Does Performance Pay Increase the Risk of Worker Loneliness?

ABSTRACT Increased wages and productivity associated with performance pay can be beneficial to both employers and employees. However, performance pay can also entail unintended consequences for workers' well‐being. This study is the first to systematically examine the association between performance pay and loneliness, a significant policy‐relevant social well‐being concern. Using representative survey data from Germany, I show that performance pay is significantly associated with increased loneliness. Correspondingly, performance pay is negatively associated with the social life satisfaction of workers. Investigating the transmission channels reveals work hours, earnings, conflict with coworkers, and conflict with the life partner as important mediators. The key findings also hold in sensible instrumental variable estimations, addressing the potential endogeneity of performance pay and in various robustness checks. Finally, implications are discussed.