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Incentive Effects of Bonus Payments: Evidence from an International Company

  • Engellandt, Axel

    ()

    (University of Basel)

  • Riphahn, Regina T.

    ()

    (University of Erlangen-Nuremberg)

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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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
Date of revision:
Publication status: published in: Industrial and Labor Relations Review, 2011, 64 (2), 241-257
Handle: RePEc:iza:izadps:dp1229
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  1. Engellandt, Axel & Riphahn, Regina, 2004. "Temporary Contracts and Employee Effort," CEPR Discussion Papers 4178, C.E.P.R. Discussion Papers.
  2. Stephen French & Katsuyuki Kubo & David Marsden, 2001. "Does performance pay de-motivate, and does it matter?," LSE Research Online Documents on Economics 3637, London School of Economics and Political Science, LSE Library.
  3. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  4. 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.
  5. 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.
  6. Ichino, Andrea & Riphahn, Regina T., 2001. "The Effect of Employment Protection on Worker Effort: A Comparison of Absenteeism During and After Probation," IZA Discussion Papers 385, Institute for the Study of Labor (IZA).
  7. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  8. Lawrence M. Kahn & Peter D. Sherer, 1990. "Contingent pay and managerial performance," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 107-120, February.
  9. Cable, John & Wilson, Nicholas, 1990. "Profit-Sharing and Productivity: Some Further Evidence," Economic Journal, Royal Economic Society, vol. 100(401), pages 550-55, June.
  10. 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.
  11. 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.
  12. Donald P. Schwab & Craig A. Olson, 1990. "Merit pay practices: Implications for pay-performance relationships," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 237-255, February.
  13. Morton, Peter J., 1998. "Annual bonuses, employment and productivity change in Taiwan's manufacturing sector," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 481-507, December.
  14. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Performance Incentives Within Firms: The Effect of Managerial Responsibility," NBER Working Papers 7334, National Bureau of Economic Research, Inc.
  15. 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, June.
  16. 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.
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