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Performance-related pay, mental and physiological health

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Keith Bender discusses what Performance-Related Pay is and the pathways to affecting health.

Image courtesy of interviewee. February 29, 2024

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This video video discusses Performance Related Pay (PRP), a compensation system where employees are paid based on their performance rather than a fixed hourly or salary rate. The advantages of PRP include incentivizing employees to perform better and potentially increasing productivity and profitability for employers. However, there are significant concerns about the negative impacts of PRP on workers' health.

Historical references, including a quote from Adam Smith, indicate that performance-oriented pay can lead to overwork and health issues. Recent studies have shown a correlation between PRP and workplace accidents, particularly among blue-collar workers, as the pressure to perform might lead to risky behavior. For white-collar workers, the stress of PRP can result in unhealthy lifestyles due to the need to constantly produce.

This video video outlines three pathways through which PRP may affect health: an increase in accidents, unhealthy behavior due to work demands, and chronic stress that can lead to various health conditions. Experimental research found that PRP raises cortisol levels, a stress hormone, suggesting an increase in stress among those working under PRP systems.

While recognizing the potential health drawbacks of PRP, such as increased blood pressure and mental health issues, the text argues against eliminating PRP altogether due to its benefits for both employees and employers. Instead, it advocates for strategies to mitigate the adverse effects, such as enhancing workplace safety protocols and promoting wellness initiatives to help reduce stress among employees.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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Performance related pay,

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or PRP is one of many forms of, of payment contracts that

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employers can have with employees.

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Most of us are used to perhaps an hourly rate of pay

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or a, a payment every month as a, as a salary.

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But for many types of jobs,

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you're actually paid on the basis of your performance,

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how much you actually produce.

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Um, these can be very directly tied to,

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to your production.

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Um, sometimes in economics, we call these piece rates

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where you're paid a particular sum for every unit

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of output that you have.

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Sometimes you're paid a commission on,

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say the amount of sales that you have.

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Um, sometimes you're paid a bonus when you hit some kind

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of performance target.

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Um, and, and so we have this sort of mix of different ways

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that, that workers are, are, are paid,

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and economics has, has long looked at all

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of these different types of contracts.

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Um, looking at both the pros

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and the cons of each one of these kinds of contracts,

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but performance related pay

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or PRP, is one form that that often,

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is talked about in terms of its advantages.

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Um, one of the key advantages of performance related pay is

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as economics research is, has shown, is that

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because it pays for performance, it gives incentives

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for workers to perform better.

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Um, and because of that direct link between their pay

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and their performance, we find that, workers

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that are paid under PRP, generate more product, which

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of course, the, the employer can turn around and sell.

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Um, so, so firms can be somewhat more profitable.

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They have this direct tie to performance.

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Um, it is attractive to, to workers who,

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who are actually really good at, at producing,

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because they know that they'll get a return, on this.

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So from an employer's point of view, economics tends

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to say yes, there are lots of good reasons.

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Interestingly, the earlier research on performance related

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pay also showed that workers benefited those workers

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that were paid under performance related pay.

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They got more money, so, so they benefited.

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Um, and, and,

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and so there was this, you know, sort

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of virtuous feedback loop, that that went back,

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to thinking about this kind of performance related pay

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as opposed to all of that research that showed all

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of these positive benefits.

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Um, there are these potential negative benefits,

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these negative, attributes to performance related pay.

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And interestingly,

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these were observed 200 more than 200 years ago.

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Um, as any good economists should do,

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they should look at Adam Smith and the wealth of nations

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and in, the wealth of nations.

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Uh, Adam Smith has, a quote where he says,

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men when liberally paid by the peace,

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meaning when they're paid by, by their performance,

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are very apt to overwork themselves and to ruin their health

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and constitution in a few years.

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So even back in 1776, Adam Smith, the father of economics,

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was making this linkage potentially between

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performance related pay.

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In the case, in the case of his example, it's peace

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Rates where you're paid directly for the output

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that you have and their health.

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So, when I read this quote, I thought, well,

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there must be lots and lots written about it.

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And indeed, there was actually very little written about it.

