Performance-related Pay Schemes Research Articles

Back to the future revisited: A systematic literature review of performance-related pay in the public sector

Performance-related pay (PRP) has been part of public-sector pay structures in the past four decades. Despite public administration scholars denouncing its use in the public sector, PRP is being increasingly implemented in public organizations worldwide. Notwithstanding controversy over its use in the public sector, the last decade has seen a huge surge in its adoption. In order to assess the theoretical, empirical, and scientific reasoning for this interest we analyze the existing literature in order to identify the emerging discussions in this area and to provide a systematic review that can be used as guidance for future research. The review highlights the gaps in our current knowledge of PRP in the public sector and identifies factors affecting its success that have emerged from new research over the last fourteen years. After identifying these, we propose a number of important pathways that future research might take in order for public organizations globally to design optimal PRP schemes.

Why do firms adopt collective incentives? An analysis of family and non-family firms

PurposeBy combining structural contingency theory and socio-emotional wealth (SEW) theory, this study aims to identify the organizational determinants of collective performance-related pay (PRP) adoption by examining the interplay between a firm's ownership characteristics (i.e. family or non-family ownership) and other organizational characteristics.Design/methodology/approachThis study adopts a quantitative approach, conducting empirical analyses of a longitudinal dataset of 4,222 Italian companies in the manufacturing sector for 2009–2017. The probability of adopting collective PRP schemes is estimated using the average marginal effects of the probit and linear probability models (LPMs).FindingsThe results show that family firms are less likely to adopt collective PRP schemes than non-family firms. Moreover, ceteris paribus, firm characteristics such as size, age and past (firm and labor) productivity are important determinants of firms' adoption of collective incentive pay; however, the significance and magnitude of their effects vary depending on a firm's ownership structure.Originality/valueThis analysis has two major elements of novelty. First, it increases the knowledge of how organizational contingencies differ in family versus non-family contexts regarding pay decisions. Second, it brings new theoretical perspectives to the pay debate by combining structural contingency theory and SEW theory, thus developing new and fertile theoretical grounds for advancing our understanding of the pay determinants. To the best of authors' knowledge, this is one of the first (if any) studies to shed light on collective PRP in family and non-family firms.

Pay incentives, human capital and firm innovation in smaller firms

This study advances the literature on human resource management in small and medium sized enterprises (SMEs) by analysing how individual and collective forms of performance-related pay (PRP) influence SMEs’ propensity for product and process innovation and how such influence varies depending on the firm’s level of human capital. We used the microdata of more than 12,000 European SMEs, controlled for endogeneity, and found that both individual (i.e. piece rate and commissions) and collective (i.e. group-bonus and profit-sharing) PRP are positively associated with higher levels of firm innovation. Interestingly, when both individual and collective PRP schemes are adopted, their association with firm innovation is significant but negative, indicating that the adoption of multiple pay incentives may be detrimental to SMEs’ innovation. Moreover, our results revealed that the effect of individual PRP on innovation is stronger in SMEs with high levels of human capital, whereas the effect of collective PRP is stronger in SMEs with low levels of human capital.

Crowding‐out or crowding‐in? Direct voice, performance‐related pay, and organizational innovation in European firms

AbstractBuilding on motivation crowding theory (MCT), this article contributes to the human resources management (HRM)‐innovation debate by examining the potential trade‐offs between HRM practices targeted to increase employees' intrinsic motivation, such as direct employee voice (EV), and the presence of extrinsic incentives in the form of individual and collective performance‐related pay (PRP). The results of the analysis on more than 22,000 European establishments show support for the positive relationship between EV and a firm's organizational innovation, and that this relationship is weaker in companies that adopted individual PRP schemes (piece‐rate plans). Moreover, while we found that collective PRP (profit‐sharing) does not moderate the relationship between EV and organizational innovation, a positive and significant moderation effect emerged when the combined presence of individual and collective PRP was considered. By advocating that the coexistence of multiple forms of PRP could overcome the crowding‐out effect of individual PRP on EV, the study contributes to the HRM debate by also calling for a better understanding of the potential contingencies between different HRM practices when innovation is focus of the analysis.

