Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of boxes
- List of contributors
- Introduction
- Part I Performance measurement – functional analyses and theoretical foundations
- Part II Performance measurement – frameworks and methodologies
- Part III Performance measurement – practicalities and challenges
- Part IV Performance measurement in public services
- Part V Performance measurement – emerging issues and enduring questions
- 20 Does pay for performance really motivate employees?
- 21 Anomalies of measurement: when it works, but should not
- 22 Loosely coupled performance measurement systems
- Index
- References
20 - Does pay for performance really motivate employees?
Published online by Cambridge University Press: 22 September 2009
Edited by
Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of boxes
- List of contributors
- Introduction
- Part I Performance measurement – functional analyses and theoretical foundations
- Part II Performance measurement – frameworks and methodologies
- Part III Performance measurement – practicalities and challenges
- Part IV Performance measurement in public services
- Part V Performance measurement – emerging issues and enduring questions
- 20 Does pay for performance really motivate employees?
- 21 Anomalies of measurement: when it works, but should not
- 22 Loosely coupled performance measurement systems
- Index
- References
Summary
Introduction
Variable pay for performance may undermine employees' efforts, as rewards crowd out intrinsic motivation under identified conditions. A bonus system then makes employees lose interest in the immediate goal. Moreover, monetary incentives in complex and novel tasks tend to produce stereotyped repetition, and measurement is often dysfunctional. Therefore, intrinsic motivation is crucial for these tasks. However, for some work extrinsic incentives are sufficient. We offer a framework for how managers can achieve the right balance between intrinsic and extrinsic motivation.
Variable pay for performance and motivation
Variable pay for performance has become a fashionable proposal over the last few years, in private companies as well as in the public sector. Many firms have given up fixed salaries and have moved to pay their employees in a variable way. Firms try to match payment to objectively evaluated performance. It is reflected in such popular concepts as stock options for managers and various types of bonuses. In the public sector, efforts to raise productivity in the wake of new public management have also resulted in attempts to adjust variably the compensation of public employees for their performance. This means that firms and public administrations increasingly rely on price incentives – i.e. on extrinsic motivations.
We argue in this chapter that variable pay for performance under certain conditions has severe limitations. In situations of incomplete contracts – and these dominate work relationships – an incentive system based only on monetary compensation for work is insufficient to bring forth the performance required.
- Type
- Chapter
- Information
- Business Performance MeasurementUnifying Theory and Integrating Practice, pp. 433 - 448Publisher: Cambridge University PressPrint publication year: 2007
References
(1963). Towards an understanding of inequity. Journal of Abnormal and Social Psychology, 67, 422–36.CrossRefGoogle Scholar
(1982). Labor contracts as partial gift exchange. Quarterly Journal of Economics, 84, 488–500.CrossRefGoogle Scholar
, and (1986). Efficiency Wage Models of the Labor Market. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
(1996). Creativity in Context: Update to the Social Psychology of Creativity. Boulder, CO: Westview Press.Google Scholar
(1998). Empowerment: the emperor's new clothes. Harvard Business Review, 76(3), 98–105.Google ScholarPubMed
(1995). Do job executives work harder when they are monitored?Kyklos, 48, 19–42.CrossRefGoogle Scholar
, and (1998). Managerial compensation and firm performance: a general research framework. Academy of Management Journal, 41, 135–45.Google Scholar
