The psychological costs of pay-for-performance
Subtitle: implications for strategic compensation
By: Ian Larkin, Lamar Pierce, Francesca Gino
Contributors: Pierce, Lamar; Gino, Francesca; Harvard Business School
Series: Working paper / Harvard Business School -- 11-056; Working paper (Harvard Business School) -- 11-056.
Publisher: Harvard Business School
Published: 2010
Place of publication: [Boston]
Language: eng
Number of pages: 42
Description: An organization's compensation strategy plays a critical role in motivating workers and attracting high-performing employees. Most of the research linking compensation to strategy relies on the principal-agent model of economics, a model that has been largely unsuccessful in predicting the extent to which companies use performance-based pay. We argue that while agency theory provides a useful framework to analyze strategic compensation, it fails to consider a host of psychological factors that affect employee motivation and attraction. This paper examines how psychological costs from social comparison, overconfidence, and loss aversion reduce the viability of individual performance-based compensation systems, and provides a framework that integrates insights from psychology and decision research into the traditional compensation framework of agency theory. The paper also discusses empirical implications and possible theoretical extensions.
Notes: "December 2010"--Publisher's website.

Includes bibliographical references.