The relationship between bonuses and firm performance – by Balázs Reizer

I investigate how bonus payments relate to firm performance using a large Hungarian linked employer–employee dataset. Previous literature used small-scale firm level surveys where the researchers could not observe the share of workers receiving bonuses. This measurement error may bias the estimation and may lead to the underestimation of the effect of bonuses.

The main finding is that firms where a larger share of workers receive bonuses exhibit significantly higher productivity. A 10-percentage-point increase in the share of bonus recipients is associated with a 3.9–4.6% increase in value added per worker and roughly a 3% increase in TFP. These relationships are robust to controls for firm size, capital, worker composition, and working hours, and remain strong when lagging bonus measures to mitigate the possibility that firms simply reward workers after positive revenue shocks.

The relationship between bonuses and performance appears linear: the more workers receive bonuses within a firm, the stronger the association with productivity. This suggest that firms need to incentivize all workers with bonuses and not only some key workers. I find little heterogeneity across firm size or wage share, but the association is stronger in the service sector than in manufacturing. There is no clear evidence that bonuses matter more for high-productivity firms than for low-productivity ones.

Overall, the study provides new evidence that bonus payments—measured with high granularity at the worker level—are positively related to firm performance. Because the dataset reduces measurement error, the estimated effects are larger than those found in earlier studies. The results imply that widespread use of incentive pay can be an efficient tool for improving firm outcomes.