Are firms paying more for performance?
We use nationally-representative, monthly data on the total wage bill and employment of around 8,500 firms to investigate fluctuations in the economic importance of performance bonuses in Britain over the past 15 years. We decompose the share of the total economy-wide wage bill that is accounted for by performance-related pay (PRP) into: (i) the shares of employment in the PRP and non-PRP sectors; (ii) the ratio of base pay between the two sectors; and (iii) the gearing of bonus payments to base pay within the PRP sector. We find that the growth in the economic importance of bonuses in Britain in the mid-2000s – and subsequent fluctuations since the onset of recession in 2008 – can be almost entirely explained by changes in the gearing of bonus to base pay within the PRP sector. There has been no substantial change in the percentage of employment accounted for by PRP firms; if anything it has fallen over time. Furthermore, movements in the gearing of bonuses to base pay in the economy are heavily influenced by changes in Finance: a sector which accounts for a large proportion of all bonus payments in Britain.