Does Performance-Related-Pay work? Recommendations for practice based on a meta-analysis

Abstract

Performance-related-pay (PRP) is a controversial topic. Views about its impact are mixed. Through a meta-analysis of studies in public administration, we aim to provide an evidence-based answer to the question: Does PRP work? Our meta-analysis finds a statistically significant, positive but small population effect size between PRP and employee and performance outcomes. Subgroup analyses show that PRPs impact is contingent upon the type of outcome, geographical context, government level, and data source rather than universal in nature. Effect sizes decrease when performance outcomes are measured as opposed to employee outcomes; in USA and European contexts compared to Asian contexts; at the local level compared to the federal level; and when multiple source or experimental data are used compared to single source data. Based on our findings and PRP literature, we construct a flowchart to support practitioners in deciding whether PRP may “work” for them while avoiding its many and typical pitfalls. Evidence for practice Our meta-analysis demonstrates that the impact of performance-related-pay (PRP) on employee and performance outcomes in public administration is statistically significant and positive; however, the fact that the effects sizes are small leads us to conclude that PRP is not a “magic bullet”. Intriguingly, performance outcomes are less impacted by PRP than employee-related outcomes like work motivation and job satisfaction, implying that PRP might carry some motivational benefits while its benefits for better performance outcomes are questionable. PRP seemingly works better in Asia than in Europe or the USA – arguably due to existing predispositions regarding the effects of rewards and monetary incentives – and also seems more effective at the federal than the local government level. Much of the small positive impact uncovered in this meta-analysis seems to be the result of the type of data used in studies. Specifically, studies using multiple or experimental data show a trivial and statistically insignificant overall impact. Practitioners thus need to carefully assess how they will evaluate PRPs impact to avoid biases due to data type. An evidence-based flowchart including questions at the macro (cultural and societal considerations), meso (specific organizational characteristics), and micro (individual and team behavior) level is presented as a support tool for practitioners in deciding upon and designing PRP systems in their organization.