Why Does Bonus Pay Increase With Seniority? Social Status and Compensation Delay in Compensation Contracting

• In Event: Incentives and Behavior

Abstract

This study investigates the effects of social status on individual preferences for delayed compensation. Prior research finds that senior employees receive a higher proportion of their compensation in the form of bonuses, even after controlling for job design factors. Given that bonus compensation is delayed relative to wages, we investigate a novel factor that may contribute to the link between seniority and bonus pay – junior employees may find bonuses to be less appealing because their lower social status leads them to ascribe lower values to delayed rewards. We predict and find that participants who experience low (high) social status increasingly prefer compensation contracts with lower but more immediate payment (higher but more delayed payment). Contract preferences are partially mediated by shifts in individuals’ subjectively perceived time. We also find that task performance does not differ by contract or by social status but that high status is associated with higher forecasted performance, consistent with overconfidence. Overall, our results suggest that compensation timing is an important element in individuals’ utility functions that may explain why junior employees are not frequently offered bonus compensation.

Authors

• Nigel J Barradale, Copenhagen Business School

• Jason Brown, Indiana University - Bloomington

• Sean A. Peffer, University of Kentucky

• Matthew Thomas Sooy, University of Kentucky