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Don't Forget the Gravy! Are Bonuses and Time Rates Complements?

Research output: Working paper

Published
Publication date2012
PublisherThe Department of Economics
Number of pages0
Original languageEnglish

Publication series

NameEconomics Working Paper Series

Abstract

The press often depicts bonuses as extra payments to the already well compensated and calls for reform. Yet, these calls typically ignore the efficiency argument that bonuses are potentially risky performance pay that substitute for salary compensation. This paper uses representative UK data to estimate that bonuses appear not to substitute for salary in cross-sectional estimates. Yet, when controlling for time invariant characteristics in panel data, bonuses emerge as substitutes. Each pound of bonus comes at a cost of 40 pence in other earnings. The degree of substitution is far larger at the bottom of the earnings distribution and far smaller at the top of the earnings distribution.

Bibliographic note

2012-008