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Incentive Effects of Bonus Payments: Evidence from an International Company

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  • Engellandt, Axel

    (University of Basel)

  • Riphahn, Regina T.

    (University of Erlangen-Nuremberg)

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.

Suggested Citation

  • Engellandt, Axel & Riphahn, Regina T., 2004. "Incentive Effects of Bonus Payments: Evidence from an International Company," IZA Discussion Papers 1229, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1229
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    References listed on IDEAS

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    Cited by:

    1. Wolter H.J. Hassink & Pierre Koning, 2009. "Do Financial Bonuses Reduce Employee Absenteeism? Evidence from a Lottery," ILR Review, Cornell University, ILR School, vol. 62(3), pages 327-342, April.
    2. Kräkel, Matthias, 2004. "Emotions and Incentives," Bonn Econ Discussion Papers 14/2004, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Konstantinos, Pouliakas & Ioannis, Theodossiou, 2010. "An Inquiry Into the Theory, Causes and Consequences of Monitoring Indicators of Health and Safety At Work," MPRA Paper 20336, University Library of Munich, Germany.
    4. W.H.J. Hassink & P. Koning, 2005. "Do Financial Bonuses to Employees Reduce their Absenteeism? Outcome of a Lottery," Working Papers 05-27, Utrecht School of Economics.
    5. Christian Pfeifer, 2014. "Base Salaries, Bonus Payments, and Work Absence among Managers in a German Company," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(5), pages 523-536, November.
    6. Pouliakas, Konstantinos & Theodoropoulos, Nikolaos, 2009. "Performance Pay as an Incentive for Lower Absence Rates in Britain," MPRA Paper 18238, University Library of Munich, Germany.

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    More about this item

    Keywords

    bonus; mobility; social status; worker effort; overtime; pay for performance; merit pay; absenteeism;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; 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 - - Personnel Economics - - - General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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