Do Bonus Deferral and Bonus Recovery Affect Employee Effort?

• In Event: Inducing Employee Effort

Abstract

We examine how bonus deferral and bonus recovery affect performance in an effort-sensitive task, where improving overall task performance requires a focus on both output quantity and output quality. Deferred bonuses and bonus recovery are important elements in contemporary incentive schemes designed to motivate employees to act in the best interest of the firm. We propose that bonus deferral improves performance by encouraging employees to exert effort towards advancing their firm’s interests, while bonus recovery serves an effort-directing role by indicating undesirable behavior that should be avoided. Bonus recovery further causes employees to focus on the monetary implications of their behavior and counteracts positive effects of bonus deferral. Our experimental results show that bonus deferral leads to higher performance quantity; in contrast, bonus recovery increases performance quality, the performance domain related to bonus recovery, but at the expense of performance quantity. Furthermore, we find that bonus recovery counteracts the positive effects of bonus deferral and leads to a reduction in overall task performance. Our study contributes to the debate on effective compensation by showing that combining bonus deferral and bonus recovery may have undesirable consequences on effort provision and allocation.

Authors

• Maria Assel, University of Augsburg

• Mandy Man-sum Cheng, UNSW Sydney

• Tami Dinh, University of St Gallen

• Wolfgang Schultze, Universität Augsburg