Incentive Effects of Bonus Payments: Evidence from an International Company

32 Pages Posted: 2 Aug 2004

See all articles by Axel Engellandt

Axel Engellandt

University of Basel

Regina T. Riphahn

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Department of Economics; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2004

Abstract

This study uses panel data describing about 6,500 employees in a large international company to study the incentive effects of performance related pay. The company uses two performance related remuneration mechanisms. One is an individual surprise bonus payment. The other is a more structured system, where part of the salary is determined by individual performance evaluations. We hypothesize that effort is higher in departments where (i) performance evaluation results are more spread out, (ii) person-specific performance evaluations are more flexible over time, (iii) surprise bonuses are used more frequently. These hypotheses are tested using days of absence and overtime work as effort indicators. The tests yield that hypotheses (ii) and (iii) are supported, and that (i) cannot be tested reliably due to possible simultaneity bias in our data. We investigate and confirm the robustness of these findings. They suggest that surprise bonus payments and flexibility in the evaluation of individual performances over time provide effective incentives for employee effort.

Keywords: bonus, merit pay, pay for performance, worker effort, social status, mobility, absenteeism, overtime

JEL Classification: J33, M12, J24, J41, M50, C25

Suggested Citation

Engellandt, Axel and Riphahn, Regina T., Incentive Effects of Bonus Payments: Evidence from an International Company (July 2004). Available at SSRN: https://ssrn.com/abstract=571725

Axel Engellandt

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Regina T. Riphahn (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Department of Economics ( email )

Lange Gasse 20
Nuernberg, D-90403
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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