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Don't Forget the Gravy! Are Bonuses and Time Rates Complements?

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  • Colin Green
  • John Heywood

Abstract

The press often depicts bonuses as extra payments to the already well compensated and calls for reform. Yet, these calls typically ignore the efficiency argument that bonuses are potentially risky performance pay that substitute for salary compensation. This paper uses representative UK data to estimate that bonuses appear not to substitute for salary in cross-sectional estimates. Yet, when controlling for time invariant characteristics in panel data, bonuses emerge as substitutes. Each pound of bonus comes at a cost of 40 pence in other earnings. The degree of substitution is far larger at the bottom of the earnings distribution and far smaller at the top of the earnings distribution.

Suggested Citation

  • Colin Green & John Heywood, 2012. "Don't Forget the Gravy! Are Bonuses and Time Rates Complements?," Working Papers 13424023, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:13424023
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    References listed on IDEAS

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    Cited by:

    1. Bryan, Mark & Bryson, Alex, 2016. "Has performance pay increased wage inequality in Britain?," Labour Economics, Elsevier, vol. 41(C), pages 149-161.
    2. Lucy Stokes & Alex Bryson & John Forth & Martin Weale, 2017. "Who Fared Better? The Fortunes of Performance Pay and Fixed Pay Workers through Recession," British Journal of Industrial Relations, London School of Economics, vol. 55(4), pages 778-801, December.
    3. Colin P. Green & John S. Heywood & Nikolaos Theodoropoulos, 2012. "Performance Pay and Ethnic Wage Differences in Britain," University of Cyprus Working Papers in Economics 06-2012, University of Cyprus Department of Economics.

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