Thomas Lemieux strikes again:
An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using a bonus, a commission, or a piece rate. In this paper, we look at the…growing incidence of performance pay on wage inequality. The basic premise of the paper is that performance pay jobs have a more competitive. pay structure that rewards productivity differences more than other jobs. Consistent with this view, we show that compensation in performance pay jobs is more closely tied to both measured (by the econometrician) and unmeasured productive characteristics of workers. We conclude that the growing incidence of performance pay accounts for 25 percent of the growth in male wage inequality between the late 1970s and the early 1990s, and for most of the growth in top-end wage inequality (above the 80th percentile) during this period. This economist deserves…um…a bonus.
Interesting, what would it say for fairness if most of the equality of wages was the result of free loading on the star performers?
i never cease to amazed by the really fascinating work many economists keep producing. good research is a public good.keep it coming.
I didn’t read the whole paper, but searched for “tax” and didn’t get a hit. They might want to take into account the fact that there is an incentive for employers to pay in part with a bonus rather than entirely with regular wages: a bonus can be deducted (for tax purposes) in the year prior to which it is paid if it is timed properly; regular wages can only be deducted in the same year that they are paid. So the assumption that bonuses are used to tie more closely to productivity might not be as strong as you’d think.
It seems that this is something that all economists should favor. Inequality drives productivity (people want to earn more, so they work harder, train, etc) and the very best form for that inequality would be that form most directly connected to performance – i.e. performance related bonuses.
“25 percent of the growth in male wage inequality between the late 1970s and the early 1990s”
I happen to work in a field where the strong producers are women – I wish they had done an analysis of Realtors and Mortgage Bankers’ compensation from 1970 to 1990 who are typically paid 100% commission. Women do quite well in this field. It’s been said that purchasing a house is an emotional decision. Many of these saleswomen connect quite well on the psychological aspect of making the sale especially when it is a face-to-face transaction.
I have been in finance all my life and am a big fan of bonuses. At my last job, the bulk of my pay was salary, but I also received quarterly stock options and cash bonuses. At a big company, once you get on the gravy train (which is where hard work comes into play), it is near impossible to get off of it. What I learned is that titles are extremely important because they provide the ranges of your discretioniary income (eg. no VP could ever get 10,000 stock options in one quarter, but an SVP could; only VPs and up are eligible for quarterly bonuses). Also, those bonuses did not vary as much as your salary could year to year regardless of how the firm did (typically 65% base, 35% bonus). All of this changes, as everyone knows, as you move up the ladder.
At my current job with a small firm, my salary will never change, but my bonus can vary wildly depending totally on the firm’s performance (25-50% base,50-75% bonus). So I live like Clark Kent for most of the year and then Superman for a few weeks before I put most of it back in the bank. I get my bonus this April for 2006 – light a candle for me.
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Please come to requiem gold, we will give you a great surprise.
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