The research shows that performance pay is associated with a reduction in workers quitting their jobs. At first blush, that might seem obvious. Of course workers should be paid well if they perform well, right? And if they're paid well, they won't want to leave their workplace, right? But actually, said Heywood, there are some interesting economic principles at work that have implications for how employers and employees navigate the labor market.

His paper, co-authored with his former student, Artz (now an economics professor at UW-Oshkosh), is titled "Performance Pay and Job Quits " and was published in the Journal of Economic Behavior & Organization in November.

Here's what you need to know.

1. What is performance pay?

Millions of people receive performance pay in many forms. Restaurant servers receive tips. Salespeople, realtors, stockbrokers, and others receive commission payments. Many workers receive bonuses for meeting sales or manufacturing targets.

"Performance pay is simply the linking, explicitly, of a measure of performance to earnings, and that measure of performance is, to some extent, in the eye of the firm," said Heywood. "So, it could be your sales, it could be the number of units you made. It could be how well you dealt with customers as measured by their responses. … Sometimes it can simply be a supervisor's rating of your performance."

2. Performance pay has changed over time.

In the past, Heywood said, performance pay was usually linked to the number of units a person could produce. That's known as a 'piece rate,' and it's been a large part of the economy for hundreds of years - think back to the days of the cottage industry, for example, or seasonal fruit-pickers.

Generally, said Heywood, it was understood that this type of performance pay led to a low attachment between worker and employer. The worker wasn't part of an internal work group or a dedicated long-term employee, and their earnings tended to stay stagnant. But after World War II, things began to shift. Over the past 20-30 years, there has been substantial growth in bonus- and commission-based performance pay in North America and Europe.

"Piece rates are a shrinking part of what performance pay is. Performance pay is increasingly bonuses and commissions," Heywood said. "This made us wonder. The old view says that the workers who are paid (piece rate) should be shorter-term employees and probably quit more often and move onto the next job. The new view is, maybe these are good jobs that have an internal profile that make you want to stay, so you're less likely to quit."

3. Based on the type of pay, workers want to stay in their jobs.

To see if that new view was correct, Heywood and Artz began examining worker data from the National Longitudinal Survey (NLS) conducted by Ohio State University. The NLS asks workers all kinds of questions about their jobs and themselves: Occupation, industry, length of tenure, job satisfaction, salary, race, gender, education, location, and so on. Most interestingly to Heywood and Artz, the NLS asked workers about the type of pay they received, including bonuses, tips, commissions, and piece rates.

"The data makes it clear that people who are paid performance pay - with the exception of piece rates, interestingly enough - are less likely to quit," said Heywood. That held true even controlling for all other factors, like the health of the economy, a worker's location, and even their job satisfaction.

What makes the piece rate pay the outlier?

Well, firstly, said Heywood, fewer industries pay piece rates these days. Secondly, workers paid by piece rate generally do not have earnings that naturally rise in good times and fall in bad times. A fruit picker's ability to pick fruit is less determined by consumer demand than a salesperson's ability to make sales.

4. Performance pay workers stay for the incentives and job resiliency.

Why do workers with performance pay tend to stay at their jobs? There are likely a few reasons, said Heywood.

First, employers often create new incentives over time, which can lead to salary growth for their employees. For example, in a sales job, all salespeople at a company typically earn the same commission rate, usually a percentage of each sale. However, as Heywood pointed out, employers may introduce incentives by assigning their top performers to territories with greater sales potential.

"Nothing's changed, except now you're earning more because I gave you a better territory, because you did a good job before," said Heywood. "Stockbrokers have a similar phenomenon we learned about where you can get more resources if you're doing a good job. We'll give you a secretary, for example, or we'll give you more leads from our central office."

The second reason is that performance paid jobs reflect the state of the economy much more than typical hourly or salaried jobs. If the economy is doing poorly, sales will usually go down, and when the economy is doing well, sales climb.

"(Worker quits) are what we call very pro-cyclical. That means that when times are good, (hourly or salaried) workers quit because they think they can do better," Heywood said. "But you don't need to do that in a performance-based job, because when times are better, your earnings are naturally higher."

Many career coaches advise that workers "job hop" every two to three years to seek higher salaries. But "The growth of performance pay is one thing that is cutting against what you might otherwise see as a tendency toward shorter-term employees," Heywood noted. "If you find yourself in a performance pay job, there will be less incentive to quit, and your employer will have a greater incentive to keep you."

So, if employers want to keep their workers long-term, or if workers are looking for a steady, long-term career, both need to think about performance pay.

By Sarah Vickery, UWM College of Letters & Science