Performance-based pay in the workplace: Magic potion or malevolent poison?

Abstract

Performance-based pay systems have been widely used in organizations. Despite their popularity, they have been criticized on a number of grounds, such as their lack of effectiveness. There is also surprisingly little research on what effects such systems may have on employee perceptions. The present paper is divided into two sections. First, we review several of the major criticisms of performance-based pay systems and provide responses in their defense. Second, based on research literature, we offer a discussion of numerous perceptions and attitudes that may mediate the relationship between performance-based pay and employee performance. ********** Money may kindle, but it cannot by itself, and for very long, burn. -Igor Stravinski Money, the root of all evil ... but the cure for all sadness. --Mike Gill Money is the barometer of a society's virtue. --Ayn Rand There are many opinions regarding money. Today, many organizations assume that money is positively viewed and can be an important employee motivational tool. In earlier times, work motivation was not a significant problem. If you wanted to eat, you had to work. If your harvesting and hunting efforts were unsuccessful, you went hungry. In Western industrial societies, this has changed. A social safety net exists, making the need to work less urgent than in the past. Work motivation also presents a greater challenge because many of us work as hired labor rather than as independent craftpersons or farmers. If organizations are to use money effectively as a motivator, an understanding of how financial incentives affect employees is essential. As indicated by our title, some have insisted that performance-based pay not only has little positive effect, but also may have a negative impact on the organization. Our aim in this article is to identify and explain the variety of effects performance-based pay may have on employees. We begin by providing an overview of performance-based pay. We then discuss some of the criticisms of performance-based pay and offer some potential responses to these criticisms. Finally, we describe some possible mediating factors that affect the relationship between performance-based pay systems and job performance. Overview of Performance-Based Pay Prior to the late 1800s, a large percentage of workers were basically self-employed. However, the industrial revolution changed much of this in the U.S. during the late 1800's and continued to during the twentieth century. Large manufacturing facilities developed, employing hundreds and, eventually, thousands of workers. Motivating effective work behavior from these legions of employees was essential to the success of such enterprises. Still, however, these were simpler times. Until unions became more firmly entrenched in the 1930's, motivation could be achieved by the threat of losing one's job. The threat of unemployment was salient to workers, particularly during the recurrent depressions that bedeviled the U.S. economy. Fear is a motivator, and the threat of losing one job when other jobs were scarce and no unemployment benefits were available was a fearful specter. The threat of losing one's job was not the only fear-based motivator. Prior to the influx of unions and more enlightened norms of supervision, motivation was sometimes achieved by fear of one's supervisor. In some organizations, discipline and productivity were achieved through physical coercion. Henry Ford is said to have selected some of his production foremen on the basis of their ability to intimidate workers; the bigger and scarier the foremen, the better. According to legend, Ford selected his security chief during a plant tour when he observed this individual beating up a worker. As time went on, unionization and other changes to the industrial setting made more sophisticated approaches to motivation necessary. The challenge was how to induce employees to perform their jobs effectively when there were too many workers for close monitoring. …