Does Higher Pay Lead to Better Worker Performance?

Abstract

Firms always want to know whether a higher pay can incentivize workers to improve their performance. This question is hard to answer since worker’s pay is usually endogenously determined. In this paper, we answer this question making use of a field experiment run by a large online education company which randomizes the hourly pay of a group of workers. The company recruits native English speakers and provides an online platform for them to teach Chinese kids spoken English. We find that workers who get a higher hourly pay not only open more classes, but their classes are also more likely to be booked by students, and these gaps are increasing over time. Based on detailed data from video and audio analytics and limited data on class rating, we identify the key factors influencing worker’s performance in a class, and we construct a score that integrates these factors and measures worker’s performance in each class. We find that workers who get a higher hourly pay do not have a higher performance score initially, but their performance score increases faster than those who get a lower hourly pay, indicating that workers with a higher hourly pay are incentivized to learn the key influencing factors and improve their performance in a faster way than those with a lower hourly pay.