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So, over the last several years, we've been developing

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of various ways of thinking about what those pathways may be

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between performance related pay and health.

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So one of the pathways, is

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through an increase in accidents.

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Um, because what performance related pay does is it puts a

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huge emphasis on the output.

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So to sort of flip the, the management maximum,

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upside down workers are incentivized to work harder,

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but not necessarily smarter.

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They may cut corners.

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Um, they'll do things that

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that may actually injure themselves,

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at, at the place of work.

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And so, back in, in 2012, I

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and two co-authors wrote a paper in the journal population

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economics that looked at about 30,000 workers, in,

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in the eu, and found there was a very strong correlation

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between those who were paid by performance related pay

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and the rate of injuries, amongst those,

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amongst those types of workers.

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So, strong relationship that we found,

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through accidents,

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and was particularly important

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for blue collar workers or manual workers.

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Now, for many jobs, you know, rates

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of accidents are, are quite low.

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So for non-manual

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or white collar workers,

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it's probably not gonna be an issue.

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But there's a different mechanism,

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that can affect those kinds of workers

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because one of the things

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that we know about performance related pay as well is

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that it puts,

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explicitly a cost on not working.

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So in performance related pay, when you are paid

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by the basis of your production or your sales

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or something like that, when you're not working,

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you don't get paid, right?

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So there's an incentive for you

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to be working perhaps quite a bit so

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that you can produce a lot, and that increases your pay.

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But if you're working a lot, it means

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that you're not doing other things.

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So, instead of going

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and, going to the grocery store and buying, food

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and taking it home and making a nice, healthy meal,

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you order take away and,

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and you eat a, you know, greasy pizza on, at,

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at your desk while you're continuing to do work,

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or, instead of going, and taking a walk

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and doing some exercise or going to the gym

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and working out, you stay at the office

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and, and continue to work.

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Neither of those things will cause you

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to be injured in any particular day,

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but over time, those kinds of behaviors,

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because you're not taking care of yourself,

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could potentially lead to worse health.

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So in another paper in 2014 in Oxford, economic papers,

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myself and my colleague,

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Giannis CIO wrote a paper using British data,

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starting looking at, at in individuals who all were healthy,

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but then tracked over time

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how long they spent in performance related pay.

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And the longer people spent in performance related pay,

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the more likely they at some point would say that

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They have heart problems,

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that they would have stomach problems,

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and they would have mental health,

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or they may have mental health problems.

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So any of those things could potentially happen the longer

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that you stay in performance related pain.

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So that's the second mechanism that it, it generates a, a,

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a, a change in the behavior of your time.

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The third, potential pathway for performance related pay

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and health is through stress.

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One of the things that we know about performance,

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the many performance related pay jobs, is

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that the income stream is uncertain.

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If you think about the Uber driver

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or the, the, the, the delivery,

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the food delivery person, when they show up at work,

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in an evening, they don't know at how much they're going

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to earn by the end because they're paid

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for the trip that that they take.

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And so if it's a terrible weather night

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and nobody's ordering out,

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or nobody's, taking Uber, trips,

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then they get paid nothing.

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Or if they get paid very little, whereas it's,

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if it's a very busy night, they could come home

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with a lot of money.

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So that uncertainty around payment also generates stress,

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and particularly perhaps for those with dependents,

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if you have kids or if you had a mortgage

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or a car payment, any

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of those things could generate stress as well.

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And, there's well-known medical literature

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that ties stress to poor worse, poor health outcomes.

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The problem that we had was that in many of the surveys

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that, that we had used already

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or that were out there, there was not very good information

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about stress itself.

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Um, certainly nothing objective in terms of stress.

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They may ask, well, how stressed are you or, or not?

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But economists tend not to like those kinds

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of very subjective, issues.

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There's also a problem when you use real world data,

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and surveys,

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that people can select into performance

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related pay jobs or not.

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It's not a random occurrence.

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As I mentioned earlier, there are incentives for,

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for particular kinds of workers, perhaps to join, jobs

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that have performance related pay.

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Um, and so that adds a problem to, to the estimation.

