Flexible pay systems and labor productivity: Evidence from Emilia Romagna manufacturing firms

Purpose: The aim of this paper is to analyze the link between flexible pay systems (FPS) and labor productivity, also looking at which factors drive firms to adopt such wage schemes. Design/methodology/approach: The analysis is conducted on a sample of more than 500 manufacturing firms located in the Emilia-Romagna region of Italy. To address endogeneity a two-stage model is estimated. Findings: Our results show that the adoption of a FPS is linked to organizational changes within firms and to union involvement. The positive relationship between FPS and labor productivity concerns mainly a traditional typology of premium, targeted to individual employees and linked to “effort improvement and control” motives or to the firm’s “ability to pay”. We also find a positive relation between ex-ante, or competence-based, FPS and labor productivity. Originality/value: The paper provides new evidence on the returns of FPS in Italy. Results support the idea that a FPS is not simply a risk premium mechanism, but is part of a more complex strategy to increase workers’ flexibility, autonomy and competences.