Compensation Supplements and the Use of Incentive Pay in US Job Markets

Abstract

The firm's interest in monitoring and/or motivating workers appears to be an important reason why firms use pay supplements such as bonuses and overtime work. In this paper, I used a representative sample of U.S. private industry jobs to obtain some indirect evidence on what pay supplements may play a role as an incentive instrument. I studied how various pay supplements differ when traditional incentive pay - pay based on individual results such as piece rates or sales commissions - is a part of job earnings; I argue that the marginal benefit to use of a pay supplement as an incentive instrument should fall when incentive pay is used. As expected, bonuses not based on individual results and use of overtime work were both found to be lower when incentive pay is used on the job. However, I also found that expected hours of holiday/vacation leave and employer spending on defined contribution retirement plans were lower with use of incentive pay. These results are contrasted with union-nonunion differences in pay supplements, updating Freeman's 1981 results. The paper also discusses the role that incentive pay and collective bargaining play in accommodating differences in worker preferences in the job market.