LAUSR

Theory suggests that performance pay (PP) can align employees' interests with those of the employer and attract high‐ability workers and incentivise effort but that it may be less effective in the public sector. However, empirical evidence on its incidence and effects is largely confined to the private sector. We find that half the 20 percentage point gap in PP incidence in Britain between the public and private sectors is accounted for by differences in occupational composition. The gap falls to 8 percentage points when ‘matching’ employees in both sectors on their demographic and job characteristics. PP is linked to positive job attitudes among private sector employees, but not among observationally equivalent public sector employees. Furthermore, PP is negatively correlated with workplace performance in the public sector. These findings raise important questions about public policies promoting PP in the public sector.