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So what we decided to do was to run a series of experiments

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where we could, get past this issue of selection.

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Because in the lab, you can, exogen exogenously,

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allocate performance related pay or not within the lab.

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And then working with health psychologists, we have learned

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that, one way

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that they measure stress in a laboratory setting is

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by measuring cortisol,

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which is a hormone sometimes called the stress hormone.

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Um, but it's a hormone that the body naturally produces when

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it is stressed.

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Now, cortisol itself is actually a good thing.

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Um, it helps regulate the body.

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Um, when the body is stressed, there's a,

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there's a shutdown in in organs.

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It, it all goes back to the fight

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or flight, evolutionary thing that,

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that we all have.

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Um, and what cortisol does is it tries to relax the body,

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takes away the adrenaline and, and that kind of thing.

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Um, but the challenge is that when you are,

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when you have repeated stress, the cortisol isn't

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as effective to bring down your body into a kind of balance,

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homeostasis as it's called in the,

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in the medical literature.

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Um, and so, our challenge in these experiments was

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to look at, well, you know, if, if we pay some people

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through performance related pay and experiment and not,

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and then measure their cortisol, what happens?

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Do we see a spike in, in, in cortisol?

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So the first of our experiments, and,

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and this was a, a grant that was funded through the Economic

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and Social Research Council, here in the uk.

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Um, we set up an experiment

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where we would randomize performance related pay

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or not across, a number of participants within our,

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experimental laboratory.

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And, we found that indeed the cortisol,

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went up quite substantially for those

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who were paid under performance related pay.

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Um, and it went up about seven to 10%, depending on the,

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the measure that that we use.

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And just to put that into context, smoking,

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caused a raise an increase in cortisol by about 15%.

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So we were somewhere between half

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and three quarters of the effect of smoking on, on cortisol.

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Again, you could think about that as well.

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Okay, so people are a little bit more stressed,

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but it, it will relax you.

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But one of the things we know about performance related pay

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jobs is it's a repeated stressor, right?

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Every single day the Uber drivers shows up to work,

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they are under the stress of,

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of having performance related pay,

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or the, the car sales person every month has to hit

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that sales target in order to get their bonus

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or to get their commission every single month.

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And so the cortisol, as I mentioned earlier,

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will not relax you when you get this repeated,

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this repeated stress.

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One challenge with using experimental methods is of course,

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you've got a very selected group,

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primarily university students, that are coming in

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and playing for, for small stakes.

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So we really wanted to put this back out into the field

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and try to see if in real life, workers who are,

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working for, for a living, have similar responses.

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Now, we weren't able to find a survey data that,

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that actually had cortisol,

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but the, UK health longitudinal,

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household longitudinal survey, the UK HLS,

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has a, a portion of it where they, ask some

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of the respondents, a number of health questions,

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done through nurses.

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So they are sort of objective health measures.

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They also take blood samples of, some of the individuals

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and they are able to run tests on various,

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kinds of biomarkers.

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But importantly for us, we wanted

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to look at those biomarkers that were related to stress

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and inflammation since we didn't have the cortisol itself.

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So what we did was we looked within this dataset

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and tried to identify if there was a strong correlation,

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Be again between those who were se who,

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who said they were paid by performance related pay,

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and these measures of either self-reported health,

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or more objective measures like blood pressure

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or these inflammation markers.

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And we published this, this study,

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earlier in 2024 in the journal industrial relations.

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And we found very strong linkages between,

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performance related pay,

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and particularly with subjective mental health.

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So again, reiterating the stress element,

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the subjective stress element,

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but also with the systolic, blood pressure.

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So that increased quite substantially.

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And we know the literature out there on blood pressure and,

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and how that influences, health in a negative way.

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And then also on inflammation markers, FibroGen

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and c-reactive protein, particularly in men, again,

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performance related pay, in a sample of a broad sample

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of workers within the UK context tended

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to have these really strong and high biomarkers.

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For, for stress.

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One easy thing would be to say, well, listen,

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we should just throw out PRP, right?

12:59.825 --> 13:01.605
We should just get rid of performance related pay.

