Risk Behavior and the Determinants of Bonus Versus Regular Pay in Japan

Posted: 28 May 2013 Last revised: 30 May 2013

See all articles by Masao Nakamura

Masao Nakamura

University of British Columbia (UBC) - Sauder School of Business

Alice Orcutt Nakamura

University of Alberta - School of Business

Date Written: June 27, 1990

Abstract

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.

Suggested Citation

Nakamura, Masao and Nakamura, Alice Orcutt, Risk Behavior and the Determinants of Bonus Versus Regular Pay in Japan (June 27, 1990). Journal of Japanese and International Economies, Vol. 5, No. 2, 1991, University of Alberta School of Business Research Paper No. 2013-276, Available at SSRN: https://ssrn.com/abstract=2270806

Masao Nakamura

University of British Columbia (UBC) - Sauder School of Business ( email )

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Alice Orcutt Nakamura (Contact Author)

University of Alberta - School of Business ( email )

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