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Bonus compensation and productivity: evidence from Indian manufacturing plant-level data

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Abstract

This paper examines whether bonus compensation for managers and workers matter for manufacturing plant productivity. We use a model based on a Cobb-Douglas production function where bonus incentives can increase worker effort and attract more skilled workers leading to increases in plant productivity. The effect of bonus compensation policies on productivity is estimated by using a representative sample of Indian manufacturing plants between 1999 and 2006. We find that conditional on a plant’s observable and unobservable characteristics, allocating a higher proportion of compensation to bonus pay for managers and workers has a significant positive effect on productivity.

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Notes

  1. Standard errors for 200 bootstrap simulations were initially computed for the first set of regressions, but were found to be similar in magnitude to using only 100 bootstrap simulations.

  2. GMM estimation is performed using STATA’s xtabond2 as described by Roodman (2009). This function is used as opposed to xtdpd because it allows for incorporation of sampling weights in the estimation process.

  3. The census component covers 100 % of all units employing 100 or more people for all the ASI periods covered in the study. The census survey also applies to smaller states in the ASI where there is limited industrialization so as to more completely capture manufacturing activities in these areas. The sample component of the ASI represents formally registered manufacturing firm establishments employing 20–99 workers within a state at the four digit level of the National Industrial Classification (NIC) code when using sample weights with at least 20 % coverage of all manufacturing units and a minimum of six sample units.

  4. For more detailed information on the ASI panel see Government of India (2011).

  5. Industries include: food products, beverages/tobacco, textiles, textile products, wood products, paper products, leather products, basic chemicals, rubber/plastic/petroleum/coal, non-metallic products, metals and alloys, metal products, machinery and electrical, transport, and other manufacturing. The HHI was checked for these broad categories and the highest HHI was 0.09 in these broad categories in the cross-sectional data. The HHI for three digit industrial classification codes in the cross-sectional data was also checked. Less than 7 % of the industry-years had HHI’s >0.25 indicating that a majority of the plants are in fairly competitive industries.

  6. This situation arises, for example, when two plants pay their workers the same baseline salary and bonuses of up to 20 % of the salary depending on a plant’s performance at the end of the year. It is possible that one plant may perform well and pay bonuses amounting to 20 % of the baseline salary, while the other performs poorly due to idiosyncratic shocks and pays no bonuses. In this case, we may wrongly conclude that a well-performing plant has a better incentive scheme using observed the ex-post share of bonus compensation out of total compensation even though both plants have the same incentive scheme.

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Acknowledgements

Detailed feedback from Aashish Mehta and two anonymous referees has been integral to the reformulation of this paper. Research assistance by Glenita Amoranto was helpful in the early stages of the development of this paper.

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Authors and Affiliations

  1. Economics and Research Department, Asian Development Bank, Manila, Philippines

    Natalie Chun

  2. Department of Economics, University of Maryland, College Park, MD, USA

    Soohyung Lee

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  1. Natalie Chun
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Correspondence to Natalie Chun.

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Chun, N., Lee, S. Bonus compensation and productivity: evidence from Indian manufacturing plant-level data. J Prod Anal 43, 47–58 (2015). https://doi.org/10.1007/s11123-014-0421-z

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