Learning and the Form of Compensation

Using data from the PSID and an empirical setup similar to the one used in Altonji and Pierret (Q J Econ 116(1):313–350, 2001)’s paper on wages and employer learning, we find that the coefficient of a hard-to-observe correlate of productivity—parents’ educational attainment—in a wage regression increases more rapidly with experience in performance pay jobs than in nonperformance pay jobs. This result is driven entirely by bonus pay jobs as opposed to commission/piece rate jobs. In the latter, there is no evidence that the importance of parental education in the wage determination process increases over time. This is consistent with the notion that explicit pay-for-performance compensation schemes are, by design, revealing workers’ productivities and that employers need not infer anything about worker productivity when the payment is ex post as is the case for commissions and piece rates as opposed to having to set pay ex ante.