Bonus: Changing the Distribution of Wages? : An investigation of variable wages in wholesale and retail

Abstract

This thesis investigates the role of wage levels between output-related and non output-related payment systems and discusses the individual characteristics of workers in output-related occupations compared to non-output related occupations in the wholesale and retail trade, based on answering the following two research questions:

1. “What is the effect of a bonus on wage levels?” 2. “What are the individual characteristics of the recipients of bonus payments compared to non-bonus recipients?”

The analysis takes a multidimensional view, as it looks at data at population, establishment and occupational levels.

First, I investigate the effect of output-related pay systems on wage levels and compare the concept of variable wage with that of straight pay. Then, I investigate the individual characteristics of employees in output-related payment systems. Theories explaining the behaviour of participants in the employer-employee relationship and firms’ reasons for using variable pay schemes as well as previous research are drawn on to formulate and test a hypothesis. I use unique individual, occupational and establishment level data from the Norwegian wholesale and retail industries for the years 1983 to 1996, which had more than 245 000 employees in more than 30 000 establishments.

This thesis focus on four expressions of hourly wages. These are defined as: (1) straight salary, which is fixed pay and exclusive to non-output related payment systems; (2) base wage, which is the fixed component of compensation paid to individuals who also receive a bonus component; (3) bonus, which refers to the variable pay component used in output-related pay systems; level of bonus is often directly related to performance; (4) base wage plus bonus, which is the total wage paid to employees in output-related pay systems. The wage component (2, 3 and 4) is thus exclusive to output-related payment systems, while straight salary (1) is exclusive to non-output payment systems.

From the investigations done in this thesis, there is support for that the size of the variable wage is large enough to make up a substantial part of a firm’s variable expenses. The effect of variable wages, and in particularly the bonus wage component, varies according to gender, trade, region and size of firm. Finally, the flow of information in the employer-employee relationship and policy making seem to be important in arriving at the decision to use a variable wage system compared to paying a straight salary.