Abstract
Anthony J. Barkume (2002) "Compensation
Supplements and Use of Incentive Pay in U.S. Labor Markets."
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. Using a representative sample of U.S. private industry
jobs, this paper obtains some indirect evidence on what pay supplements
serve as incentive instruments. I study how various pay supplements differ
in both incidence and generosity when traditional incentive pay—pay based
on individual results such as piece rates or sales commissions—is a part
of job earnings. If a firm does use incentive pay the marginal benefit of
a pay supplement as an incentive instrument should fall. Otherwise,
the use of incentive pay should have no necessary relationship to
provision of a pay supplement, with provision driven by worker preferences
for the benefits provided.
The paper's methodology follows that in Richard Freeman's 1981 study of
union-nonunion differences in compensation supplements. (Since the data I
use includes union status, I also update Freeman's results.) Specifically,
I estimate expected employer costs per hour worked for various
compensation supplements. Across all US private industry jobs, employer
costs for bonuses not based on individual results are about half of
predicted levels with use of incentive pay. Similarly, use of incentive
pay reduces expected employer spending levels in defined contribution
retirement plans by about a third. Employer spending on health insurance
was unrelated to use of incentive pay but forty percent higher in union
jobs. Union jobs had more costly compensation supplements, except for
employer payments for bonuses and to defined contribution retirement
plans.
The results also suggest that use of incentive pay and collective
bargaining help to accommodate differences in worker preferences for hours
of work. Among jobs with the same fulltime year-round work schedule, I
estimate that a slightly higher amount of expected overtime work is
attached to a union job. But a worker choosing between full time jobs
offering paid leave can also expect about six fewer work days per year in
a union job than in a job using incentive pay.
Last Modified Date: July 19, 2008
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