Risk Behavior and the Determinants of Bonus Versus Regular Pay in Japan
Posted: 28 May 2013 Last revised: 30 May 2013
Date Written: June 27, 1990
Compensation schemes for workers have generated much interest in recent years. At the micro level they may affect workers' productivity. Due to the responses of firms, aggregate employment may also be affected by how workers get paid. Japanese bonus payments account for 25 to 33% of workers' total earnings and have attracted attention in the literature as a flexible method of compensation. In this paper we consider a model in which regular pay and bonus payments are treated as two streams of income with different risk characteristics. Workers are assumed to be risk averse while employers are assumed to face different cost conditions depending on how workers are paid. One of the implications of the model is that returns to human capital investments paid out in bonus form contain risk premiums. Another is that the ratio of bonus to regular pay should rise as the qualifications of the worker increase. These implications are consistent with the empirical findings presented in the paper.
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