An Empirical Analysis of Employee Responses to Bonuses and Penalties

The Accounting Review, Forthcoming

Posted: 6 Mar 2020

See all articles by Wim A. Van der Stede

Wim A. Van der Stede

London School of Economics & Political Science (LSE)

Anne Wu

National Chengchi University (Taipei)

Steve Wu

The University of Hong Kong - School of Business

Date Written: January 16, 2020

Abstract

We examine how employees respond to bonuses and penalties using a proprietary data set from an electronic chip manufacturer in China. First, we examine the relative effects of bonuses and penalties and observe a stronger effect on subsequent effort and performance for penalties than for bonuses. Second, we find that the marginal sensitivity of penalties diminishes faster than that of bonuses, indicating that the marginal effect of a bonus may eventually exceed that of a penalty as their value increases. Third, we find an undesirable selection effect of penalties: penalties increase employee turnover especially for skillful and high-quality workers. These results may help inform our understanding of the observed limited use of penalties in practice due to their bounded effectiveness and possible unintended consequences.

Keywords: Employee compensation, incentives, bonus, penalty, prospect theory

JEL Classification: D22, J33, M40

Suggested Citation

Van der Stede, Wim A. and Wu, Anne and Wu, Steve, An Empirical Analysis of Employee Responses to Bonuses and Penalties (January 16, 2020). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3531586

Wim A. Van der Stede (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 7420 (Fax)

Anne Wu

National Chengchi University (Taipei) ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Steve Wu

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

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