Pay for Performance: Contrary Evidence and a Predictive Model (2006)

ABSTRACT This paper presents research from various disciplines and various settings revealing counter-intuitive results deriving from the use of rewards. It is hypothesized that these results obtain by virtue of the salience of the reward - contrary to models such as expectancy theory which suggest that to be effective, rewards must be salient. A salient reward distracts the subject from fully engaging in the process required to obtain the reward: shortcutting. The reward also seems to interfere with a person's need for autonomy. A model is proposed for understanding the effects of incentives as major components of compensation systems. This model relates the negative effects of reward contingency on three organizational outcomes: in-role performance, extra-role performance, and turnover. INTRODUCTION Motivating employees by using performance-contingent rewards is a long-established management practice. Pay-for-performance is used to promote two ends. First, it is expected that these systems will motivate employees to increase their effort and thereby their performance. Expectancy theory clearly posits that effort is increased when meaningful rewards are offered (Vroom, 1964; Porter & Lawler, 1968). Managers try different methods of incentives or fear to get productivity out of their subordinates. ...However, there is a burgeoning literature suggesting that the use of incentives and attempts to cajole may be experienced by employees as controlling or pressuring and that such attempts to manipulate people have a significant downside (Baard, 2002, p. 256). Second, these compensation plans are often introduced to better align the efforts of employees with organizational goals and objectives set by management. According to Barnard, alignment of individual self-interest with the interests of the organization is the basis of organizational efficiency. ... [T]he efficiency of a cooperative system is its capacity to maintain itself by the individual satisfactions it affords. (Barnard, 1938, p. 57) Expectancy theory describes worker motivation as a function of the individual's expectancy of successful performance (expectancy), the valence or salience of the reward (valence), and the belief that performance will lead to reward (instrumentality). Following expectancy theory, compensation planning should be based, at least in part, on establishing the proper goal and reward combinations that will effectively motivate employee performance. Several researchers and theorists have raised serious questions, however, about the efficacy of carrot-and-stick techniques of motivation. Her/berg (1959) and Levinson (1973) were among the first to seriously question the use of incentives as a management tool. Festinger ( 1967) believed rewards would affect the attitude of individuals toward their work and their understanding of why they are working. Following his theory of cognitive dissonance, Festinger predicted rewards would reduce intrinsic motivation. In order to test the relationship between monetary rewards and intrinsic motivation, Deci (1971) conducted one laboratory study and one field study. In the laboratory experiment, 24 undergraduate psychology students were divided into two twelve-person groups - one experimental and one control. The subjects were given the Parker Brothers game called Soma and diagrams showing configurations they were asked to reproduce. In three thirteen-minute trials, they were asked to complete as many as possible. The experimental group was paid $ 1 for each configuration successfully reproduced in trial two. These subjects were told there was only enough money to pay them for one trial and thus they could not be paid for the third trial. To measure intrinsic motivation, the experimenter left the room for eight minutes in the middle of each session. A guise was used to explain the interruption. During the eight-minute break the subjects were free to play with the game, read magazines, which were provided, or simply wait. …