Pay setting based on evaluations of employees' job performance is a popular reward system in many of today's organizations (Nyberg, Pieper & Trevor, 2016). Performance-based pay refers to many different forms of pay plans that are used within organizations, such as performance based pay raises on an annual basis, i.e., merit pay systems (Maaniemi, 2013), commissions, and bonus systems (Rynes, Gerhart & Parks, 2005). Organizations use performance-based pay plans as a way of enhancing employees' job performance (Fang & Gerhart, 2012). In this context, pay appraisals usually include quantity and/or quality aspects of performance at work, and reward decisions are determined based on measures of productivity (i.e., number of tasks completed) or manager evaluations of past performance (Cappelli & Conyon, 2018; DeNisi & Murphy, 2017). Past research has found financial rewards to be associated with higher levels of job performance (Cerasoli, Nicklin & Ford, 2014; Cerasoli, Nicklin & Nassrelgrgawi, 2016; Jenkins Jr. et al., 1998). However, their efficiency might be limited to tasks that are simple and boring (Bailey and Fessler, 2011), be of minor importance for performance quality (Cerasoli et al., 2014, 2016), and might decrease performance on interesting tasks (Weibel, Rost & Osterloh, 2009). Moreover, meta-analytic results indicate that if (or when) reward systems attenuate intrinsic motivation (i.e., doing things out of pure interest or joy) or psychological need satisfaction (i.e., satisfaction of higher needs that enable the quest to reach the full human potential as well as ensure happiness and prosperity) they run the risk of hampering performance quality (Cerasoli et al., 2014, 2016; Deci, Koestner & Ryan, 1999). This risk may be more likely when behaviors and rewards are salient and closely intertwined (i.e., when rewards are strictly performance-based) since such explicit links may provide reason for employees to narrow their cognitive attention towards those behaviors that can render future monetary gains rather than on quality (Cerasoli et al.,
How experiences and perceptions of pay and pay setting relate to employees’ job performance, willingness to remain in the organization, and health has been the subject of much debate. Previous research has typically used a variable-centered approach to investigate associations between different pay-related factors and such outcomes. In contrast, we used latent profile analysis to explore combinations of compensation characteristics (pay level, perceived horizontal pay dispersion, and procedural quality, i.e., transactional leadership and procedural pay-setting justice), combining relevant theories on the subject. Based on a nationally representative sample of private sector employees in Sweden (N = 1,146), our study identified six compensation profiles. Our key findings show, first, that higher levels of pay were generally associated with better performance, lower turnover intention, better self-rated health, and lower work-related exhaustion, especially when combined with perceptions of high procedural quality. Second, in terms of perceived horizontal pay dispersion, the results indicate that pay compression may be associated with beneficial outcomes, particularly when combined with high procedural quality. Third, procedural quality was generally associated with favorable work-related and health-related outcomes, although such positive effects may be contingent upon pay level and perceived horizontal pay dispersion. In conclusion, while pay level, perceptions of horizontal pay dispersion, and procedural quality may all matter for employee outcomes, it is important to consider their combinations.
This chapter explores research on the importance of money to motivate people to work. Research on the role of money in people’s lives and as a motivator of working shows that even though people need a decent basic income, money is not the best motivator of work performance. A review of research on the effects of performance-based compensation on motivation, performance, and well-being concludes that financial incentives do not seem to be as powerful to drive performance as portrayed in many motivation theories, and that there is still a need to better understand how such incentives relate to need satisfaction and work motivation. Moreover, incentives seem to have undesirable side effects on moral engagement, stress, and well-being. The chapter also explores other aspects of compensation, including how fairness and the relative distribution of money within organizations influence need satisfaction, motivation, and work outcomes, as well as how motivational assumptions and payment norms and preferences might modify how money influences motivation. It ends with an identification of remaining knowledge gaps and suggestions for future research on the effects of compensation on work motivation that would benefit from using self-determination theory, as well as the practical implications of what is known thus far for the design of compensation systems.
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