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Does performance pay de-motivate, and does it matter?

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  • French, Stephen
  • Kubo, Katsuyuki
  • Marsden, David

Abstract

The sheer scale and speed of the shift of payment system from time-based salaries to performancerelated pay, PRP, in the British public services provides a unique opportunity to test the effects of incentive pay schemes. This study is based on the first large scale survey designed to measure the effects of performance related pay on a) employee motivation and work behaviour across the British public services; and b) workplace performance. The latter uses an index of organisational performance based on line-manager judgements. While there is evidence of a clear incentive effect for those gaining above average PRP, it is likely that it is offset by a more widespread de-motivating effect arising from difficulties of measuring and evaluating performance fairly. These motivational outcomes are found to affect workplace performance. Organisational commitment appears to offset some of the negative effects of PRP. In contrast to the many studies of top executives, sales and sports personnel, our study examines PRP for large numbers of ordinary employees.

Suggested Citation

  • French, Stephen & Kubo, Katsuyuki & Marsden, David, 2001. "Does performance pay de-motivate, and does it matter?," LSE Research Online Documents on Economics 3637, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:3637
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    1. Tirole, Jean, 1994. "The Internal Organization of Government," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 1-29, January.
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    Cited by:

    1. Zwick, Thomas & Wolf, Elke & Beblo, Miriam, 2002. "Erfolgsabhängige Vergütung: Ein sicherer Weg zur Steigerung der Leistung von Top-Managern?," ZEW Discussion Papers 02-72, ZEW - Leibniz Centre for European Economic Research.
    2. Belfield, Richard & Marsden, David, 2004. "Unions, performance-related pay and procedural justice: the case of classroom teachers," LSE Research Online Documents on Economics 3632, London School of Economics and Political Science, LSE Library.
    3. Bhaskar, V & Holden, Steinar, 2002. "Wage Differentiation via Subsidised General Training," Economics Discussion Papers 8851, University of Essex, Department of Economics.
    4. Finn Christensen & James Manley & Louise Laurence, 2011. "The Allocation of Merit Pay in Academia: A Case Study," Economics Bulletin, AccessEcon, vol. 31(2), pages 1548-1562.
    5. Pouliakas, Konstantinos, 2008. "Pay enough, don’t pay too much or don’t pay at all? An empirical study of the non-monotonic impact of incentives on job satisfaction," MPRA Paper 10031, University Library of Munich, Germany.
    6. Finn Christensen & James Manley & Louise Laurence, 2010. "The Allocation of Merit Pay in Academia," Working Papers 2010-13, Towson University, Department of Economics, revised Jul 2010.
    7. Christophe Lemiére & Gaute Torsvik & Ottar Mæstad & Christopher H. Herbst & Kenneth L. Leonard, 2013. "Evaluating the Impact of Results-Based Financing on Health Worker Performance: Theory, Tools and Variables to Inform an Impact Evaluation," Health, Nutrition and Population (HNP) Discussion Paper Series 98269, The World Bank.
    8. Belfield, Richard & Marsden, David, 2002. "Matchmaking: the influence of monitoring environments on the effectiveness of performance pay systems," LSE Research Online Documents on Economics 3636, London School of Economics and Political Science, LSE Library.
    9. repec:lan:wpaper:3175 is not listed on IDEAS
    10. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2012. "Rewarding carrots and crippling sticks: Eliciting employee preferences for the optimal incentive design," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1247-1265.
    11. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2009. "Rewarding Carrots & Crippling Sticks: Eliciting Employee Preferences for the Optimal Incentive Mix in Europe," MPRA Paper 14167, University Library of Munich, Germany.
    12. Engellandt, Axel & Riphahn, Regina T., 2004. "Incentive Effects of Bonus Payments: Evidence from an International Company," IZA Discussion Papers 1229, Institute of Labor Economics (IZA).
    13. Peter Reilly, 2003. "New Approaches in Reward: Their Relevance to the Public Sector," Public Money & Management, Taylor & Francis Journals, vol. 23(4), pages 245-252, October.
    14. Antti Kauhanen & Hannu Piekkola, 2006. "What Makes Performance-Related Pay Schemes Work? Finnish Evidence," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 10(2), pages 149-177, May.
    15. repec:lan:wpaper:2926 is not listed on IDEAS
    16. C Green & J S Heywood, 2007. "Performance pay, sorting and the dimensions of job satisfaction," Working Papers 584041, Lancaster University Management School, Economics Department.
    17. Konstantinos Pouliakas, 2010. "Pay Enough, Don't Pay Too Much or Don't Pay at All? The Impact of Bonus Intensity on Job Satisfaction," Kyklos, Wiley Blackwell, vol. 63(4), pages 597-626, November.
    18. repec:lan:wpaper:2928 is not listed on IDEAS
    19. Colin Green & John S. Heywood, 2008. "Does Performance Pay Increase Job Satisfaction?," Economica, London School of Economics and Political Science, vol. 75(300), pages 710-728, November.
    20. repec:lan:wpaper:3020 is not listed on IDEAS

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    More about this item

    Keywords

    performance-related-pay; incentives; performance measurement; organisational commitment; public sector;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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