Incentive effects of pay for performance on employee motivation, performance and well-being: a self-determination perspective

Abstract

Pay-for-performance (PFP) is a financial incentive component of employee compensation that is contingent on performance. It is rewarded to the employee in recognition of the past performance and also acts an incentive for future performance. While PFP is a widely prevalent compensation practice, it also runs the risk of becoming counterproductive. Hence, it is important to determine when is PFP effective and how to enhance the effectiveness of PFP. The aim of this study is to investigate: 1) What is the impact of PFP on employee motivation, performance and well-being, and 2) How can organizations enhance the PFP effectiveness. To address these questions, we have broadened the criterion for PFP effectiveness to include the dual concerns of employee performance and well-being. Further, employee performance is addressed in a more comprehensive manner by the inclusion of the aspects of organizational citizenship behaviors (OCB) and creativity, in addition to the traditional job performance aspect. To determine the impact of PFP on the employee level outcomes, we examine the role of PFP characteristics and their influence on employee perception of the PFP practice. Applying self-determination theory (SDT), we propose that when an employee perceives that the PFP characteristics support the satisfaction of basic psychological needs of autonomy, competence, and relatedness, there is a positive impact on their autonomous motivation, and, in turn, on performance and well-being. The study was conducted in a mid-sized engineering firm in the state of Gujarat (India) that specializes in design and manufacturing of plastic processing machines. The organization has 375 permanent employees consisting of managers (5%), engineers and executive staff (55%)and workers (40%), where workers are unionized. The data on employee pay was sourced directly from the organization, while the data on employee perceptions of PFP, motivation, performance and well-being were collected through the survey method. The surveys were conducted in three time-lagged phases separated by three months each. The data was analysed using structural equation modelling and regression analysis. The results suggest that PFP characteristics – equity allocation, frequency, and recognition and feedback have a positive impact on the autonomous motivation of the employee, which, in turn has a positive impact on the outcomes of performance, OCB, creativity and subjective well-being. Contrary to the popular notion in management literature that PFP is a negative influence on motivation, this study tends to demonstrate that PFP may not always be detrimental for employee attitudes and behaviors.