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The dispersion of bonus payments within and between firms

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Abstract

We explore the dispersion of bonus payments of managers within and between five large firms from the German chemical sector and disentangle the dispersion within and between levels of the hierarchy. We use data from a yearly salary survey in these firms during the observation period 2008 to 2013. Bonus payments account for one quarter of yearly base salaries on average. Both the amount and the dispersion of bonus-to-base ratios differ across firms. We disentangle the dispersion between and within the levels of firms’ hierarchies. Revealed differences, which are consistent with differences in firms’ value statements, suggest that there is no one best incentive system of a firm.

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Notes

  1. The data have been used for other research questions before. Grund and Walter (2015) explore the role of the financial crises for (changes in) compensation of middle managers. Besides Grund (2015) focuses on component specific gender pay gaps for a homogeneous subsample (employees holding a doctorate degree in a STEM field). Grund and Kräkel (2012) have provided first cross-sectional evidence on determinants of bonus relevance in the sector. We refer to the latter paper below.

  2. In their longitudinal study, Grund and Walter (2015) explore the impact of the economic crises on managers’ compensation more in detail. They find that fixed salaries are hardly affected, whereas bonus payments considerably decreased from 2008 to 2010. Total compensation recovered quite fast, though. Managers report real increases in remuneration in 2011 compared to the pre-crises year 2008 on average.

  3. Additionally, previous empirical studies demonstrate that firm strategy is a significant predictor of middle managers’ pay systems (Guth and MacMillan 1986; Napier and Smith 1987; Balkin and Gomez-Mejia 1990; Boyd and Salamin 2001; Yanadori 2011). R&D intensity (calculated as the ratio of annual R&D expense to annual sales) is widely used in the literature to measure the strategic orientation of a firm (Griliches 1986; Balkin and Gomez-Mejia 1987; Gerhart and Milkovich 1990). R&D intensity generally reflects a firm innovation strategy that captures both long-term orientation and the willingness to bear risk (Yoshikawa et al. 2010). Consequently, the differences in a firm’s alignment to R&D might lead to differences in the use of bonus payments (Yanadori and Marler 2006). However, it should be noted that the main effects of seniority, functional area and hierarchy in the pooled OLS regression of Table 2 and firm-wise OLS regressions of Table 3 are robust to estimations with the control for R&D intensity instead of year dummies or EBIT performance.

  4. Notably, there was an additional bonus payout in Firm D in 2013, based on the achievement of main targets in the 2012 fiscal year. Focusing on the 2008 to 2012 fiscal years only, Fig. 3 shows that bonus-to-base ratios vary considerably within Firm D year-on-year.

  5. Notably, bonus payments of Firm C were partly brought forward from fiscal year 2011 (2012) to fiscal year 2010 (2011). There were some extra bonus payments for exceptional performance in 2011, too. Leaving aside these years of observation, a generally low spread of bonus relevance, as in Firm A and Firm E, can be observed, as shown in Fig. 3.

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Authors and Affiliations

  1. Chair of Human Resource Management and Personnel Economics, School of Business and Economics, RWTH Aachen University, Templergraben 64, 52056, Aachen, Germany

    Christian Grund & Tanja Hofmann

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  1. Christian Grund
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  2. Tanja Hofmann
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Correspondence to Christian Grund.

Appendix

Appendix

See Tables 7, 8 and 9.

Table 7 Firm wise estimations with control for firm performance (EBIT)
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Table 8 Firm wise estimation with interactions of EBIT and level of the hierrarchy
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Table 9 Explained variance (adj. R2) and changes in adj. R2 (including EBIT instead of year dummies in step 4) in stepwise estimations on bonus-to-base ratios
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Grund, C., Hofmann, T. The dispersion of bonus payments within and between firms. J Bus Econ 89, 417–445 (2019). https://doi.org/10.1007/s11573-018-0920-x

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