Evaluation of Performance Related Pay

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Evaluation of performance related pay (PRP)

«PRP is a method of payment where an individual employee receives an increase in pay based wholly or partly on the regular and systematic assessment of individual performance. A process of systematic performance appraisal determines the payment of salary increments, bonus or other incentives. The performance measures may concern inputs or outputs but generally focus on the achievement of specific individual objectives. » (Redman et Al, 2009).

Effects of pay for performance (PFP)

* Incentive effects

Locke et al (1980) = introduction of individual pay incentives increased productivity 30%.

Guzzo et al (1985) = financial incentives had a large effect on productivity.

* Sorting effects

« Lazear (2000) reported a 44% increase in productivity when a glass installation company switched from salaries to individual incentives.
Of this increase, roughly 50% was due to existing workers increasing their productivity, while the other 50% was attributable to less productive workers quitting and being replaced by more productive workers over time. » (Wilkinson et Al. 2010)

Cadsby, C.B, Song, F. and Tapon, F. (2007) «Sorting and incentive effects of pay for performance: An experimental investigation». Academy of Management Journal, 50:387-405

Cadsby et al (2007): both, incentive and sorting effects explained the postivie impact of PFP on productivity.

Evidence suggest that PFP os more attractive to higher performers than to lower performers. Trank et al (2002) found that the highest-achieving college student place considerably more importance on being paid for performance than do their lesser achieving counterparts....
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