empirical literature on PRP focuses on a question of whether the firm can increase firm performance in general and enterprise productivity in particular by introducing PRP and if so, how much. However, not all PRP programs are created equal and PRP programs vary significantly in a variety of attributes. This paper provides novel and rigorous evidence on the productivity effect of varying attributes of PRP and shows that the details of PRP indeed matter.

The aim of this paper is to examine rent sharing under a heterogeneous workforce using Finnish linked employer‐employee data in 1987‐1998. Rent sharing is one component of the empirically estimated firm‐effect and depends on the sensitivity of firm‐level payments to quasi‐rents. It is shown that rent sharing moderates other forms of firm‐level wages. Thus, the lower the starting wages, the higher rent sharing will be. Alternatively, in many firms new workers are attracted to the job by paying high entry wages, while these new workers do not obtain the full level of rent sharing in the first years of service. Highly educated workers are the main targets of rent sharing and rent sharing is more common in R&D‐intensive firms. All this shows the importance of human capital accumulation and flexible technology in explaining rent sharing. This can also explain why rent sharing is targeted at experienced workers in R&D‐intensive firms. In non‐R&D‐intensive firms, job search is also of importance. Rent sharing is more common when highly educated workers have flexible labour supply.

We study career and wage dynamics within and between firms using a large linked employer-employee panel dataset spanning 26 years. We construct six-level hierarchies for more than 5,000 firms. We replicate most of the analyses from Baker, Gibbs, and Holmström (1994) and make some extensions. Many of our results corroborate their findings. Careers within firms are important, but the strong version of the theory of internal labor markets does not fit the data. Recent theories of career and wage dynamics explain our findings well.

This paper introduces the Special Issue on competitive versus non‐competitive wage differentials, a collection of papers originally presented at the 79th Conference of the Applied Econometrics Association held in Brussels in May 2002.

Pay varies across individuals. Some variation is endemic to a country's institutions including a country's level of development and its technological infrastructure. Some variation is based on differences in individual attributes, particularly an individual's ability to acquire human capital. Finally, some variation is based on incentives instigated by the government, by one's employer, or by one's family. These incentives often operate indirectly by influencing educational choices, labor force participation, and even cohabitation and marital arrangements. This volume contains eight articles on aspects of the distribution of income. One deals with technology change and the distribution of earnings, two deal with internal labor markets, four deal with incentives that motivate work related behavior, and finally one deals with immigrant labor market success.