Performance-related-pay in the UK public sector

Purpose – The purpose of this paper is to provide an up-to-date, comprehensive, independent and credible assessment of relevant academic and other literature since 2007, on the effectiveness and value for money of performance-related-pay (PRP) in the public sector. Design/methodology/approach – PRP was studied using both economics-based literature and literature from the organisational and management field (including human resources, management sociology and psychology). An initial search of databases identified 7,401 documents regarding PRP in the public sector, which was reduced to 57 final papers included in the study (27 in the health sector, 16 in the education sector and 16 in the civil service) after abstract and full paper screening. Findings – The review found some evidence that PRP schemes can be effective across the three domains of the public sector for which there was evidence available (health, education and the civil service), but findings within and between the sectors are mixed, with scheme effectiveness often dependent on scheme design and organisational context. Research limitations/implications – The research highlights the importance of considering both economics-based and organisational literature when discussing PRP in the public sector, and the implications for motivation and PRP design. Practical implications – The results indicated that the design of PRP schemes could influence their effectiveness and outcomes, and the research suggests how the challenges of designing and implementing PRP schemes can be overcome in the public sector. Social implications – The review highlights that when implementing PRP schemes there may be gender differences in their overall effectiveness (especially in education) and there must be consideration for how fairly the PRP scheme is perceived. Originality/value – The paper uses literature from economics and behavioural sciences when looking at the motivational implications for PRP in the public sector.

Decentralised bargaining and performance-related pay

Purpose – The purpose of this paper is to examine the extent to which performance-related pay (PRP) has been negotiated through decentralised bargaining in Italy. Design/methodology/approach – The paper provides estimates aimed at identifying the main factors that have favoured agreements on PRP, on the basis of a nationally representative sample of Italian manufacturing and service companies. Findings – The paper shows that collective bargaining on PRP in Italy is positively associated with the presence of unions. The estimates also suggest that in unionised firms, workers have more access to returns from training in the form of PRP schemes. Finally, the paper finds that firm performance is positively associated with the adoption of PRP. Research limitations/implications – Further research based on additional data should enable the authors to identify causal effects. Practical implications – Partial fiscal exemptions for the wage component linked to enterprise results might increase the number of firms adopting PRP. In addition, the presence of unions may discourage the diffusion of “cosmetic” schemes that are adopted merely to secure benefits for the firm. Unions may also increase the returns of training and diffusion of PRP. Originality/value – This paper utilises a unique database containing recent information from a nationwide sample of Italian firms. It includes a whole set of information, including unionisation at the firm level, which allows the authors to address a critical issue, i.e., the strategic role of unions in adopting (or impeding) the adoption of PRP.

Can Hybrid Organizations—Based on the Combination of Long-term Employment and Performance-related Pay—Operate Effectively in Japan?

Japanese firms have undertaken two types of corporate reform, corporate governance (CG) reform and human resource management (HRM) reform, during the ‘two lost decades’ of the Japanese economy. These reforms tended to diversify Japanese firms, which have been stereotyped as being characterized by the coexistence of seniority-based pay and long-term employment practices, by introducing a new hybrid type of organization, based on the combination of long-term employment (LTE) and performance-related pay (PRP). However, it is not yet clear whether such an organization works effectively in the Japanese societal context. In particular, the adoption of a strong PRP scheme, promoted by market-oriented CG, may contradict the maintenance of LTE practices. Then, the firms that intend to strengthen the effects of PRP may be led to abandon the LTE policy, and become what is apparently a non-Japanese type organization. Alternatively, the hybrid organization can survive, if the effects of PRP are weakened, in other words, if the PRP scheme is designed for being compatible with LTE practices. From these contradictory perspectives, in this article we aim at examining how PRP operates within a hybrid organization by using two sets of data obtained by surveys done in 2005 and 2009 by a Japan Institute of Labour Policy and Training (JILPT) team. These questionnaire-based surveys included 2802 and 8353 respondents, respectively. These data sets provided useful and original data permitting us to analyze employees’ work motivation problems which could be specified as three types: achievement of individual performance, contribution to the overall company performance, and meeting the challenge of a new task. Evidence showed that these three types of motivation are affected differently by the PRP scheme and this led us to interpret the survey results from the viewpoint of a multi-task problem. Furthermore, we investigated to what extent further organizational diversity is viable among Japanese firms in connection with the issue of employees’ work motivation.

Union Coverage, Membership and Performance-Related Pay: Are Piece Rates Different?

This paper revisits a literature on the links between unionisation and performance-related pay (PRP), which offers a disparate set of results. Part of the reason for this is the usual inability to distinguish between different types of PRP and the lack of rich panel data containing such measures. Analysis of panel data containing six separate PRP schemes reveals that union members are less likely to receive PRP in general and less likely to receive bonus payments, stock options, or profit sharing than non-members. Furthermore, profit sharing is negatively related to both union membership and coverage. However, union members or those covered by a union contract are more likely to be paid piece rates, providing further evidence that piece-rate pay differs from other forms of PRP.

