Are firms paying more for performance?

Despite its potential to raise productivity, performance-related-pay (PRP) is not widespread in market-oriented economies. Furthermore, despite secular changes conducive to its take-up, there is mixed evidence as to whether it has become more prominent over time. Ours is the first paper to present firm-level data for the Britain on both the incidence and size of bonus payments in the 2000s. We decompose the share of the total wage bill accounted for by bonuses into the employment shares in the PRP and non-PRP sectors, the ratio of base pay in the two sectors, and the gearing of bonus payments to base pay within the PRP sector. We show that there has been some growth in the share of total pay accounted for by bonuses since 2000, but that this is almost exclusively due to an increase in the gearing of bonus to base pay within the PRP sector. There is no substantial change in the percentage of employment accounted for by PRP firms. Furthermore, the increase in the gearing of bonuses to base pay is largely accounted for by change in the Finance Sector, a sector which accounts for a large proportion of all bonus payments in the British economy.