Healy, Paul M, (1985). “The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics 7, nos. 1–3:85–107.
Analyzes the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies. The test results suggest that (1) accrual policies of managers are related to income-reporting incentives of their bonus contracts, and (2) changes in accounting procedures by managers are associated with adoption or modification of their bonus plan
Oyer, Paul, (1998). “Fiscal year ends and nonlinear incentive contracts: The effect on business seasonality,” Quarterly Journal of Economics 113, no. 1:149–85.
Empirically establishes results consistent with agents’ incentive to manipulate prices, influence the timing of customer purchases, and vary effort over their firms’ fiscal years. In addition to varying with the calendar business cycle, manufacturing firms’ sales are higher at the end of the fiscal year, and lower at the beginning, than they are in the middle.
Owan , Hideo., Tsuyoshi Tsuru, and Katsuhito Uehara, (2013). "Incentives and Gaming in a Nonlinear Compensation Scheme," Evidence-based HRM: a Global Forum for Empirical Scholarship 3(3): 222 - 243.
Examines the incentive effect of a discontinuous and nonlinear compensation scheme, using the transaction data provided by two North American auto dealerships. Finds that a measure of varying incentive intensity has a positive effect on the distribution of daily sales, suggesting that salespeople adjust their effort levels in response to the intensity of the incentive.
Larkin, Ian, (2014). "The Cost of High-Powered Incentives: Employee Gaming in Enterprise Software Sales," Journal of Labor Economics 32, no. 2 (April): 199-227.
Investigates the pricing distortions that arise from the use of a common nonlinear incentive scheme at a leading enterprise software vendor. The empirical results demonstrate that salespeople are adept at gaming the timing of deal closure to take advantage of the vendor’s accelerating commission scheme.
Benson, Alan, (2015). "Do Agents Game Their Agents’ Behavior? Evidence from Sales Managers," Journal of Labor Economics, vol. 33, no. 4
Studies how sales managers, acting as agents of the firm, game the staffing and incentives of their subordinates. Sales managers on a quota’s cusp have a unique personal incentive to retain and lower quotas for poor-performing subordinates; this personal incentive deviates from the firm's.
Wang, Yongxiang., Raymond Fisman, (2017). “The Distortionary Effects of Incentives in Government: Evidence from China's "Death Ceiling" Program,” NBER working paper no. 23098.
Studies a 2004 program designed to motivate Chinese bureaucrats to reduce accidental deaths: each province received a set of ‘death ceilings’ that, if exceeded, would impede government officials' promotions. Observes a sharp discontinuity in reported deaths at the ceiling, suggesting that bureaucrats manipulate death statistics to ‘game’ a nonlinear incentive scheme.
Terry, Stephen J, (2017). "The Macro Impact of Short-Termism," Econometrica. JEL Codes: E20, G30, O40. APPENDIX.
Firms that miss a pre-announced earnings target pay a substantial penalty in terms of their stock market valuation, sometimes resulting in cuts to CEO pay. To avoid these penalties, firms that are at risk of missing a target manipulate their earnings by reducing their long-term investments in R&D and intangibles.
West, Karl, (2018). “Tesla boss Elon Musk pursues his most unlikely goal yet: a $55bn bonus,” The Observer, Guardian News and Media, Jan 26.
Elon Musk’s bonus scheme is an example of an extremely nonlinear bonus (nonlinear pay scheme).
Sliwka, Dirk. Bonuses and performance evaluations Individual bonuses do not always raise performance; it depends on the characteristics of the job IZA World of Labor, 2020.
A helpful, up-to-date overview of the literature on when bonuses are effective motivators.
Loyalka, Prashant., Sean Sylvia, Chengfang Liu, James Chu, and Yaojiang Shi, (2019). "Pay by design: Teacher performance pay design and the distribution of student achievement," Journal of Labor Economics, 37(3): 621-662.
Teachers in 216 schools in western China were assigned to performance pay schemes where teacher performance was assessed by one of three different methods. Teachers offered “pay-for-percentile” incentives outperformed teachers offered simpler schemes based on class-average achievement or average gains over a school year.
Du, Longyuan, Ming Hu, and Jiahua Wu (2021) Sales Effort Management Under All-or-Nothing Constraint. Management Science 68(7):5109-5126.
Consider a salesperson who chooses effort each day, and who receives a lump sum bonus if her total sales exceed a predetermined target at the end of the month. Daily sales are subject to random uncertainty. Deciding how much hard to work each day (as a function of realized sales to date) is quite a complex problem. The authors solve this problem when sales follow a Poisson distribution, showing that optimal effort is highest when sales-to-date are neither “too high” nor “too low”. If sales-to-date are too low, the bonus is effectively ‘out of reach’ this month; if sales-to-date are too high, the bonus can be attained even with low effort.
Chevalier, Judith, and Glenn Ellison. "Risk taking by mutual funds as a response to incentives." Journal of Political Economy 105.6 (1997): 1167- 1200.
The authors document an increasing, convex relationship between a mutual fund’s performance and the inflow of money people invest in the fund. This non-linear relationship creates incentives for fund managers to increase or decrease a fund’s riskiness, depending on the fund’s year-to-date return. The authors then show that mutual funds respond to these incentives by changing the riskiness of their portfolios as the end of the year approaches.
Shue, Kelly, and Richard R. Townsend. 2017 "How do quasi-random option grants affect CEO risk-taking?." The Journal of Finance 72.6: 2551-2588.
Option grants to CEOs are a highly non-linear incentive, whose expected effect on CEO risk-taking depends on the CEO’s risk aversion. The authors use quasi-random variation in option grants to CEOs to show that, on net, option grants increase CEO risk-taking, as measured by equity volatility.
de Figueiredo Jr, Rui JP, Evan Rawley, and Orie Shelef. "Bad bets: Nonlinear incentives, risk, and performance." Strategic Management Journal (2019).
The authors study how incentive slope and shape (concavity versus convexity) affects risk-taking by hedge fund managers. Their results suggest that poor performance in the industry is often due to bad bets—excessive risk-taking that reduces performance—taken in response to nonlinear incentives. The findings suggest that, although nonlinear incentives are widely used, they can, under certain circumstances, predictably produce pernicious effects on organizational performance.