According to economic theory, workers' wages are equal to the marginal revenue product of their labor. If one employee is very productive he or she will have a high marginal revenue product: one additional hour of their work will produce a significant increase in output. It follows that more productive employees should have higher wages than less productive employees. Imagine if this were not true: a firm decides to pay a highly productive worker less than the marginal revenue product of his labor. Any other firm could make a profit by offering a higher salary to attract the productive employee to their company, and the worker's wage would rise. Theoretically, therefore, there is a direct relationship between job performance and pay.
We know that this is not always the case in reality. Wages are determined not only by one's productivity, but also by seniority, networking, ambition, and luck. It is very rare for an entry-level worker to make the same wage as an experienced member of the same profession regardless of their relative levels of productivity because the older worker has had time to receive pay raises and promotions for which the younger employee is simply not eligible. Discrimination is sometimes responsible for members of minority racial or gender groups receiving wages that are less than wages for the majority group even when productivity levels are the same. Finally, outside forces, such as unions or government regulations, can distort pay rates .
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Wages and Productivity in the U.S.
On a macroeconomic level, this graph shows the disconnect, beginning around 1975, between the productivity of labor and the wage rate in the U.S. If the economic theory were correct in the real world, wages and productivity would increase together.
Linking Performance and Pay
Some of the disconnect between performance and pay can be addressed with alternate pay schemes. While a salary or hourly pay does not directly take into account the quality of work, performance-related pay compensates workers with higher levels of productivity directly. One example is commission-based pay. In this type of pay scheme, workers receive some percentage of the profit that they generate for their company. This may be paid on top of a baseline salary or may be the only form of compensation. This type of system is very common among car salespeople and insurance brokers.
Another alternative is piece-work, in which employees are paid a fixed rate for every unit produced or action performed, regardless of the time it takes. This is common in settings where it is easy to measure the output of piece work, such as when a garment worker is paid per each piece of cloth sewn or a telemarketer is paid for every call placed.