Incentive Effects of Bonus Payments: Evidence from an International Company

This study uses panel data describing about 6,500 employees in a large international companyto study the incentive effects of performance related pay. The company uses two performancerelated remuneration mechanisms. One is an individual "surprise" bonus payment. The other isa more structured system, where part of the salary is determined by individual performanceevaluations. 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. Thetests yield that hypotheses (ii) and (iii) are supported, and that (i) cannot be tested reliably dueto possible simultaneity bias in our data. We investigate and confirm the robustness of thesefindings. They suggest that surprise bonus payments and flexibility in the evaluation of individualperformances over time provide effective incentives for employee effort.