Three types of pay-setting methods are piece rates (pay mechanically linked
to output), merit pay (pay based on less formal judgments by one's supervisor),
and standard rates (pay based on one's job classification and perhaps seniority,
but not directly on performance). Firms' choice among methods depends on
balancing the gains from more precise links between performance and pay against
the costs of either precise or judgmental measures of output. Using data from the
BLS Industry Wage Study program, hypotheses suggested by this observation are
tested and for the most part confirmed.
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