Safelite Auto Glass Increased Employee Output by 44% with Profit Sharing
There’s an iconic case study on the impact of profit sharing and performance pay by Edward Lazear from Stanford Business School.
“A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates.”
Much of the theory in personnel economics relates to effects of monetary incentives on output, but the theory was untested because appropriate data were unavailable… until this case study.
The effects, which are documented by examining the behavior of about 3,000 different workers over a 19-month period, are dramatic and completely in line with economic theory.
In what follows, the theory of piece-rate compensation is sketched with particular emphasis on the predictions that pertain to changes in the compensation method used by Safelite.
The theory is backed up by the empirical results, the most important of which are:
A switch to piece-rate pay has a significant effect on average levels of output per worker. This is in the range of a 44% gain.
The gain can be split into two components:
About half of the increase in productivity results from the average worker producing more because of incentive effects.
Some of the increase results from an ability to hire the most productive workers and possibly from a reduction in quits among the highest output workers. None reflects the “Hawthorne effect”.
The firm shares the gains in productivity with its workforce. A given worker receives about a 10% increase in pay as a result of the switch to piece rates.
Moving to piece-rate pay increases the variance in output. More ambitious workers have less incentive to differentiate themselves when hourly wages are paid than when piece-rate pay is used.
The data is fascinating.
If you want to see the entire case study, you can download it for free here 👇
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