Don't Forget the Gravy! Are Bonuses Just Added on Top of Salaries?

24 Pages Posted: 3 Jun 2016

See all articles by Colin P. Green

Colin P. Green

Department of Economics

John S. Heywood

University of Wisconsin at Milwaukee

Date Written: July 2016

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 partial 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 where, indeed, bonuses look more like gravy.

Suggested Citation

Green, Colin P. and Heywood, John S., Don't Forget the Gravy! Are Bonuses Just Added on Top of Salaries? (July 2016). Industrial Relations: A Journal of Economy and Society, Vol. 55, Issue 3, pp. 490-513, 2016, Available at SSRN: https://ssrn.com/abstract=2789212 or http://dx.doi.org/10.1111/irel.12147

Colin P. Green (Contact Author)

Department of Economics ( email )

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John S. Heywood

University of Wisconsin at Milwaukee ( email )

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