Pay for performance: What type of pay scheme is best for achieving business results?

• Main Author: DIEZ, Fermin Augusto
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: executive compensation; prospect theory; human resources; motivation; strategy implementation; pay for performance; Organizational Behavior and Theory; Organization Development; Work, Economy and Organizations
• Online Access: https://ink.library.smu.edu.sg/etd_coll_all/38; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1038&context=etd_coll_all
• Institution: Singapore Management University

Much has been written, for and against, about compensation as a driver of performance. Two main theoretical constructs deal with this subject: extrinsic theory, including agency theory, whereby money is a main motivator to performance, and intrinsic theory which proposes that money does not motivate, and in fact may hinder, performance. However, corporations spend considerable effort in designing compensation packages with the objective of linking remuneration to performance. Practitioners have developed a variety of mechanisms to deliver pay packages, but heretofore there has been no attempt to validate which, if any, of these various approaches is better able to drive performance. This study addresses these questions by engaging subjects in running a simulated lemonade stand for profit. Different groups of subjects were randomly assigned to one of fifteen pay conditions so that the amount of money they would receive for participating in the experiment depended on the results obtained in the simulation. These conditions were derived from standard pay practices including different Long Term Incentive (LTI) approaches, various pay mix alternatives, three different pay-for-performance delivery models and finally team vs. individual incentives. The results show that team incentives are significantly superior. However, no evidence was found for differences in results within each of the conditions; no LTI vehicle, pay mix variation or pay for performance model is better suited to drive performance. An additional finding links Prospect Theory to how incentives motivate performance. The study informs practitioners on the design of incentive compensation programs and academics of the value of pay as a motivator of business results.