Performance pay and employee turnover

PurposeThe purpose of this paper is to explore how various performance related pay (PRP) schemes influence employee turnover. It also tests whether profit sharing has a differential impact on turnover in comparison to other forms of PRP.Design/methodology/approachUtilizing a nationally representative longitudinal dataset of individuals, analysis begins with a parsimonious specification of the determinants of turnover and then progressively adds various sets of controls known to influence turnover decisions to observe how their inclusion influences PRP coefficients. Estimations employ both standard probits and panel data models.FindingsEmpirical evidence reveals a negative relationship between an aggregate measure of PRP and turnover. Disaggregating performance pay measures by type reveals a robust negative relationship between profit sharing and turnover. Although one would expect the influence of other PRP schemes to mimic that of profit sharing, evidence suggests otherwise.Research limitations/implicationsData lack information on how much earnings are based on PRP. Consequently, estimates may be biased when combining those who receive little earnings from PRP with those who receive substantial amounts of PRP into a single PRP measure.Practical implicationsAlthough PRP schemes are often introduced to improve incentives and productivity, profit sharing based on firm profitability may allow labor costs to vary with firm profits hence enhancing retention and reducing the incidence of unemployment during recession.Originality/valueThis paper adds to the literature and fulfils an identified need to study how other types of PRP besides profit sharing influence turnover.

Performance-Related Pay and Employees Responses in the Chinese Education System

Human resource management in the Chinese public sector has been largely under-researched. This study explores performance-related pay (PRP) practices and employees' responses to these practices in the Chinese education system. It concludes that the PRP scheme has been widely implemented in China and has been well received by Chinese high school teachers in terms of improving employee performance. Chinese high school teachers highly regard PRP for three reasons: first, PRP, as 'prize money', is believed to increase employee income; second, itemized performance criteria help reduce subjectivity; and third, small differences in PRP between employees mitigate unhealthy competition. This study adds to the knowledge base of PRP in the public sector.

Performance‐related pay in German public services

PurposeThis article seeks to examine the experiences of the recent introduction of performance‐related pay (PRP) in German public services. From an industrial relations perspective, it addresses the question of how different designs of PRP schemes and the circumstances under which PRP is implemented influence its functionality and its acceptance by employees.Design/methodology/approachThe paper uses an analysis of 215 works and establishment agreements, 17 case studies in municipalities of the federal state of North Rhine‐Westphalia (including employee attitude surveys in three cases), and interviews with experts from the employers' federation and the trade union.FindingsIt is shown that – in accordance with the literature – enhancing employee motivation is not the only objective pursued by the collective actors in the introduction of PRP. Different PRP schemes have differing effects: highly selective PRP schemes tend to fail; schemes resembling conventional appraisal systems have little positive effect on motivation and performance, whereas participative systems focusing on the inclusion of employees can offer an opportunity to renegotiate performance objectives in the public services.Practical implicationsFactors such as balancing material interest and social recognition, and strengthening participative elements could be crucial for improving the acceptance and functionality of PRP schemes.Originality/valueThis paper provides first findings on the recent introduction of PRP in the German public sector and contributes to the discussion on the functionality of PRP in public services.

The impact of varying types of performance-related pay and employee participation on earnings

Using matched employer-employee data from a nationally representative sample of British establishments, the paper examines the impact of different types of performance-related pay (PRP) on earnings and whether this is moderated by the presence of employee involvement and financial participation schemes. It supports previous work that has suggested that there are strong and complex interactions between employee involvement schemes and compensation mechanisms. In particular, the results indicate that employees' earnings are highest where both individual and work-group PRP schemes are present at a workplace, and where there are congruent PRP and employee participation schemes.

Linking Performance-Related Pay to a Business School's Mission and Objectives

This paper first analyses the Performance Related Pay (PRP) schemes developed from 1992/3 to 2002/3 in a large Business School in England and then the School’s mission and strategic objectives in that period. The PRP schemes changed to include more specific performance indicators and these were increasingly linked to the objectives. The School’s resources allocated to PRP increased from £44,000 in 1992/93 to £355,000 in 2002/3 and from 1.08% in 1995/96 to 2.37% of the School’s income in 2002/3. As well as examining the changing strategic objectives and PRP schemes, the paper charts the development of the School’s reputation and resources and the role which staff motivation via PRP played at different stages. The paper concludes that the PRP scheme was at its most effective when it was clearly linked with the School’s strategic objectives, but that the relationship between objectives and motivation may be more complex than apparent from this study. Although the PRP scheme under consideration also applies to academic related staff, this paper concentrates on the effect on academic staff.

Performance pay remuneration for consultants in the NHS: is the current system fair and fit for purpose?

