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.