Pay for Performance

Abstract Chapter 2 focuses on theories and research centered on merit pay. Psychological and economic theories provide the rationale for merit pay. According to these theories, the linking of pay to performance should lead to improved performance because motivation is increased.

In turn, this increase in performance helps organizations maximize profits. Both psychological and economic theories have implications for the design and administration of merit pay plans. These implications center around the measurement of performance, the establishment of pay increases, and the linking of pay to performance.

It takes time, money, and effort to build these features into a merit pay plan. Many studies have examined the actual and perceived relationship between pay and previous performance. The results suggest that it is possible to put the theory of merit pay into action.

This is seen in a variety of organizational settings where there is a robust relationship between actual performance and pay, when a merit pay plan is in place. Studies that have looked at the perceived relationship between performance and pay also show moderate results in terms of the magnitude of the relationship. Along with the potential advantages of merit pay, such as improved performance, there are some potential drawbacks.

These could include decreases in intrinsic motivation, cooperation, self-esteem, satisfaction, and perceived equity. The research that considers these issues does not provide strong support for any one of these arguments. Nevertheless, they should be weighed against the potential benefits of merit pay when evaluating its overall value.