Bonus Payments, Hierarchy Levels, and Tenure: Theoretical Considerations and Empirical Evidence

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. Using data on executive compensation for the German chemical industry, we investigate the relevance of two theoretical approaches that focus on bonuses as part of a long term wage policy of a firm. The first approach argues that explicit bonuses serve as substitutes for implicit career concerns. The second approach claims that bonuses are used as complements to an executive's internal career. Our data show that bonus payments are mostly prevalent among senior executives at higher hierarchy levels and rather for management jobs than for jobs in research and development. This is true for the whole chemical sector as well as for single large corporations. The findings indicate that the two theoretical views are not mutually exclusive, but are both relevant in practice. JEL Classification:M52, J33

Higher and higher? Performance pay and wage inequality in Germany

“…These shares are much lower for the group of non-PP jobbers, where a much larger share are trained workers (23%). These results are in line with Grund and Kräkel (2012) who show that performance pay is found more frequently with increasing tenure and hierarchical level. All this points towards a strong positive selection of employees into job matches with pay for performance (also see Dohmen and Falk, 2011).…”

Management compensation and the economic crisis: longitudinal evidence from the German chemical sector

“…Kräkel & Schöttner (2012) argue that bonus payments and internal career opportunities may be complements in incentive provision. Grund & Kräkel (2012) confirm that bonus relevance increases with the level of hierarchy within the German chemical sector. These considerations lead to our However, management compensation itself can also be seen as a part of an agency problem.…”

“…Few studies focus on the determinants of bonus payments for low and middle management employees (see, e.g., Ortin-Angel and Salas-Fumas (1998), Nash (2003), Grund and Kräkel (2012)). One main result is that bonus relevance is attached to characteristics such as the hierarchical level, functional area, firm size and tenure.…”

The dispersion of bonus payments within and between firms

“…Then there is little need for bonus payments at lower hierarchy levels, since expected larger bonus relevance at higher levels induce sufficient incentives. Existing empirical evidence on broader samples across firms indeed show that bonus relevance is positively related to firm tenure and level of the hierarchy (Ortín-Ángel and Salas-Fumás 1998, Grund and Kräkel 2012). However, it is likely to observe some dispersion in bonus relevance also within the level of a firm's hierarchy as an incentive device in the sense of agency theory (see Milgrom & Roberts 1992 for an overview).…”

“…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.…”