How Important Is Pay and What Are the Effects (Positive and Negative) of Pay for Performance?: Evaluating Claims and Evidence

Summary

This review examines how important pay is to employees and evaluates the evidence on pay-for-performance (PFP) — its benefits, risks and contextual contingencies. The authors first establish that pay matters: workers’ behaviour (quitting, migration, strikes, job selection) and survey evidence show pay is a central inducement. They then define PFP along three dimensions (measure type, aggregation level, incentive intensity) and explain two core mechanisms by which PFP affects outcomes: incentive effects (current employees work harder) and sorting effects (PFP attracts and retains higher performers).

The paper summarises robust evidence that PFP, especially when part of wider high-performance work systems (HPWS) and good management practices, can raise productivity, firm performance and national living standards. It also details credible concerns: excessive incentive intensity can provoke harmful behaviours, cause income volatility and stress, and may worsen health outcomes in some contexts (notably piece-rate/low-pay settings). The literature on intrinsic motivation and creativity is revisited — newer studies show PFP can complement intrinsic motivation (particularly under autonomy-supportive conditions) rather than uniformly undermine it. The authors close by urging a balanced, contingency-based approach and outlining future research directions (health trade-offs, pay inequality, organisational change, AI impacts).

Key Points

Pay is a primary job attribute for many workers — it shapes quitting, job choice, strikes and migration; global poverty differences amplify pay importance in many regions.
PFP is defined by measure type (results vs behaviour), level (individual vs group), and incentive intensity; accurate measurement of PFP must account for promotions and career growth.
PFP works through two mechanisms: incentives (change current effort) and sorting (change workforce composition); both can produce substantial productivity gains.
When embedded in HPWS and high-quality management, PFP correlates with better firm performance and can contribute to higher national living standards.
Concerns exist: high incentive intensity and extreme targets can produce gaming, neglect of non-incentivised tasks and unethical behaviour (Wells Fargo case as example).
Evidence on intrinsic motivation is mixed historically, but recent meta-analyses and experiments show PFP can enhance overall motivation and creative performance when paired with autonomy and thoughtful design.
PFP and piece-rate systems can increase stress and adverse health outcomes, especially for low-paid workers with little income security or recovery resources.
Pay distribution issues matter: PFP may increase pay dispersion and contribute to inequality unless explained differentials are managed and transparency/equity mechanisms are used.
Changing to or implementing PFP is organisational change — success depends on fit with culture, complementary practices (ability, opportunity, selection) and time for sorting.
Future research priorities include multilevel translation of firm gains to national outcomes, PFP design for creativity, health trade-offs across worker groups, and AI-driven pay systems and fairness.

Context and Relevance

This is a comprehensive, evidence-rich synthesis that matters to HR leaders, senior managers, policymakers and researchers. It reframes many debates: pay is not trivial; PFP can create value through incentives and sorting; but it is not risk-free. The balance of benefits versus harms depends heavily on design, context (income level, job type, managerial quality), and safeguards (reasonable targets, multi-source measures, pay transparency).

Practical implications: organisations should consider PFP as one lever among many — design incentives carefully, pair them with autonomy and monitoring for unintended behaviours, mitigate income volatility for vulnerable workers, and couple PFP with transparency and equity safeguards. For policymakers, the paper highlights why minimum wages, pay-transparency laws and worker protections interact with PFP outcomes and labour-market fairness.

Why should I read this?

Short answer: because this paper saves you hours of slogging through conflicting studies. It gives a clear map of when pay and pay-for-performance work well, when they backfire, and what to watch for — from stress and health effects to inequality and organisational fit. If you make pay decisions, manage teams or set policy, this is a must-read briefing that tells you what to keep, what to tweak and where the real risks lie.

Source

Source: https://onlinelibrary.wiley.com/doi/10.1002/hrm.70037?af=R