Background: Although recent economics literature suggests a link between performance-related pay (PRP) and ill health, this finding is contested on the grounds that this link is plagued by endogeneity between the two variables of interest.
Objective: This study investigates the adverse effects of performance-related pay on stress which is an important determinant of physical health.
Methods: Forty subjects were randomly assigned to two equal groups: either being paid by performance or being paid a flat fee. Both objective (saliva samples to measure cortisol elevation) and subjective (self-reported stress level) measures of stress were obtained before and after participation in the experiment. This experimental methodology purges the effects of self-selection into performance pay and identifies the direction of causation from performance-related pay to stress which is measured by cortisol levels.
Results: Those who were paid for their performance experienced higher levels of stress, both in terms of perceived stress and in terms of objectively measured cortisol levels, compared to those who were paid a flat fee for minimum performance.
Conclusions: Performance-related pay induces objectively measurable stress. Self-reported stress levels and the objective stress measure obtained by measuring cortisol move in a similar direction for the PRP and non-PRP groups, but only the cortisol group shows statistically significant differences between the PRP and non-PRP. This also suggests that individuals underestimate the stress caused by performance pay.
Keywords: Performance-related pay; cortisol; real-effort experiment; stress.