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Incentive Effects of Bonus Payments: Evidence from an International Company

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Author Info
Engellandt, Axel (University of Basel)
Riphahn, Regina T. () (University of Basel, DIW Berlin and IZA Bonn)

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Abstract

This study uses panel data describing about 6,500 employees in a large international company to study the incentive effects of performance related pay. The company uses two performance related remuneration mechanisms. One is an individual "surprise" bonus payment. The other is a more structured system, where part of the salary is determined by individual performance evaluations. We hypothesize that effort is higher in departments where (i) performance evaluation results are more spread out, (ii) person-specific performance evaluations are more flexible over time, (iii) surprise bonuses are used more frequently. These hypotheses are tested using days of absence and overtime work as effort indicators. The tests yield that hypotheses (ii) and (iii) are supported, and that (i) cannot be tested reliably due to possible simultaneity bias in our data. We investigate and confirm the robustness of these findings. They suggest that surprise bonus payments and flexibility in the evaluation of individual performances over time provide effective incentives for employee effort.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1229.

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Length: 32 pages
Date of creation: Jul 2004
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Handle: RePEc:iza:izadps:dp1229

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Related research
Keywords: bonus merit pay pay for performance worker effort social status mobility absenteeism overtime

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Find related papers by JEL classification:
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
M50 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - General
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Engellandt, Axel & Riphahn, Regina, 2004. "Temporary Contracts and Employee Effort," CEPR Discussion Papers 4178, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Cable, John & Wilson, Nicholas, 1990. "Profit-Sharing and Productivity: Some Further Evidence," Economic Journal, Royal Economic Society, vol. 100(401), pages 550-55, June. [Downloadable!] (restricted)
  3. John McMillan, 1993. "Autonomy and Incentives in Chinese State Enterprises," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.
    Other versions:
  4. Rajesh K. Aggarwal & Andrew A. Samwick, 2003. "Performance Incentives within Firms: The Effect of Managerial Responsibility," Journal of Finance, American Finance Association, vol. 58(4), pages 1613-1650, 08. [Downloadable!] (restricted)
    Other versions:
  5. Jones, Derek C & Kato, Takao, 1995. "The Productivity Effects of Employee Stock-Ownership Plans and Bonuses: Evidence from Japanese Panel Data," American Economic Review, American Economic Association, vol. 85(3), pages 391-414, June. [Downloadable!] (restricted)
  6. Groves, Theodore, et al, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 183-209, February. [Downloadable!] (restricted)
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  7. Cable, John & Wilson, Nicholas, 1989. "Profit-Sharing and Productivity: An Analysis of UK Engineering Firms," Economic Journal, Royal Economic Society, vol. 99(396), pages 366-75, June. [Downloadable!] (restricted)
  8. Lawrence M. Kahn & Peter D. Sherer, 1990. "Contingent pay and managerial performance," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 107-120, February.
  9. Ichino, Andrea & Riphahn, Regina, 2003. "The Effect of Employment Protection on Worker Effort: A Comparison of Absenteeism During and After Probation," CEPR Discussion Papers 3847, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Donald P. Schwab & Craig A. Olson, 1990. "Merit pay practices: Implications for pay-performance relationships," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 237-255, February.
  11. Sousa-Poza, Alfonso & Ziegler, Alexandre, 2003. "Asymmetric information about workers' productivity as a cause for inefficient long working hours," Labour Economics, Elsevier, vol. 10(6), pages 727-747, December. [Downloadable!] (restricted)
  12. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  13. David Marsden & Stephen French & Katsuyuki Kubo, 2001. "Does Performance Pay De-Motivate, and Does It Matter?," CEP Discussion Papers 0503, Centre for Economic Performance, LSE. [Downloadable!]
  14. Treble, John G., 2001. "Productivity And Effort: The Labor-Supply Decisions Of Late Victorian Coalminers," The Journal of Economic History, Cambridge University Press, vol. 61(02), pages 414-438, August. [Downloadable!]
  15. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-48, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wolter Hassink & Pierre Koning, 2005. "Do Financial Bonuses to Employees Reduce their Absenteeism? Outcome of a Lottery," Working Papers 05-27, Utrecht School of Economics. [Downloadable!]
    Other versions:
  2. Matthias Kräkel, 2004. "Emotions and Incentives," Bonn Econ Discussion Papers bgse14_2004, University of Bonn, Germany. [Downloadable!]
    Other versions:
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