Agency‐Theory and Internal‐Labor‐Market Explanations of Bonus Payments: Empirical Evidence from Spanish Firms

Abstract

This paper combines agency theory and internal‐labor‐market theories to explain the determinants of bonus payments among a large sample of top and middle managers from Spanish firms. A distinction is made between the decision whether to pay bonus or not and the size of the bonus. The empirical evidence confirms that the two decisions are determined by different factors. The results of the analysis show a trade‐off between short‐term and long‐term incentives (bonuses and promotion opportunities) as well as differences in the pattern of compensation policies across economic sectors and functional areas inside the firm.

The dispersion of bonus payments within and between firms

“…Firm tenure is significantly positively related to the bonus-to-base ratio in most cases. There is a (concave) increase of the bonus-to-base ratio with tenure in most cases, which is in line with previous evidence(Ortín-Ángel & Salas-Fumás 1998, Grund & Kräkel 2012. The most general factor associated with bonus relevance is the level of the hierarchy.…”

“…There are few empirical studies that focus on bonus payments based on survey-or firm-based data instead of relying on fixed wages or total compensation. These studies investigate the determinants of the amount of bonus payments (Ortín-Ángel and Salas-Fumás 1998;Nash 2003) or bonus relevance measured as the ratio of bonus-to-base-salary (Gerhart and Milkovich 1990;Boyd and Salamin 2001;Yanadori 2011;Kampkötter 2015) or to total compensation (Stroh et al 1996;Yanadori and Kang 2011;Grund and Kräkel 2012). Main results include those that both bonus level and bonus relevance for highly qualified and managerial employees are determined by the level of the hierarchy and the seniority of employees with regard to age and firm tenure.…”

The management of managers: A review and conceptual framework

“…What seems to emerge from this literature is the sense that, while agency concerns may influence the structuring of reward packages for senior managers, they do not provide a sufficient explanation for how management rewards are actually compiled (Garen 1994; Ortin‐Angel and Salas‐Fumas 1998). Understandably, Barkema and Gomez‐Mejia (1998) argue that research into what determines managerial pay needs to be broadened beyond firm performance and aspects of ownership structure to include the influence of a wide range of factors.…”

Performance‐Related Pay, Efficiency Wages and the Shape of the Tenure‐Earnings Profile

“…For a theoretical investigation that focuses on the former see MacLeod and Malcomsom (1998) who show that PRP dominates efficiency wages when vacancy costs are low and there are few available qualified workers. For empirical evidence see Ortín‐Ángel and Salas‐Fumás () who, in the context of our model, find evidence that varies across both different sectors and levels of a firm's hierarchy. They also find that bonus payments increase with age, although it is unclear whether this is due to a productivity effect or a reflection of a change in across age groups.…”