The Determinants and Earnings Effects of Performance

Using a unique dataset containing separate information on the base andbonus pay of over a million workers, we provide novel evidence on the determinantsand earnings effects of performance pay. Several observables—in particularage, education, tenure, and job complexity—have a large impact on boththe likelihood and the magnitude of performance pay. Performance pay workersearn a sizable wage premium compared to salary workers, and the earningspremium is larger for men than for women. The wage functions differ markedlybetween salary and performance pay workers. In particular, the earnings premiaassociated with age, job complexity, and managerial position are muchlarger for performance pay workers than for salary workers. The difference inthese earnings premia can in part be explained by the fact that heterogeneityamong workers increases with age, job complexity, and managerial position. Itaccounts for about half of the earnings differential between salary and performancepay workers. A separate analysis of the base pay and bonus componentsof performance pay workers’ earnings reveals that workers who receive higherbase pay also get larger bonuses, and that observables predict base pay muchbetter than bonuses.[...]