HKU Jockey Club Enterprise Sustainability Global Research Institute
World-Class Hub for Sustainability
Jason (Pang-Li) Chen | Jakub Hajda | Joseph Kalmenovitz
Escaping Pay for Performance
July 9 2026
Key Takeaways
- Research question: The paper studies the implications of tying regulators’ pay more closely to measured performance.
- Data and methodology: The authors examine nine pay for performance reforms adopted by U.S. financial regulatory agencies between 1981 and 2006. They combine payroll records for 31,784 regulators from 1973 to 2013 with Federal Register rulemaking data and Revelio career histories, and estimate a stacked difference in differences design. They also study a separate 2004 reform for 23,763 Senior Executive Service officials across 397 agencies.
- Findings:
- Pay for performance increased exits from government by 43% to 57% relative to the sample mean among financial regulators. Exit responses were stronger where evaluations were noisier or less trusted and among regulators with weaker prior attachment to public service.
- Among regulators who remained in government, the likelihood of contributing to a new regulatory document rose by 62%-68% relative to the sample mean.
- Conditional on leaving government, regulators exposed to performance-pay reforms earned 53% higher starting salaries in their first private-sector jobs than comparable regulators in the control group.
- Implication: Compensation reforms in regulatory agencies should be evaluated not only by their effects on employee productivity but also by their effects on retention. The findings highlight an important tradeoff of stronger pay-for-performance incentives: while they increase effort and output, they also accelerate employee turnover and the revolving door between regulators and the private sector.
Source Publication:
Chen, Jason, Jakub Hajda, and Joseph Kalmenovitz. 2026. Escaping Pay-for-Performance. SSRN Working Paper.
Background
In the wake of the recent regional banking crisis, critics have argued that bank regulators may be insufficiently incentivized to perform their duties effectively. In response, commentators and policymakers have suggested that federal agencies consider adopting pay-for-performance compensation schemes. While such incentives are widely used in the private sector—and a large literature documents their effects on executive behavior and firm outcomes—we know much less about how performance-based pay affects public-sector employees.
The authors study a fundamental policy question: Should regulators be paid based on performance?
Data and Methodology
Their analysis exploits the staggered adoption of pay for performance across nine U.S. financial regulatory agencies between 1981 and 2006, including the OCC, SEC, FDIC, and CFTC. These reforms replaced largely automatic step increases with merit-based raises and wider pay bands with the goal of incentivizing effort and retaining regulatory talent. The empirical design compares agencies adopting pay for performance with agencies that had not yet adopted it and always adopted it before and after the reforms.
The authors assemble payroll records covering the universe of employees at ten financial agencies and construct a main sample of 31,784 regulators. They then link those records to a new regulator level dataset on rulemaking activity from the Federal Register and to Revelio career histories that trace employment before and after government service.
Findings
Once agencies adopted pay for performance, exits rose sharply. Among financial regulators, voluntary exits increased by 43%-57% relative to the sample mean. To assess whether the pattern extends beyond financial regulators, the paper also studies the 2004 introduction of performance-based pay for the Senior Executive Service, covering 23,763 executives across 397 agencies and find similar response.
At the same time, the reform raised measured effort among those who stayed. In the rulemaking sample, regulators exposed to pay for performance became 62% to 68% more likely, relative to the sample mean, to contribute to at least one new regulatory document. On this margin, the reform achieved its stated purpose. Agencies got more observable output from the workers who remained.
Conditional on leaving government, regulators exposed to performance-pay reforms earned 53% higher starting salaries and 69% higher total compensation relative to comparable leavers from control agencies. This suggests that the reform strengthened regulators’ outside options. Performance pay may have encouraged regulators to exert more effort and build skills valued by private-sector employers. It may also have made individual ability more visible, allowing firms to better identify high-performing regulators. As a result, regulatory experience became more valuable in the private labor market, making exit more attractive.
Performance pay also changed who chose to remain in government. Turnover was highest where performance evaluations were less transparent and among regulators who appeared less attached to public service. Employees hired during recessions, or those who had sacrificed relatively little pay to join government, were especially likely to leave after the reform. In other words, performance pay did not just affect effort—it also reshaped the composition of the regulatory workforce. Those with stronger outside opportunities and weaker public-service motivation were the most likely to exit.
Implications
The paper suggests that pay reform in regulatory agencies should be evaluated on more than productivity alone. Performance pay increased regulatory output, but it also increased turnover. If the same incentives that encourage regulators to work harder also make them more attractive to private-sector employers, agencies may gain productivity while losing experienced staff. In organizations where employees have strong outside options and specialized expertise, that tradeoff is especially important.
The results also highlight the importance of implementation. Turnover responses were strongest where performance evaluations were less transparent and where employees had fewer comparable peers. This suggests that the credibility of the evaluation process matters as much as the compensation formula itself. The paper’s structural estimates reinforce this point: stronger performance incentives increase effort, but they also increase exits, whereas higher government pay reduces turnover. For agencies concerned about retaining technical talent, raising pay caps and improving the quality and transparency of performance evaluations may be more effective than relying solely on stronger pay-for-performance incentives.