Higher and higher? Performance pay and wage inequality in Germany

Performance pay is of growing importance to the wage structure as it applies to a rising share of employees. At the same time, wage dispersion is growing continuously. This leads to the question of how is the growing use of performance pay schemes related to the increase in wage inequality? German Socio-Economic Panel (SOEP) data for the years 1984<bold>--</bold>2009 confirm the large increase in the application of performance pay schemes. This in turn led to an upward shift of the wage distribution by about one log point. However, it did not contribute to the growth in wage inequality. Even though wage inequality grew within the group of employees who receive performance pay, it grew even more so within the group who do not. Still, the wage difference between both wage schemes remained flat over the distribution. The empirical analysis employs sequential decompositions in a quantile regression framework.