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Do Pay for Performance Schemes Motivate Employees?

Submitted by  on December 30th, 2010

In my previous post on Sibson Consulting’s survey on performance management practices, I pointed out that at least four in five organizations link employee ratings to financial rewards. Yet despite the popularity of pay for performance schemes, only 47% of senior human resources personnel judge their performance management system as assisting their organization achieve its strategic objectives. Just as alarmingly, survey respondents reported that less than one three employees place trust in the performance appraisal process and results. In this post, I want to explore the key reasons for this failure of confidence.

There are many reasons why pay for performance schemes fail to meet the expectations of scheme designers and implementers. A number of studies have demonstrated the tenuous link between paying monetary rewards for exceptional performance and performance improvement. I reference some of those studies below. A key shortcoming of such motivation systems is that they seek to pit one individual against another when modern organizations require collaborative effort within and across disciplines and departments. In the grab for scarce resources, individuals can withhold information, claim others’ ideas as their own, shift blame when under the spotlight and display other dysfunctional behaviors.

Another challenge is that pay for performance systems assume that poor performance is mostly due to the lack of individual effort. Paying bonuses and salary rises is often an illusory quick fix alternative to the much harder task of identifying and fixing the organization’s systemic problems.

Paying for performance can also attract the wrong kind of individual to an organization. This kind of applicant is one that puts individual financial goals ahead of other organizational related goals, such as designing leading edge technology and delighting customers. Their attraction to a fat pay packet outweighs any intrinsic interest in the type of work being offered.

Tying performance ratings to monetary rewards can also skew the performance appraisal conversation away from performance improvement towards a highly emotive battle over a numerical rating. Many managers and supervisors experience this unnerving clash year in, year out, and some employ whatever means they can to avoid this conflict.

Perhaps most fundamentally, pay for performance schemes have as their basic assumption that the vast majority of employees are principally motivated by money. Numerous studies over decades tell otherwise. Most employees are motivated by a sense of higher purpose, camaraderie, challenging work and having some control over how the work is done. This is true even of managers! Yet most managers mistakenly believe that ordinary workers are motivated by something different.

Don’t get me wrong. Financial incentives can work well in some settings. However, the system will need to be designed and implemented very carefully with due consideration to these factors. The incentive will need to be sufficiently large to motivate the target audience. If it is too small, it can appear condescending and act as a demotivator. Secondly, the performance measurement system will need to be as objective as possible. Employees have a keen sense of fairness, and if they perceive that rewards are being distributed capriciously, this will also act to demotivate workers. Lastly, each organization has a number of competing values and objectives, such as speed of processing versus quality. Poorly designed performance objectives and measurement criteria can quickly lead to dysfunctional and counterproductive behaviors.

One of the most significant distracters to an effective performance management system is tying individual performance to financial rewards. Monetary rewards can work well in a limited set of circumstances. However, applying it across the board can have deleterious consequences, as the Sibson Consulting survey and numerous studies demonstrate.

What has been your experience? Are monetary rewards working well in your business? What have you learned about completing a successful implementation? What would you avoid next time?

Read my full commentary on the Sibson Consulting survey


  • Bloom, Matt. “The Performance Effects of Pay Dispersion on Individuals and Organizations”, Academy of Management Journal, Vol. 42 (1), 1999, pp. 25-40
  • Pfeffer, Jeffrey and Langton, Nancy. “The Effect of Wage Dispersion on Satisfaction, Productivity, and Working Collaboratively: Evidence from College and University Faculty”, Administrative Science Quarterly, Vol. 38, Sept, 1993, pp. 382-407
  • Siegel, Phyllis A. and Hambrick, Donald C. “Pay Disparities within Top Management Groups: Evidence of Harmful Effects on Performance of High-Technology Firms”, Organization Science, Vol. 16, No. 3, May-June 2005, pp. 259-274

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Posted in Performance, Processes, Research | Comments (3)

3 Responses to “Do Pay for Performance Schemes Motivate Employees?”

  1. Nagesh Says:

    I will like to learn about performance incentives & management

  2. Dr. Dennis Wilson Says:

    I once work for a tax preparation firm. Our remuneration was based on a small hourly base salary, plus commission based on number of forms completed, minus a factor for errors.

    It was the slickest remuneration package I have ever worked with. I worked fast, in order to complete as many forms as I could in the shortest time possible. I worked very carefully to minimize my error count as muck as possible. I received a pretty good paycheck, with which I was pleased. This pay for performance scheme resulted in high productivity with very good quality.

    I have been under other pay for performance schemes that involved the subjective appraisal of a manager, and I thought they were a joke. I did not feel motivated, and I did not feel they measured performance or contribution to the organization. Much like the show Survivor, I felt they became more of a pay for popularity or affinity scheme (as in how much do I like you as compared to the another person).

  3. Leslie Allan Says:

    Thanks Dennis for sharing your experiences. You certainly highlight where pay for performance can work well. This is where:

    -the work does not involve ambiguity and lots of professional judgment
    -the work requirements are clearly articulated
    -importance is placed equally on speed and accuracy
    -goal achievement is objectively measurable

    You also show clearly where pay for performance does not work well. Can anybody else share their experiences?

    Leslie Allan

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