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6 Pay and Performance: Individuals, Groups, and Executives
Abstract
In this chapter, we address three pay for performance (PFP) questions. First, what are the conceptual mechanisms by which PFP influences performance? Second, what programs do organizations use to implement PFP and what is the empirical evidence on their effectiveness? Third, what perils and pitfalls arise on the way from PFP theory to its execution in organizations? We address these questions in general terms, but also highlight unique issues that arise in PFP for teams and for executives. We highlight the fact that research and practice in the area of PFP requires one to deal with a number of trade‐offs. For example, strengthening PFP links can generate powerful motivation effects, but sometimes these are in unintended and unanticipated directions, resulting in undesirable effects. In addition, there are also trade‐offs in deciding the degree of emphasis to give to individual versus team performance and to results versus behaviors in PFP plans. What all this means is that, as in other areas of management, “one best way” advice (e.g., do or do not use individual PFP plans) or “sound‐bite” conclusions (e.g., PFP does not exist; PFP does or does not motivate) are rarely valid, but rather depend on the circumstances and the organization. In the realm of executive pay, we question the current conventional wisdom in the management literature that there is little or no PFP. We close the chapter with a discussion of our key conclusions and suggestions for what we think would be the most interesting and useful future research areas. We encourage the management literature, which has increasingly become interested in the concept of evidence‐based management, to execute this concept more effectively in its research and when talking or writing about pay.
... Specifically, individualized pay-setting refers to the processes where employees' monthly pay is determined and often raised annually, to some extent, by their performance. In developing and designing individualized paysetting processes, the definition and measurement of performance is key (Gerhart et al. 2009;Heneman & Werner 2005). Employee performance is usually assessed both in terms of what employees have performed and how employees have performed. ...
... Employee performance is usually assessed both in terms of what employees have performed and how employees have performed. Here, the what is more objective and result-oriented, including for instance the number of items produced, while the how is more subjective and behavior-oriented, including for instance collaborative and social skills (Gerhart et al. 2009). The basis for individualized pay-setting is that employees will be motivated to perform better when their performance is clearly linked to their pay (Gerhart et al. 2009;Lawler 2000). ...
... Here, the what is more objective and result-oriented, including for instance the number of items produced, while the how is more subjective and behavior-oriented, including for instance collaborative and social skills (Gerhart et al. 2009). The basis for individualized pay-setting is that employees will be motivated to perform better when their performance is clearly linked to their pay (Gerhart et al. 2009;Lawler 2000). This is referred to as line-of-sight (Lawler 1990(Lawler , 2000. ...
This study explored pay-setting managers’ experiences regarding the individualized pay-setting process. Seven semi-structured group-interviews with pay-setting managers (N = 28) from four private companies in Sweden were conducted. A thematic analysis identified three main themes: 1) Prerequisites for pay-setting, which included conditions for pay-setting work and experiences of these conditions; 2) Assessment and feedback, which included experiences of employee performance assessment and feedback provision; 3) Rewards, which covered experiences of different pay incentives and the relationship between performance and pay. The pay-setting process was considered to include many obstacles as well as a few opportunities. Without proper pre-requisites to assess employee performance, the possibilities to adequately reward performance were experienced as limited, which, in turn, hampered possibilities to justify both the assessment and pay raise. Taken together, this study underscores the conflict between intentions relating to how to carry out a pay-setting process and managers’ difficulties to actually accomplish this.
... Financial incentives (also called contingent pay, monetary incentives, pay incentives, or just incentives) link rewards to desired results or behavior (Gerhart, Rynes, & Fulmer, 2009) and they form one of the elementary strategic practices of human resource management (Buller & McEvoy, 2012;Stone & Deadrick, 2015;Wright & Boswell, 2002). Financial incentives affect many organizational outcomes, and their effects have been researched for more than 40 years in human resources (HR) management and personnel psychology (Cerasoli, Nicklin, & Ford, 2014). ...
... Studying factors beyond the scope of organizations is important for advancing financial incentives' theoretical development and empirical findings. Thus, this research contributes to numerous calls for studying new moderating variables to better understand financial incentives (Gerhart et al., 2009;Maltarich et al., 2017;McGraw, 2016;Shaw & Gupta, 2015). ...
... Traditional pay policies differentiate financial remuneration from nonfinancial benefits (Gerhart et al., 2009). Benefits are often considered something additional to financial remuneration. ...
... Developing effective reward systems is among the most complicated organizational challenges (Amadi et al., 2021). Although rewards are an important motivation tool (Gahan et al., 2021), they also represent a major operation cost for many companies (Gerhart et al., 2009). Therefore, to reap expected benefits against its cost, the comprehension of employees' preference for reward allocation rules is crucial for organizations to attract talent, retain employees and keep them motivated (Adamovic, 2023). ...
