Skip to main content

Currently Skimming:

5 Pay for Performance: Perspectives and Research
Pages 77-101

The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.


From page 77...
... First, we found virtually no research on merit pay that directly examined its effects. Second, the research on pay-for-performance plans makes it clear that their effects on individual and organization performance can not be easily disentangled from other aspects of pay systems, other pay system objectives, and the broader context of an organization's strategies, structures, management and personnel systems, and environment (Galbraith, 1977; BaLkin and Gomez-Mejia, 1987a; Ehrenberg and MiLkovich, 1987; Milkovich and Newman, 19901.
From page 78...
... (Merit pay increases do, however, compound from one year to the next—over time, outstanding performers will reach a significantly higher pay level than average performers.) Merit plans are used across the spectrum of employee groups, from hourly and clerical to high-level managers.
From page 79...
... Payouts under individual incentive plans are typically larger than those found under merit plans (HayGroup, Inc., 1989) and are often made more frequently (piece rate plans, for example, can pay out every week)
From page 80...
... PAY FOR PERFORMANCE: RESEARCH FINDINGS Organization pay objectives include motivating employees to perform, as well as attracting and retaining them; the fair and equitable treatment of employees; and regulating labor costs. We are interested in research on how pay-for-performance plans influence an organization's ability to meet these objectives and in the conclusions we can draw particularly regarding merit pay plans.
From page 81...
... Individual incentive plans tie pay increases to individual level, quantitative performance measures. It is generally believed that employees view individual-level measures as more doable, because they are more likely to be under the individual's direct control.
From page 82...
... But it is also important to understand the restricted organizational conditions under which these results are observed without accompanying unintended, negative consequences. Case studies suggest that individual incentive plans are most problem-free when the employees covered have relatively simple, structured jobs, when the performance goals are under the control of the employees, when performance goals
From page 83...
... Restrictive norms were also more common when employee-management relations were poor, and employees generally distrusted managers. These findings suggest the dangers of using individual incentive plans for employees in complex, interdependent jobs requiring work group cooperation; in instances in which employees generally distrust management; or in an economic environment that makes job loss or the manipulation of incentive performance standards likely.
From page 84...
... This is especially true when merit plans are considered in the context of more complex managerial and professional jobs. As we document in the next chapter, merit pay plans are almost universally used for managerial and professional employees in large private-sector organizations.
From page 85...
... The field studies comparing managers and professionals under merit plans with those under seniority-related pay increase plans, or no formal increase plan, suggest that the presence of a merit plan positively influences measures of employee job satisfaction and employee perceptions of the link between pay and performance. In several of these studies, the stronger measures of job satisfaction and of employee perceptions of pay-toperformance links found under merit pay plans were also correlated with higher individual performance ratings (Kopelman, 1976; Greene, 1978; Allan and Rosenberg, 1986; Hills et al., 1988~.
From page 86...
... Group Incentive Plans Ad_ _ ~~ r the adoption of group incentive plans may provide a way to accommodate the complexity and interdependence of jobs, the need for work group cooperation, and the existence of work group performance norms and still offer the motivational potential of clear goals, clear pay-to-performance links, and relatively large pay increases. Most of the group incentives used todaygainsharing and profit-sharing plans resemble individual incentive plans; they are tied to relatively quantitative measures of performance, offer relatively large payouts, and do not add payouts into base salaries.
From page 87...
... (1990:69-71) note that an analysis of this case study literature leaves the impression that job design enabling team work, smaller organizational size and more flexible technology, employee participation, and favorable managerial attitudes about gainsharing plans may all be critical to their success in improving productivity, but that the research does not allow conclusions beyond `'gainsharing may work in different situations for different reasons." This suggests that many beneficial effects attributed to gain sharing including productivity effects may be as much due to the contextual conditions as to the introduction of gain sharing.
From page 88...
... As we noted for gainsharing plans, it is possible that these benefits would result from organization conditions like information sharing absent a profit-sharing plan. Profit-sharing plans and managerial bonus plans have traditionally been used as part of executive and middle management compensation packages; typically they tie payments to organizational financial outcomes (such as return on assets, return on equity, and so forth)
