Discretion over Bonus Timing

We study bonus assignments by managers who have discretion over bonus timing. We first illustrate in a formal model that there is a basic tension between providing timely
recognition to employees and assigning bonuses based on reliable information. We show that the latter rationally causes a delay in bonus assignments as managers aim at gathering
more information to assess performance signals correctly. Analyzing extensive personnel records and linked survey data from a multinational firm, we find that – even in a bonus
system intended to provide timely rewards throughout the year – managers award most bonuses at the end of a year and provide evidence for the importance of the information
acquisition channel. However, our survey results also reveal that employees who receive bonuses earlier in the year perceive a stronger recognition compared to those receiving late
bonuses. Thus, firms face a trade-off between collecting reliable information and providing timely recognition.

Keywords: SPOT BONUS, BONUS TIMING, DISCRETIONARY BONUS, INCENTIVES

JEL Classification: J33, M10, M40, M50, M52

Suggested Citation: Suggested Citation

Block, Sidney and Opitz, Saskia and Sliwka, Dirk and Vogelsang, Timo, Discretion over Bonus Timing (May 21, 2024). Available at SSRN: https://ssrn.com/abstract=4322361 or http://dx.doi.org/10.2139/ssrn.4322361