The more employees receive bonuses, the better a company performs

The Corvinus analysis examined the relationship between bonus payments and corporate productivity using data from Hungary’s labour force survey. In the study, Balázs Reizer, Associate Professor at Corvinus University of Budapest and a researcher at ELTE-KRTK, compared data from around 120,000 employees at approximately 11,000 companies per year between 2003 and 2018 with the firms’ financial statements.  

The results show that at companies where the proportion of employees receiving a bonus is higher by 10 percentage points, value added per employee is 3.9–4.6% higher. At the same time, overall total factor productivity also improves by nearly 3%. This indicates how efficiently a company turns the resources it uses – capital and labour – into products or services. 

The relationship is linear: it is not only companies that pay bonuses to everyone that raise the average. The larger the share of employees who receive bonuses, the greater the impact on performance. 

“Based on the study, the flexible pay components work best when they are not the privilege of a narrow group, but instead incentivise broader groups of employees. The research found no evidence that bonuses are especially effective at companies that spend a lot on wages, meaning the improvement in performance is not simply a side effect of higher wage expenditure,” emphasised Balázs Reizer, Associate Professor at Corvinus and the author of the study. 

The effect of bonuses remains even after controlling for company size, capital intensity and workforce composition. The effectiveness of bonus payments also does not depend on how large labour’s share is within overall company costs. However, the positive relationship is stronger in the service sector than in industry.  

The paper was published in the Finance Research Letters.