From page 89...
... Merit pay plans have some design features, such as the addition of pay increases to base salary, and the use of individual performance measures, including both quantitative and qualitative objectives, that can help avoid some of the negative consequences of individual incentives plans; these characteristics may also dilute the plans' potential to motivate employees. Organizations, however, can take steps to strengthen the motivational impact of merit plans.
From page 90...
... suggests that gainsharing and profit-sharing plans are associated with improved group- or organizational-level productivity and financial performance. This research does not, however, allow us to disentangle the effects of group plans on performance from the effects of many other contextual conditions usually associated with the design and implementation of group pay plans.
From page 91...
... However, if high wages generally reduce turnover, we can infer that merit pay probably has a positive influence on the retention of those employees who receive high performance ratings and, therefore, the largest pay increases from one year to the next. In summary, the role that pay-for-performance plans can play in an organization's ability to attract and retain the best performers can be conceived in terms of an inducements-contributions exchange between employee and employer.
From page 92...
... (see Adams, 1965; Mowday, 1987~. Pay distribution concerns would involve employee perceptions of the fairness of pay outcomes such as the level
From page 93...
... Distributive justice theories also predict that some employees, particularly those managing or administering pay systems, will be concerned with distributing pay increases according to rules that the majority will view as fair, thereby reducing conflict (Greenberg and Levanthal, 1976~. These distribution concerns encompass employee perceptions of the fairness of basic pay policies, especially those about how pay increases are allocated.
From page 94...
... also suggest that pay satisfaction is multidimensional; that employees make judgments about their satisfaction with multiple distributive outcomes: base salaries, pay increases, and so forth. This research does not, however, allow us to determine whether dissatisfaction with one type of pay outcome (such as base salary)
From page 95...
... (1990) do, however, point out that individual and group incentive plans that offer relatively large pay increases, which are not added into base (matrix cells two and three)
From page 96...
... He proposes that a firm's choice among plans basing pay increases on seniority or across-the-board criteria, merit plans, or piece rate (individual incentive) plans would depend on its assessment of each plan's ability to accurately measure employee performance and the costs of implementing the plan in the fimn context.
From page 97...
... For example, when organization conditions all favor the use of individual incentives, investments in such procedural protections as appeals may be lower than under merit plans because it is easier for employees to accept quantitative performance measures as fair. Yet unions and associations often consider individual incentives plans unfair unless they are involved in the development of individual performance measures and in monitoring when measures should change.
From page 98...
... The research available does suggest that certain contextual conditions believed to reflect indirect labor costs are associated with organization decisions about adopting a pay-for-perfo~n~ance policy and selecting among merit, individual, or group incentive plans. The more contextual conditions depart from those considered most cost-effective in the implementation of individual incentive plans (structured, independent jobs, low occupational diversity, high labor intensity, and so forth)
From page 99...
... Although virtually no research on the performance effects of merit pay exists, we conclude by analogy from research that examines the impact of individual and group incentive plans on performance that merit pay plans could sustain, and even improve, individual performance to the extent that they approximate the ideal motivational conditions prescribed by expectancy and goal-setting theories. There are some features of merit plan design that depart from these conditions, namely the use of less specific, less quantitative measures of performance (typically performance appraisal measures)
From page 100...
... when their occupational diversity, job complexity, and labor intensity are higher than would be ideal for individual incentive plans such as piece rates. Though piece rates offer the most potential for accurate performance measurement (and are thus the best indicator of actual individual performance)
From page 101...
... At the same time, the research suggests that organizations investing in measures to assure employees about the fairness of the procedures surrounding payfor-performance plan design and implementation can positively influence pay satisfaction, perceptions of pay fairness, and employee trust and commitment. In application to merit plans, certain procedures would be included: providing employees with information about the way appraisal works, training managers in conducting appraisals, employee participation in setting performance objectives, and channels for appealing ratings and pay increases.


This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More information on Chapter Skim is available.