Pay-for-Performance and Employee Mental Health: Large Sample Evidence Using Employee Prescription Drug Usage

This paper provides evidence linking pay-for-performance (P4P) adoption by employers to long-term and serious mental health problems in employees. Matching survey-based data on P4P adoption by 1,309 Danish firms with wage, demographic, and medical prescription data of 318,717 full-time employees, we find a four to six percent increase in the usage of anti-depressant and anti-anxiety medication after firms adopt P4P. This change is strongest in low-performing and older workers. We also find that workers select in and out of P4P firms based on mental health considerations, which implies that mental health effects influence turnover. We similarly show that low performers are more likely to leave following P4P adoption. Finally, we show sizable but imprecise response differences from female and male employees to the mental health threat of performance-based pay. Women with latent or potential mental health concerns appear to leave firms after P4P adoption, while men do not. Although we cannot claim a causal relationship, collectively our results suggest a model where performance-based pay forces many employees to choose between leaving or else depression and anxiety. Our study expands existing work by showing that the mental health costs of performance-based pay can be severe enough to necessitate pharmaceutical treatment.