13:01.945 --> 13:04.005
Um, and,

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and that would get rid of these problems of,

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of poor health and, and stress.

13:08.185 --> 13:10.725
Now, some may advocate for that,

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but we know that there are benefits

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for performance related pay, as I outlined earlier.

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Um, employers like it

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because of this linkage, workers like it

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because they get higher pay.

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So I guess the, the key thing is, the first sort

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of learning point is, well, one, just recognizing

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that there is this issue, we have framed it in the past

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as an unintended consequence of performance related pay,

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but it's really an unknown consequence

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of performance related pay.

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And so the more you know about that

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and the potential cost for performance related pay,

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the more likely, perhaps you can do things,

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to mitigate for, for it.

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So you could offset it.

13:46.105 --> 13:48.405
Um, if you're going to offer performance related pay,

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perhaps a, an employer could mo, could offset it by,

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for example, if you're worried about accidents at work,

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making sure there's a strong focus on health

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and safety, at, at the workplace, making sure

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that people adhere to the safety protocols

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that, that are in place.

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Um, if you're worried about perhaps more, non-manual

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or white collar, workers, make sure that there are ways

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of being able to de-stress your, your workforce.

14:16.465 --> 14:19.605
So maybe that's even, subsidizing gym memberships

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or making sure that people do go out

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and take a walk at, at, at lunch or something like that.

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Ways of being able to, to build into the system,

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some ways to reduce the stress that seems to come about

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because of performance related pay.

00:00 - Performance related pay, or PRP is one of many forms of, of payment contracts that employers can have with employees. Most of us are used to perhaps an hourly rate of pay or a, a payment every month as a, as a salary. But for many types of jobs,

00:15 - you're actually paid on the basis of your performance, how much you actually produce. these can be very directly tied to, to your production. sometimes in economics, we call these piece rates where you're paid a particular sum for every unit of output that you have. Sometimes you're paid a commission on, say the amount of sales that you have. sometimes you're paid a bonus when you hit some kind

00:38 - of performance target. and, and so we have this sort of mix of different ways that, that workers are, are, are paid, and economics has, has long looked at all of these different types of contracts. looking at both the pros and the cons of each one of these kinds of contracts, but performance related pay or PRP, is one form that that often, is talked about in terms of its advantages.

01:06 - one of the key advantages of performance related pay is as economics research is, has shown, is that because it pays for performance, it gives incentives for workers to perform better. and because of that direct link between their pay and their performance, we find that, workers that are paid under PRP, generate more product, which of course, the, the employer can turn around and sell. so, so firms can be somewhat more profitable. They have this direct tie to performance.

01:35 - it is attractive to, to workers who, who are actually really good at, at producing, because they know that they'll get a return, on this. So from an employer's point of view, economics tends to say yes, there are lots of good reasons. Interestingly, the earlier research on performance related pay also showed that workers benefited those workers that were paid under performance related pay. They got more money, so, so they benefited. and, and,

02:03 - and so there was this, you know, sort of virtuous feedback loop, that that went back, to thinking about this kind of performance related pay as opposed to all of that research that showed all of these positive benefits. there are these potential negative benefits, these negative, attributes to performance related pay. And interestingly, these were observed 200 more than 200 years ago. as any good economists should do,

02:29 - they should look at Adam Smith and the wealth of nations and in, the wealth of nations. Adam Smith has, a quote where he says, men when liberally paid by the peace, meaning when they're paid by, by their performance, are very apt to overwork themselves and to ruin their health and constitution in a few years. So even back in 1776, Adam Smith, the father of economics, was making this linkage potentially between performance related pay.

02:56 - In the case, in the case of his example, it's peace Rates where you're paid directly for the output that you have and their health. So, when I read this quote, I thought, well, there must be lots and lots written about it. And indeed, there was actually very little written about it. So, over the last several years, we've been developing of various ways of thinking about what those pathways may be between performance related pay and health. So one of the pathways, is

03:21 - through an increase in accidents. because what performance related pay does is it puts a huge emphasis on the output. So to sort of flip the, the management maximum, upside down workers are incentivized to work harder, but not necessarily smarter. They may cut corners. they'll do things that that may actually injure themselves, at, at the place of work.

