Paying for Creativity: the Effect of Piece-rate Vs. Time-rate Compensation on Quality of Work

Abstract: Incentive-systems theory proposes generally that piece-rate compensation should yield higher quantity of output and, assuming that quality cannot be perfectly monitored, lower quality of output than time-rate compensation. But recent advances in psychology and behavioral economics suggest that such incentive compensation will elicit particularly poor quality results for non-routine tasks for which creative problem-solving is required. Using a unique database from the energy-related home services industry, we explore differences in quantity and quality outcomes between employee technicians who are paid a daily rate and contractor technicians who are paid by the job. Of particular interest, different job types require different levels of creative problem-solving, and calls are assigned to technicians independently of their compensation-scheme status. We find significant evidence that piece-rate workers indeed work faster and complete more jobs, with this advantage especially pronounced for routine jobs. We find mixed evidence regarding quality: piece-rate workers yield comparable quality for routine, low-creativity tasks, while their quality is significantly lower for high-creativity tasks. This study thus helps to reconcile prior results from conflicting theories.