Purpose
This paper aims to explain and determine the effect of rewards on employees’ autonomy by investigating the mediating effect of enabling controls on their relationship.
Design/methodology/approach
A three-wave survey strategy has been used to collect data from the alumni of a French business school. Structural equation modelling has been used for measures validating and hypotheses testing.
Findings
The study reveals a positive relationship between rewards and autonomy, mediated by enabling controls.
Practical implications
The study guides the process of administrating rewards to employees in a way that maximizes their autonomy, highlighting the crucial role of supervisors through enabling controls.
Originality/value
The study strives to create consensus regarding the long-existing debate on the effect of rewards on employees’ autonomy with the help of organizational theory literature. By considering the role of enabling controls, it provides a unique, cohesive framework to illustrate the intertwined relationship between the constructs.
... Among this stream, a critical question is whether providing extrinsic rewards for creativity (ERC) could increase creativity. It may naturally be assumed that ERC can increase creativity, just as pay-for-performance (PFP) can increase performance (Gerhart et al., 2009;Gerhart & Fang, 2015). However, the relationship between ERC and creativity is a long-standing debate in social psychology and management research (for a review, see Malik & Butt, 2017). ...
... In general, employees are interested in HR practices because those are important for their career (Stumpf et al., 2010). Compared to other HR practices, PFP is more salient to employees (Garg et al., 2021) because compensation is crucial for their life (Gerhart et al., 2009). ...
Prior studies have suggested that downsizing events can lead to a contagion of voluntary turnover among employees. In the current study, drawing on the turnover event theory, we propose that the relationship between downsizing and turnover can be nonlinear. We also propose that the presence of collective pay‐for‐performance (PFP) practices is an important but overlooked contingency that moderates the effects of downsizing. By analyzing a dataset collected from 317 firms with 634 firm‐year observations, we found that the relationship between downsizing and voluntary turnover rates takes an attenuated positive form, and that this relationship is mitigated in firms that have more collective PFP practices. Our findings contribute to the literature on downsizing, turnover, and collective PFP practices while also providing a specific practical implication pertaining to the mitigation of the disruptive effects of downsizing.
... Contemporary organizations recognize that a more complex reward system, including a diverse compensation package, constitutes a strong motivational factor for employees, giving the organization a greater chance to achieve its business goals (Zolak Poljašević et al., 2017). Many organizations rely on various incentive pay and benefit package practices to align employee motivation and behaviour with the desired organizational outcomes (Nyberg et al., 2013;Gerhart et al., 2009;Dulebohn & Werling, 2007). ...
Although, in theory, a considerable amount of literature emphasizes the significance of employee incentive pay, there is not much empirical research indicating their dispersion in practice. The primary purpose of this study is to explore the level of implementation of various incentives in three countries: Slovenia, Serbia, Bosnia and Herzegovina. The research was conducted on a sample of 321 companies. Data for this study were extracted from the CRANET dataset. The latest data collection cycle was conducted in 2021-2022. In addition to descriptive statistics, the Pearson Chi-Square Test and Cramer’s V test were used to test hypotheses. The research results indicate a statistically significant difference in using most observed compensation elements among the observed countries. The study contributes to compensation management literature by presenting empirical data regarding the degree of implementation of various compensation instruments in three observed countries.
... An attractive bonus and rewards system is another significant pay factor. Performance-linked bonuses and rewards can serve as strong motivators for employees, increasing their engagement and willingness to exert effort (Gerhart, Rynes, and Fulmer, 2009). Adequate compensation for the position is equally important. ...
... Prilikom strukturiranja koncepta plaćanja po učinku, ključno je odrediti način definisanja i merenja učinka. Dve osnovne dimenzije se uzimaju u obzir: (a) izvor, odnosno, da li je učinak rezultat individualnog ili kolektivnog doprinosa; i (b) da li su mere učinka objektivne ili subjektivne(Gerhart et al., 2009). Pored finansijskih implikacija, informacije vezano za merenje i kontrolu učinka se mogu koristiti i u procesu odlučivanja, planiranja i kontrole, zatim formiranja trening programa i organizacionog učenja, a po potrebi, i za eksternu komunikaciju(Simons, 2000). ...
This case study analyzes the existing characteristics of the performance measurement system and incentive payment in an international manufacturing company in Serbia, from furniture industry. The main aim of the paper is to understand the cause-andeffect relationship that the performance-based payment system has on employees and the organization, that is, to assess the real motivational power of rewarding employees with financial incentives. The aim of the paper is to analyze the advantages and disadvantages of incentive pay systems from the point of view of process motivational theories that deal with the cause-and-effect relationship of motivation for work, performance and job satisfaction in people. A case study method was used. The existing practice was evaluated with a purpose-built instrument, based on assumptions derived from process theories of motivation. The results indicate that regardless of the high salaries of employees (up to 30% higher than other employee salaries in the market), there is still high employee turnover and absenteeism, reduced motivation, dissatisfaction and unethical behavior. The causes are inadequate and unrealistic goals, non-transparent performance measurement, frequent changes in teams, lack of work resources and technical training, as well as numerous operational problems in the company. After the identification and analysis of the current method of performance management, practical recommendations were given on how to overcome the observed shortcomings and increase the satisfaction and motivation of employees.