03:44 - And so, back in, in 2012, I and two co-authors wrote a paper in the journal population economics that looked at about 30,000 workers, in, in the eu, and found there was a very strong correlation between those who were paid by performance related pay and the rate of injuries, amongst those, amongst those types of workers. So, strong relationship that we found, through accidents, and was particularly important

04:11 - for blue collar workers or manual workers. Now, for many jobs, you know, rates of accidents are, are quite low. So for non-manual or white collar workers, it's probably not gonna be an issue. But there's a different mechanism, that can affect those kinds of workers because one of the things that we know about performance related pay as well is

04:30 - that it puts, explicitly a cost on not working. So in performance related pay, when you are paid by the basis of your production or your sales or something like that, when you're not working, you don't get paid, right? So there's an incentive for you to be working perhaps quite a bit so that you can produce a lot, and that increases your pay. But if you're working a lot, it means

04:55 - that you're not doing other things. So, instead of going and, going to the grocery store and buying, food and taking it home and making a nice, healthy meal, you order take away and, and you eat a, you know, greasy pizza on, at, at your desk while you're continuing to do work, or, instead of going, and taking a walk and doing some exercise or going to the gym and working out, you stay at the office

05:21 - and, and continue to work. Neither of those things will cause you to be injured in any particular day, but over time, those kinds of behaviors, because you're not taking care of yourself, could potentially lead to worse health. So in another paper in 2014 in Oxford, economic papers, myself and my colleague, Giannis CIO wrote a paper using British data, starting looking at, at in individuals who all were healthy,

05:46 - but then tracked over time how long they spent in performance related pay. And the longer people spent in performance related pay, the more likely they at some point would say that They have heart problems, that they would have stomach problems, and they would have mental health, or they may have mental health problems. So any of those things could potentially happen the longer that you stay in performance related pain.

06:08 - So that's the second mechanism that it, it generates a, a, a, a change in the behavior of your time. The third, potential pathway for performance related pay and health is through stress. One of the things that we know about performance, the many performance related pay jobs, is that the income stream is uncertain. If you think about the Uber driver or the, the, the, the delivery, the food delivery person, when they show up at work,

06:35 - in an evening, they don't know at how much they're going to earn by the end because they're paid for the trip that that they take. And so if it's a terrible weather night and nobody's ordering out, or nobody's, taking Uber, trips, then they get paid nothing. Or if they get paid very little, whereas it's, if it's a very busy night, they could come home with a lot of money.

06:57 - So that uncertainty around payment also generates stress, and particularly perhaps for those with dependents, if you have kids or if you had a mortgage or a car payment, any of those things could generate stress as well. And, there's well-known medical literature that ties stress to poor worse, poor health outcomes. The problem that we had was that in many of the surveys that, that we had used already or that were out there, there was not very good information

07:24 - about stress itself. certainly nothing objective in terms of stress. They may ask, well, how stressed are you or, or not? But economists tend not to like those kinds of very subjective, issues. There's also a problem when you use real world data, and surveys, that people can select into performance related pay jobs or not. It's not a random occurrence.

07:45 - As I mentioned earlier, there are incentives for, for particular kinds of workers, perhaps to join, jobs that have performance related pay. and so that adds a problem to, to the estimation. So what we decided to do was to run a series of experiments where we could, get past this issue of selection. Because in the lab, you can, exogen exogenously, allocate performance related pay or not within the lab. And then working with health psychologists, we have learned that, one way

08:18 - that they measure stress in a laboratory setting is by measuring cortisol, which is a hormone sometimes called the stress hormone. but it's a hormone that the body naturally produces when it is stressed. Now, cortisol itself is actually a good thing. it helps regulate the body. when the body is stressed, there's a, there's a shutdown in in organs. It, it all goes back to the fight

