Flexible pay systems and labour productivity: Evidence from manufacturing firms in Emilia-Romagna

The purpose of this paper is to analyze the link between flexible pay systems (FPS) and labor productivity, also looking at which factors drive firms to adopt such wage schemes.

The analysis is conducted on an original sample extracted from a firm-level survey on manufacturing firms with at least 20 employees in the Emilia-Romagna region of Italy. A two-stage model is adopted to mitigate potential self-selection into FPS adoption.

The results show that the adoption of a FPS is linked to the unions’ involvement and organizational changes within firms, supporting the idea that a FPS is not simply a risk-sharing mechanism, but part of a more complex strategy to increase workers’ flexibility and autonomy. The relationship between FPS and labor productivity concerns a traditional form of premiums intended for individual employees and linked simply to “effort improvement and control” motives and to the firm’s “ability to pay.” Productivity also increases after adopting ex-ante payment systems that focus on developing employees’ participation and competences.

The main findings have two important implications. In the personnel economics literature, the authors stress the complementarity among different organizational practices and their role in making firms more competitive. The authors also attribute an additional role to flexible payment systems, which can be seen not just as a way to make employees work harder, but also as the means by which the effect of organizational changes on labor productivity materializes.

From the policy perspective, the results show that non-price incentives are as important as price incentives for achieving higher productivity targets. Firms’ competitiveness is the outcome not only of a higher worker effort and lower labor costs, but also of the adoption of managerial and organizational innovations to promote skill development, learning, and union involvement.

The analysis has two elements of novelty: first, the distinction between a broad array of human resource management practices in both production and labor management; and second, the analysis of different types of flexible payment systems: ex post, ex ante, individual, team-based, and mixed.