... Individual and team bonuses comprise a significant part of total earnings, typically 6%-10% of the total earnings of non-executive employees (Gocardless, 2021) with bonus payments linked to individual performance being the most prevalent form (Shields, 2020). These bonus payments are intended to recognize the differential contributions of employees (Gerhart et al., 2009 ...
Having limited information regarding how pay is distributed in their organization, employees often find it difficult to assess the fairness of their pay. Uncertainty management theory (UMT) posits that fairness uncertainty is aversive and that individuals experiencing it search for information to reduce this uncertainty. Pay information exchange – the communication of one's pay‐related information to others in return for information from that other – provides a mechanism to reduce pay information uncertainty. We focus on third‐party mediated pay information exchange (such as via Glassdoor and PayScale), an increasingly prevalent form of exchange. Drawing on UMT, we investigate why and when individuals exchange their pay information with such agents. Using data from a field experiment we find that (a) the willingness of employees to disclose their pay to a pay information exchange platform is influenced by perceived utility of a‐priori information offered by the exchange partner, but that this relationship depends on the salience of fairness uncertainty to the employee, and (b) employer pay communication restrictiveness only attenuates the impact of disclosure willingness on actual disclosure when individuals engage in deliberative thinking about such restrictiveness and its possible consequences. We discuss the implications for theory and practice.
The length and breadth of the interaction between administrative institutions and ecological forces operating within their ambiances is a topic that has generated a considerable amount of empirical inquiries and theoretical speculation within the field of public administration, where a number of models and frameworks were advanced by scholars in an attempt to establish a sound theoretical footing for that aspect of public administration. One of such models is Gabriel Almond and Sidney Verbais’s Structural Congruent Model, which asserts that the development of an administrative system is dictated by its own history, economic structure, belief pattern, and political system. The structural congruent model explains changes in bureaucratic evolution in terms of changes in political culture. The model therefore, explores the unique features of bureaucracy in developing nations and its suitability in understanding variations in administrative behavior across nation-states in the sense that each society has its own social and cultural qualities that individually and collectively influence and shape its administrative systems. This paper attempts to analyze the conceptual relevance of the structural congruent model in explaining the predicaments of public administration reforms in Nigeria. The paper argued that the bane of public administration reforms in Nigeria is premised on the fact that the forces emanating from environments such as norms, values, sectarianism, ethnicity, and schism play a greater role in bureaucratic institutions than the ideas generated from manpower training and development efforts of successive governments in the country. Therefore, administrative behaviour in Nigeria is a product of the public official’s environment, not the school or training he/she received.
The United States has developed a varied and widespread employee ownership sector. This sector has two distinct sub-sectors, the public stock market and small privately-held firms. There is a significant gap in the incidence and development of employee ownership between the European Union (EU) and the US when both sectors are examined. Socioeconmic system differences between the EU and the US suggests that EU employee ownership will be more likely to develop if the EU expands citizen participation in its public stock markets and creates legislative support for selling smaller family businesses to employees. Second, US employee ownership is deficient in direct employee participation in corporate governance. If employees are to have reasonable rights to protect their investment risk, the US will have to converge with the EU in terms of its appreciation of the co-determination rights of workers. The development of employee ownership in the US can be better understood by appreciating the subtleties of how the argument that ownership causes superior performance of employee owned firms is presented. Most employee ownership firms will use the pull model of employee ownership where the firm never makes the extreme commitments of cultural transformation that are necessary to drive better corporate performance. We expect that the push model of employee ownership will continue to be the basis of a more “utopian” image of employee ownership. The pull model of employee ownership is based on the notion that the structure of compensation has changed in modern society and corporations are increasingly looking for ways to provide modest fix wage commitments and pay AFTER performance has taken place. The collapse of the fixed wage system plays a key role in the emergence of employee ownership in the US. Research on the wealth effects of employee ownership supports the perception that employee ownership firms are more generous. It is only this evidence that creates the basis of broad public support of the idea. This last observation helps explain why employee ownership has become so popular in the United States despite the fact that it violates a common precept of investment, namely, that a diversified basket of investments are the most rational market investment. Too much US employee ownership was “bogus employee ownership” based on workers purchasing stock with their savings. To the extent the EU wants to learn about employee ownership from the US, it should not imitate these mistakes.
