Abstract
The use of pay for performance (PFP) in organisations has come to be a standard tool in human resource management within the past three decades. However, economic-psychological literature questions the effectiveness of PFP plans, as they might crowd out intrinsic motivation, leading to reduced labour efforts of employees. This paper discusses the situation of PFP in relation to non-financial incentives in German small and medium-sized enterprises (SMEs). We find that variable pay is well-established in German SME and discuss the effects of financial and non-financial incentives on intrinsic motivation. We identify three key factors for the success of SME: social environment, non-financial incentives, and intrinsic motivation. These factors are strongly connected and can be used to offer employees a different kind of workplace in contrast to big companies. We point out that PFP in SME can be hazardous and the use of this kind of compensation must be implemented implemented.
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