Contingent Pay and Managerial Performance

This paper uses longitudinal data on managers from one company to examine the relationship between financial incentives and performance. One important finding is that bonuses for managers who are in high-level positions, work at corporate headquarters, and have low seniority are more sensitive to performance than are the bonuses given to managers without those three characteristics. A second important finding is that the managers for whom bonuses are most sensitive to performance have higher subsequent performance levels than other managers, even when past performance levels are controlled for. Merit pay, in contrast to bonuses, appears to be awarded on the same basis across managerial levels, plant locations, and seniority levels, and differences in the sensitivity of merit pay to performance appear to have no significant effect on subsequent performance.