How to reward doctors for performance over and above their basic responsibilities has always been contentious. George Bernard Shaw1 recognized that the profit motive and doctors' entrepreneurialism create the wrong incentives for good medical practice and it is taken for granted that the professional ethic requires doctors to place the needs of the patient above all else. Any suggestion that extra financial rewards be given for the clinical care they deliver raises possible conflicts of interest because it becomes more difficult to determine if doctors are sacrificing patients' needs to financial expediency. Yet most doctors who practise in the developed world are part of organizational systems in which pay is linked to ‘merit’ and to some form of performance appraisal. Of course, in the medical field, pay is rarely linked directly to clinical performance but it is frequently contingent on clinically related fields—for example, rational prescribing, meeting waiting list targets and taking management decisions which may impact directly on patient care. In UK general practice it is not unusual for doctors who meet their prescribing budgets to be financially rewarded by keeping the savings. During the early 1990s, when GP fund-holding was being promoted, many benefited directly from savings made to clinical budgets. In the hospital sector the existence of discretionary awards and distinction awards can be considered as a form of performance-related pay (PRP) and it is in this context that this paper discusses the issue of pay for performance. This paper examines the development of the NHS merit pay scheme, reviews the operation of the merit pay schemes with particular reference to the issues of discrimination, and discusses the PRP scheme and whether such schemes are appropriate for rewarding individuals in health-care systems where teamwork is becoming increasingly important.

What Makes Performance-Related Pay Schemes Work? Finnish Evidence

We analyze how features of performance-related pay (PRP) schemes affect their perceived motivational effects using a Finnish survey for upper white-collar employees from 1999. The results show that the following features are important for a successful PRP scheme: (i) the employees have to feel they are able to affect the outcomes; (ii) the organizational level of the performance measurement should be close to the employee: individual and team level performance measurement increase the probability that the scheme is perceived to be motivating; (iii) employees should be familiar with the performance measures; (iv) the level of payments should be high enough and rewards frequent enough. Levels below the median do not generate positive effects; (v) employees should participate in the design of the PRP scheme.

Performance‐related pay and firm performance in Finland

PurposeTo analyse productivity effects of performance‐related pay (PRP).Design/methodology/approachFixed effect analysis of the productivity effects of the introduction of PRP scheme using linked employer‐employee data from Finland in 1996‐2002 and controlling for the skill structure of the employees.FindingsPRP improves both productivity and profitability by the same magnitude of around 6 per cent, but only if the compensations are substantial enough and exceeding on average 3.6 per cent of salaries for those who receive it. Incentive effects relate to the introduction of PRP, usually accompanied by new human resource management. PRP in Finland cannot, however, be directly linked to an increase in participation of employees in decision‐making. PRP schemes have substantially improved firm performance without creating much wage pressures.Practical implicationsUseful information for the implementation and design of incentive‐based wage schemes.Originality/valueVery few papers using large data sets have information on exact PRP payments that are separate from bonus pay or piece wages.

Performance-related pay for health service professionals: the Italian experience.

Italy has significant experience of performance-related pay (PRP) for health service professionals: a system which links part of doctors' remuneration to their productivity dates back to 1938. This paper reports on a two-year field research, carried out on the Italian National Health Service, which investigates the objectives, design and implementation of PRP, as well as its operation and effectiveness. First, the evolution of PRP schemes over the latest 25 years is reconstructed, and the range of covert and overt objectives underlying the use of PRP are unravelled. Then, after having highlighted the main structural and cultural factors which negatively affect PRP effectiveness, a critical evaluation of PRP is attempted, drawing on the analysis of both hard performance data and the subjective perceptions of stakeholders. The conclusion is that PRP led to problems and unforeseen consequences in most of the hospitals examined, due to both structural factors, mainly some flaws in PRP design, and cultural constraints, mainly the values of health professionals. However, the case of a Northern Italian hospital proves that, despite the constraining environmental setting, there is still scope for managerial intervention in the implementation process which is sufficient to guarantee PRP effectiveness. This indicates that the implementation process far outweighs the significance of structural and cultural constraints, and that PRP is a powerful tool at management disposal to increase employees' performance and commitment.

PRP for Manual Workers

Evidence indicates that the distribution of performance‐related pay (PRP) schemes among manual workers is limited and has increased at a much slower rate than with non‐manual workers. Case study evidence from firms with manual PRP schemes is used to investigate this. A successful PRP scheme for manual workers is likely to demand a very careful introduction. Successful operation of a manual PRP scheme is only likely if the organizational culture changes at the same time, or if it is part of a wider process of performance management.