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DCC Accounting Research Seminars

An Empirical Analysis of Employee Responses to Bonuses and Penalties

Wim Van der Stede (London School of Economics)

20 mars 2017  -  17:15-19:00, salle Anthropole 3032

Host(s): Anette Mikes

We examine how employees respond to bonuses and penalties using a proprietary
data set from an electronic chip manufacturer in China. First, we examine the relative effects
of bonuses and penalties and observe a stronger link between penalties and subsequent effort
(measured by production quantity and time) and performance (measured by production
efficiency and quality), suggesting that a per-dollar penalty motivates higher levels of effort
and performance than a per-dollar bonus. Second, we find the marginal sensitivity of
bonuses/penalties diminishes with their value. Furthermore, we find that the curvature of
penalties is significantly greater than that of bonuses, indicating that the marginal effect of a
bonus may eventually exceed that of a penalty when their values are sufficiently large. Third,
we find that penalties increase employee turnover especially for experienced and high-quality
workers. Finally, we extend our analyses to implicit bonuses and penalties where employees
perceive implicit gains (losses) when their actual pay is higher (lower) than their expectations.
We expect, and find, a negative impact of both implicit gains/losses on effort and
performance, where the effects of penalties are differentiated from those of bonuses as with
their explicit equivalents. These results help inform our understanding of the observed
(limited) use of penalties in practice, their effectiveness (up to a point), and their possible
unintended consequences (such as on undesired turnover or when affected by
uncontrollables), and how these effects may even extend into implicit incentives, such as
when employees miss out on their (expected) bonuses.

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