Performance pay and hours worked

Recent trends in performance pay in the US and Europe suggest that a growing share of workers receiving bonuses tend to work in higher-earning jobs (Gittleman and Pierce, 2013; Zwysen, 2021). Given the rising inequality in several developed countries, the changing nature of work contracts may play an important role in explaining this trend. Therefore, the goal of our analysis is to explore how the characteristics of work contracts (hours worked, wages, bonus rate) co-vary in the data.

Do jobs with longer hours tend to have higher bonus rates? How does this vary across individual characteristics and how do taxes and public policies lead to differences in contracts?

Our research areas extend across several strands of the literature, and we consider two broad themes: empirical papers on performance pay, and inequality. Firstly, the empirical papers tend to focus on how performance pay may affect employees' choice of how many hours to work with performance pay either increasing hours or having no impact (DeVaro, 2022; Green and Heywood, 2023).

We study the relationship between hours and performance pay from a different perspective: since work contracts typically cover both working hours and pay conditions, we ask whether work contracts with longer hours tend to provide higher or lower performance pay. Indeed, part-timers tend to have a different pay structure compared to full-timers.

Secondly, the inequality papers identify various mechanisms that may impact contract provisions relating to performance pay. For example, Lemieux, MacLeod, and Parent (2009) show that underlying changes in returns to skill (e.g., from technological change) result in more firms offering performance pay contracts. Under these schemes, workers are paid closer to their marginal product, leading to increased wage inequality. A goal of our analysis is to identify the various mechanisms leading to differences in contracts.

We have developed a preliminary theoretical model. Through a structural estimation, we aim to improve understanding of the role of incentives within contracts in determining the distribution of contract characteristics. Individuals may be heterogeneous in relation to their disutility of work (e.g., the need to care for a child or an elderly relative might translate into a higher disutility of work) and in relation to their ability.

These heterogeneities should lead to different wages, incentive structures, and work status (full- or part-time).

We are also interested in understanding how public policies impact the distribution of contract characteristics. For example, better childcare policies may lower the disutility of work, allowing parents to pursue higher earning and riskier jobs.

The above research project raises further questions to explore. First, given that the above project examines how taxes and public policies lead to differences in contracts, it is natural to next ask how do these differences in contract characteristics affect wage and income inequality across demographic variables (e.g., gender, age, etc.)? Secondly, how should bonuses be optimally taxed?

Several papers identify various forms of taxation to reduce the inequalities from performance-based pay. A goal of this analysis would be to contribute to the optimal taxation literature and determine whether wealth taxation may be another avenue to address the inequalities of performance pay while also incentivizing effort. This is because effort increases the probability of receiving a bonus, and wealth taxation may have a lower negative effect on effort incentives than income taxation.

From our scan of the literature, there appear to be no papers linking performance pay and wealth taxation. Through the PhD program, I hope to tackle these research questions and I am also exploring other research questions that could form part of the thesis.