The Role of Firm Size and Performance Pay in Determining Employee Job Satisfaction Brief: Firm Size, Performance Pay, and Job Satisfaction

Abstract. Job satisfaction reflects the on‐the‐job utility of workers and has been found to influence both the behavior of workers and the productivity of firms. Performance pay remains popular and widely used to increase worker productivity and more generally align the objectives of workers and firms. Yet, its impact on job satisfaction is ambiguous. Whereas the increased earnings increase job satisfaction, the increased effort and risk decreases job satisfaction. This paper finds empirical evidence that on net performance pay increases job satisfaction but does so largely among union workers and males in larger firms.