Anthony J. Barkume (2002) "Compensation Supplements and Use of Incentive Pay in U.S. Labor Markets."
The firm's interest in monitoring and/or motivating workers appears to be an important reason why firms use pay supplements such as bonuses and overtime work. Using a representative sample of U.S. private industry jobs, this paper obtains some indirect evidence on what pay supplements serve as incentive instruments. I study how various pay supplements differ in both incidence and generosity when traditional incentive pay—pay based on individual results such as piece rates or sales commissions—is a part of job earnings. If a firm does use incentive pay the marginal benefit of a pay supplement as an incentive instrument should fall. Otherwise, the use of incentive pay should have no necessary relationship to provision of a pay supplement, with provision driven by worker preferences for the benefits provided.
The paper's methodology follows that in Richard Freeman's 1981 study of union-nonunion differences in compensation supplements. (Since the data I use includes union status, I also update Freeman's results.) Specifically, I estimate expected employer costs per hour worked for various compensation supplements. Across all US private industry jobs, employer costs for bonuses not based on individual results are about half of predicted levels with use of incentive pay. Similarly, use of incentive pay reduces expected employer spending levels in defined contribution retirement plans by about a third. Employer spending on health insurance was unrelated to use of incentive pay but forty percent higher in union jobs. Union jobs had more costly compensation supplements, except for employer payments for bonuses and to defined contribution retirement plans.
The results also suggest that use of incentive pay and collective bargaining help to accommodate differences in worker preferences for hours of work. Among jobs with the same fulltime year-round work schedule, I estimate that a slightly higher amount of expected overtime work is attached to a union job. But a worker choosing between full time jobs offering paid leave can also expect about six fewer work days per year in a union job than in a job using incentive pay.
Last Modified Date: July 19, 2008