Abstract
Incentives are one of the core practices of strategic human resource management and their effect on motivation and performance has been studied extensively. Particular attention is devoted to pay-for-performance (PFP) incentives while research on the effect of PFP incentives on performance has produced contradictory results. More importantly, incentives are not an isolated process; the effect of incentives goes beyond individual or organisational performance because they affect an entire organisation. Although incentives are included in most organisational design frameworks, the effect of incentives on other organisational design components has been neglected. The study uses the organisational design framework to focus on neglected relations between incentives and other organisational design components. The purpose of the study is to explore what are the organisational design components and how they are influenced by PFP incentives. A case study research design was used. The data was collected in a small company in which the incentive system was changed to PFP incentives as a part of substantial changes in the organisational design. Data was collected through interviews with employees, supported by internal documentation and observation. Thematic analysis was used to analyse the data. In the case, the PFP incentives led to higher performance although the PFP incentives restricted the new exploratory strategy and harmed cooperation. The effect of the PFP incentives on exploration and cooperation was slow, and hardly visible, predominantly as a result of unintentionally deviated attention.The study points out that focusing solely on performance when designing incentive systems may be myopic because PFP incentives may have a detrimental effect on other organisational design components. Based on the results, the paper provides a set of suggestions to consider when implementing PFP incentives.
Highlights
Incentives are one of the core practices of strategic human resource management, so it is not surprising that the effects of incentives have been researched for more than 40 years in human resource management and in personnel psychology (Cerasoli, Nicklin and Ford, 2014)
PFP incentives are in alignment with strategies based on high exploration, either in combination with high exploitation or low exploitation
Exploration requires learning and it is difficult to incentivise learning, especially for those who learn slowly (March, 1991). These arguments were empirically tested with the conclusion that fostering PFP incentives leads to higher exploitation while weakening PFP incentives leads to higher exploration, by high-performing individuals (Lee and Meyer-Doyle, 2017)
Summary
Incentives are one of the core practices of strategic human resource management, so it is not surprising that the effects of incentives have been researched for more than 40 years in human resource management and in personnel psychology (Cerasoli, Nicklin and Ford, 2014). Most of the research has focused on the effect of pay-for-performance. (PFP) incentives on motivation and individual performance (Cameron and Pierce, 1994; Deci, Koestner and Ryan, 1999; Cameron, Banko and Pierce, 2001). Focusing solely on performance consequences may be myopic
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