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Do Pay-For-Performance Systems Motivate Employees?

Pay-for-performance systems are becoming more popular in today’s workforce. Pay-for-performance systems connect compensation to job performance. In other words, employees who perform better earn more. This type of system has been used mostly in the healthcare industry, but it is gaining traction in other industries.

Previous research on pay-for-performance systems assumes that they empower employees at all levels of performance. However, a recent article in the Academy of Management Journal has demonstrated that this may not necessarily be the case given the way pay-for-performance systems manage underperforming employees across a series of periods. When individuals underperform in the first period, the company can either (1) apply a penalty such that employees carry that debt into the second period or (2) not apply a penalty thereby allowing employees to start fresh in the second period. The first option could cause underperforming employees to lose motivation given that they are so behind that no amount of effort will enable them to catch up. This option can perpetuate their underperformance. On the other hand, the second option cold also cause a loss of motivation because if individuals cannot meet their targets during the first period, they will stop trying and wait until the second period to start over. This option can also perpetuate underperformance.

To alleviate these issues, some organizations have created pay-for-performance exceptions. When organization utilize exceptions, underperforming employees are placed in debt to the system. However, if the debt increases to a level where it adversely affects motivation, the debt is removed. This type of exception may impact motivation in two key ways. On one hand, employees may see this as an act of kindness by the organization. Therefore, they may feel a sense of obligation and this may motivate them to do better in their job. However, on the other hand, the exception may break down the perceived relationship between performance and compensation, therefore weakening the integrity of the system.

The researchers were interested in how pay-for-performance exceptions affect underperformers. They collected data from a healthcare organization on the performance of medical practitioners. The results of the study showed that the pay-for-performance system incentivized the practitioners to perform at a higher level. However, when practitioners went into debt, they were less motivated, and their performance decreased. When a pay-for-performance exception was used, their motivation was restored but this effect decreased over time and was absent after two months. Individuals with higher levels of debt were more positively impacted by the exception than those with lower levels of debt.

 

Maltarich, M. A., Nyberg, A. J., Reilly, G., Abdulsalam, D., & Martin, M. (2017). Pay-for-performance, sometimes: An interdisciplinary approach to integrating economic rationality with psychological emotion to predict individual performance. Academy of Management Journal60(6): 2155-2174.

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