08:42 - or flight, evolutionary thing that, that we all have. and what cortisol does is it tries to relax the body, takes away the adrenaline and, and that kind of thing. but the challenge is that when you are, when you have repeated stress, the cortisol isn't as effective to bring down your body into a kind of balance, homeostasis as it's called in the, in the medical literature. and so, our challenge in these experiments was

09:10 - to look at, well, you know, if, if we pay some people through performance related pay and experiment and not, and then measure their cortisol, what happens? Do we see a spike in, in, in cortisol? So the first of our experiments, and, and this was a, a grant that was funded through the Economic and Social Research Council, here in the uk. we set up an experiment where we would randomize performance related pay or not across, a number of participants within our,

09:37 - experimental laboratory. And, we found that indeed the cortisol, went up quite substantially for those who were paid under performance related pay. and it went up about seven to 10%, depending on the, the measure that that we use. And just to put that into context, smoking, caused a raise an increase in cortisol by about 15%. So we were somewhere between half and three quarters of the effect of smoking on, on cortisol.

10:09 - Again, you could think about that as well. Okay, so people are a little bit more stressed, but it, it will relax you. But one of the things we know about performance related pay jobs is it's a repeated stressor, right? Every single day the Uber drivers shows up to work, they are under the stress of, of having performance related pay, or the, the car sales person every month has to hit that sales target in order to get their bonus

10:34 - or to get their commission every single month. And so the cortisol, as I mentioned earlier, will not relax you when you get this repeated, this repeated stress. One challenge with using experimental methods is of course, you've got a very selected group, primarily university students, that are coming in and playing for, for small stakes. So we really wanted to put this back out into the field and try to see if in real life, workers who are,

11:02 - working for, for a living, have similar responses. Now, we weren't able to find a survey data that, that actually had cortisol, but the, UK health longitudinal, household longitudinal survey, the UK HLS, has a, a portion of it where they, ask some of the respondents, a number of health questions, done through nurses. So they are sort of objective health measures. They also take blood samples of, some of the individuals

11:33 - and they are able to run tests on various, kinds of biomarkers. But importantly for us, we wanted to look at those biomarkers that were related to stress and inflammation since we didn't have the cortisol itself. So what we did was we looked within this dataset and tried to identify if there was a strong correlation, Be again between those who were se who, who said they were paid by performance related pay, and these measures of either self-reported health,

12:01 - or more objective measures like blood pressure or these inflammation markers. And we published this, this study, earlier in 2024 in the journal industrial relations. And we found very strong linkages between, performance related pay, and particularly with subjective mental health. So again, reiterating the stress element, the subjective stress element, but also with the systolic, blood pressure.

12:27 - So that increased quite substantially. And we know the literature out there on blood pressure and, and how that influences, health in a negative way. And then also on inflammation markers, FibroGen and c-reactive protein, particularly in men, again, performance related pay, in a sample of a broad sample of workers within the UK context tended to have these really strong and high biomarkers. For, for stress. One easy thing would be to say, well, listen,

12:58 - we should just throw out PRP, right? We should just get rid of performance related pay. and, and that would get rid of these problems of, of poor health and, and stress. Now, some may advocate for that, but we know that there are benefits for performance related pay, as I outlined earlier. employers like it because of this linkage, workers like it

13:18 - because they get higher pay. So I guess the, the key thing is, the first sort of learning point is, well, one, just recognizing that there is this issue, we have framed it in the past as an unintended consequence of performance related pay, but it's really an unknown consequence of performance related pay. And so the more you know about that and the potential cost for performance related pay, the more likely, perhaps you can do things,

13:42 - to mitigate for, for it. So you could offset it. if you're going to offer performance related pay, perhaps a, an employer could mo, could offset it by, for example, if you're worried about accidents at work, making sure there's a strong focus on health and safety, at, at the workplace, making sure that people adhere to the safety protocols that, that are in place. if you're worried about perhaps more, non-manual

14:08 - or white collar, workers, make sure that there are ways of being able to de-stress your, your workforce. So maybe that's even, subsidizing gym memberships or making sure that people do go out and take a walk at, at, at lunch or something like that. Ways of being able to, to build into the system, some ways to reduce the stress that seems to come about because of performance related pay.

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