, , and (1988). Compensation and incentives: practice versus theory. Journal of Finance, 43, 593–616.CrossRefGoogle Scholar
(1976). The Economic Approach to Human Behavior. Chicago: University of Chicago Press.Google Scholar
(ed.) (1990). Paying for Productivity: A Look at the Evidence. Washington, DC: Brookings.Google Scholar
, and (1999a). The sound of silence in prisoner's dilemma and dictator games. Journal of Economic Behaviour and Organization, 38, 43–57.CrossRefGoogle Scholar
, and (1999b). Social distance and other-regarding behavior in dictator games: comment. American Economic Review, 89(1), 335–9.CrossRefGoogle Scholar
, and (1985). The Reason of Rules: Constitutional Political Economy. Cambridge: Cambridge University Press.Google Scholar
, , and (1996). Breaking the Psychological Contract: A Social Exchange Theory Perspective of Performance-based Managerial Pay, working paper. Storrs: University of Connecticut, School of Business Administration.Google Scholar
, and (1975). The self-perception of intrinsic and extrinsic motivation. Journal of Personality and Social Psychology, 31, 599–605.CrossRefGoogle ScholarPubMed
(1975). Beyond Boredom and Anxiety: Experiencing Flow in Work and Play. San Francisco: Jossey-Bass.Google Scholar
(1988). Rational Choice in an Uncertain World. San Diego: Harcourt, Brace, Jovanovich.Google Scholar
, , and (1988). Not me or thee but we: the importance of group identity in eliciting cooperation in dilemma situations – experimental manipulations. Acta Psychologica, 68, 83–97.CrossRefGoogle Scholar
(1968). Personal Causation: The Internal Affective Determinants of Behavior. New York: Academic Press.Google Scholar
(1971). Effects of externally mediated rewards on intrinsic motivation. Journal of Personality and Social Psychology, 18, 105–15.CrossRefGoogle Scholar
, and (1995). Why We Do what We Do: The Dynamics of Personal Autonomy. New York: Putnam.Google Scholar
, , and (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin, 125(6), 627–68.CrossRefGoogle ScholarPubMed
, and (1980). The empirical exploration of intrinsic motivational processes. Advances in Experimental Social Psychology, 10, 39–80.CrossRefGoogle Scholar
, and (1985). Intrinsic Motivation and Self-determination in Human Behavior. New York: Plenum Press.CrossRefGoogle Scholar
(1995). American Anti-management Theories of Organization: A Critique of Paradigm Proliferation. Cambridge: Cambridge University Press.Google Scholar
, and (1996). Detrimental effects of reward: reality or myth?American Psychologist, 51, 1153–66.CrossRefGoogle ScholarPubMed
, and (1993). Surveillant intentions and intrinsic motivation. Journal of Psychology and Social Psychology, 30, 257–66.Google Scholar
, , and (1997). Reciprocity as a contract enforcement device: experimental evidence. Econometrica, 65, 833–60.CrossRefGoogle Scholar
(1992). Melding sociology and economics: James Coleman's foundations of social theory. Journal of Economic Literature, 30, 147–70.Google Scholar
(1997). Not Just for the Money: An Economic Theory of Personal Motivation. Cheltenham: Edward Elgar.Google Scholar
, and (1995). Institutions affect fairness: experimental investigations. Journal of Institutional and Theoretical Economics, 151(2), 286–303.Google Scholar
, and (1997). The cost of price incentives: an empirical analysis of motivation crowding-out. American Economic Review, 87(4), 746–55.Google Scholar
, and (1996). Bad for practice: a critique of the transaction cost theory. Academy of Management Review, 21(1), 13–47.CrossRefGoogle Scholar
(1998). Incentives in organizations. Journal of Economic Perspectives, 12(4), 115–32.CrossRefGoogle Scholar
(1995). Shirking versus managerial incentives of chief executive officers (CEOs): a note on a possible misunderstanding of principal–agency theory. Journal of Institutional and Theoretical Economics, 151(4), 693–8.Google Scholar
(1998). Competence and contract in the theory of the firm. Journal of Economic Behavior and Organization, 35, 179–201.CrossRefGoogle Scholar
