eThesis - School of Business electronic theses

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Research objective:

This paper aims to explore whether a causal relationship exists between performance-based compensation (PBC) for white-collar workers (WCWs) and future firm performance. The paper also analyzes whether and how demographic factors of firm employees influence the outcomes of PBC schemes. Finally, the paper aims to contribute to prior literature regarding the effectiveness of individual and team incentives, and to shed light on how the effectiveness of these two types of schemes varies in companies with different employee demographics.

Data and methodology:

The quantitative research employs a large and unique pay data covering over one million employee-year observations in Finnish industrial companies that are members of the Confederation of Finnish Industries (EK). Accounting data about firm performance and other firm-specific facts was collected from Voitto+ database. The final sample consists of 4511 firm-year observations for years 2007-2010. The statistical research methods applied include descriptive analysis, correlation analysis, and OLS regression analysis for testing the theory-based hypotheses.

Results:

It is argued that the performance contingent incentives for white-collar workers can improve firm future performance. Weak support is found also for the argument that PBC effectiveness varies in companies with different demographic characteristics of employees. Interestingly, the results also weakly indicate that higher amount of incentives paid out does not yield superior firm performance. Finally, it seems that demographic factors may also influence the effectiveness of individual-based and team-based incentives. However, this indication is very weak and thus further research is required for drawing conclusions.