The Effect of Performance Pay on the Retention of Apprenticeship Graduates: A Panel Data Analysis

A firm’s willingness to provide and pay for general training in the form of apprenticeship training crucially depends on whether it is able to recoup the training costs. A successful strategy is to retain the most productive apprentices after graduation. This article explores whether training firms can use performance pay plans as a successful retention mechanism. Economic theory predicts that inherently more productive workers self-select into performance pay jobs because of higher expected returns. Using representative data from a large employer-employee survey, we test whether a similar relationship exists in the apprenticeship-training context. Using a panel IV method, we find that both the magnitude and the likelihood of performance pay have a significantly positive effect on a firm’s share of internal apprenticeship graduates. Because of their higher retention success, performance pay firms are in turn better positioned to finance general training.