, and (1991). Multitask principal–agent analyses: incentive contracts, asset ownership and job design. Journal of Law, Economics and Organization, 7(Special issue), 24–52.CrossRefGoogle Scholar
, and (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 225–64.CrossRefGoogle Scholar
, and (1996). Translating Strategy into Action: The Balanced Scorecard. Boston: Harvard Business School Press.Google Scholar
, and (1991). Implementing global strategies: the role of procedural justice. Strategic Manangement Journal, 12, 125–43.CrossRefGoogle Scholar
, and (1998). Procedural justice, strategic decision making, and the knowledge economy. Strategic Management Journal, 19, 323–38.Google Scholar
(1993). Punished by Reward: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes. Boston: Houghton Mifflin.Google Scholar
(1975). The endogenous–exogenous partition in attribution theory. Psychological Review, 82, 387–406.CrossRefGoogle Scholar
, III (1990). Strategic Pay: Aligning Organizational Strategies and Pay Systems. San Francisco: Jossey-Bass.Google Scholar
Lazear, E. P. (1996). Performance Pay and Productivity, Working Paper no. 5672. Cambridge, MA: National Bureau of Economic Research.CrossRef
, and (eds.) (1978). The Hidden Costs of Reward: New Perspectives on the Psychology of Human Motivation. Hillsdale, NY: Erlbaum.Google Scholar
(1999). Because it is there: the challenge of mountaineering … for utility theory. Kyklos, 52(3), 315–43.Google Scholar
, and (1992). Economics, Organization and Management. Englewood Cliffs, NJ: Prentice Hall.Google Scholar
, and (1997). When employees feel betrayed: a model of how psychological contract violation develops. Academy of Management Review, 22(1), 226–56.CrossRefGoogle Scholar
, and (2000). Motivation, knowledge transfer and organizational forms. Organization Science, 11(5), 538–50.CrossRefGoogle Scholar
Pfeffer, J. (1995b). Incentives in organizations: the importance of social relations. In (ed.), Organization Theory: From Chester Barnard to the Present and Beyond, 72–97. Oxford: Oxford University Press.Google Scholar
(1999). The provision of incentives in firms. Journal of Economic Literature, 37(1), 7–63.CrossRefGoogle Scholar
, , and (1994). Changing obligations and the psychological contract: a longitudinal study. Academy of Management Journal, 37(1), 137–52.Google Scholar
(1966). Generalized expectancies for internal versus external control of reinforcement. Psychological Monographs, 80(1), 1–28.CrossRefGoogle Scholar
(1995). Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Thousand Oaks, CA: Sage.Google Scholar
, and (1993). The contracts of individuals and organizations. Research in Organizational Behavior, 15, 1–43.Google Scholar
(1990). The creation and destruction of value. American Psychologist, 45, 7–15.CrossRefGoogle Scholar
(1951). A formal theory of the employment relationship. Econometrica, 19, 293–305.CrossRefGoogle Scholar
, and (1977). De gustibus non est disputandum. American Economic Review, 67(2), 76–90.Google Scholar
, and (1995). The overjustification effect: a meta-analysis. Applied Cognitive Psychology, 9, 365–404.CrossRefGoogle Scholar
(1992). The Winner's Curse: Paradoxes and Anomalies of Economic Life. New York: Free Press.Google Scholar
(1970). The Gift Relationship: From Human Blood to Social Policy. London: Allen and Unwin.Google Scholar
(1973). Altruism, attribution and intrinsic motivation in the recruitment of blood donors. In Selected Readings in Donor Motivation and Recruitment, vol. II, 7–38. Washington, DC: American Red Cross.Google Scholar
(1992). The effects of extrinsic rewards on intrinsic motivation: a meta-analysis. Journal of Occupational and Organizational Psychology, 65, 101–14.CrossRefGoogle Scholar
(1975). Markets and Hierarchies: Analysis and Antitrust Implications: A Study in the Economics of Internal Organization. New York: Free Press.Google Scholar
(1985). The Economic Institutions of Capitalism: Firms, Markets, Relational Contradicting. New York: Free Press.Google Scholar
(1996). Economic organization: the case for candor. Academy of Management Review, 21, 48–57.CrossRefGoogle Scholar
- 6
- Cited by