Effect of Executive Compensation on Worker Motivation and Firm Profitability

Past studies have often considered the relation between the executive compensation schemes and what these are based on, yet there has been much less attention as to what effect the bonus has on the firm itself. This paper examines how the differences in bonus sizes affect the effort exerted by the bosses and workers and how this affects the expected profitability of firms. Additionally, the signaling power of the bonus is examined. A bonus payment is a useful tool for firms to increase expected profits, as recognizing those who are of more relative importance will increase their effort exertion and in turn improve firm profitability.