Promise and Peril in Implementing Pay-for-performance

Immense pressure for higher performance has led corporations to search continually for managerial practices that will enhance competitiveness. An increasingly large number of corporations have explored how rewards, particularly money, could be linked to desired behavior and/or performance outcomes to improve effectiveness (Gerhart & Rynes, 2003; Pfeffer, 1998; Rigby, 2001). This has led to widespread and growing development of payfor-performance plans (Schuster & Zingheim, 1992). For example, a survey of 1,681 companies indicated that 61% had implemented variable compensation systems (Hein, 1996). The powerful role that financial incentives can play in influencing behavior has been widely acknowledged since ancient times (Peach & Wren, 1992). Early motivation theories such as expectancy theory (Vroom, 1964) have demonstrated intuitive appeal, and its basic components have received empirical support (Van Eerde & Thierry, 1996). In addition, decades of empirical research in a variety of areas indicate that financial incentives are a potent motivator. An examination of studies of pay-for-performance programs suggests that performance improves in approximately two out of three programs (Heneman, Ledford, & Gresham, 2000). Gibson (1995) reported on a study by Carla O’Dell and Jerry McAdams (sponsored by World at Work and conducted by the Consortium for Alternative Reward Strategies), which suggested that the average net return PROMISE AND PERIL IN IMPLEMENTING PAY-FOR-PERFORMANCE