Are bonus pools driven by their incentive effects? Evidence from fluctuations in gainsharing incentives

Abstract

Bonus pools, in which a worker’s realized bonus depends both on a worker’s share of the pool (which serves as the incentive) and on the size of the pool (which is largely outside of the worker’s control), are a common method for distributing incentive pay. Using data on the variation in the size of the bonus pool generated by a US manufacturing plant’s gainsharing plan, which varies incentives for quality and worker engagement, the authors evaluate the conditions under which such bonuses have incentive effects. Overall, results are cautionary: The evidence suggests gainsharing’s benefits operate outside of the incentive channel, and incentives may backfire if they are too small or too diluted by group performance metrics. The authors illustrate how random variation in the size of bonus pools offers researchers a powerful, readily available, and underused tool for studying how workers respond to the availability and strength of incentives.

In this paper, we advance the strategic HR and personnel economics literatures by recognizing HR practices as interdependent components of a larger, dynamic system of HR strategies and by providing empirical evidence and theoretical explanations regarding the consequences of a certain HR practice–i.e., compensation. To isolate the effects of bonus-pool incentives from the larger web of HR practices employed simultaneously and to determine their impact on quality and engagement measures, we exploited variation in the eligibility and the size of a shared bonus pool at a manufacturing plant (using 16 instances of the plant crossing the eligibility threshold and 52 changes in the incentive’s magnitude over 173 weeks).