Principles of Organizational Behavior, 3rd Edition

7Pay for Performance

KATHRYN M. BARTOL

Robert H. Smith School of Business, University of Maryland

Our principle is pay for performance. This principle involves providing monetary rewards through carefully designed compensation systems that base pay on measured performance within the control of participants. It also includes incorporating appropriate concerns for procedural and distributive justice. In most situations, properly designed pay-for-performance systems will lead to better performance results.

Well-designed pay-for-performance systems make major contributions to performance through two main mechanisms. First, they positively influence the motivation to perform. Second, they impact the attraction and retention patterns of organizations (i.e. who joins and who remains), thereby affecting the caliber of individuals available to perform.

A number of different pay delivery plans qualify as pay-for-performance systems, although they vary widely with respect to how closely they tie pay to performance. Pay-for-performance systems can deliver monetary rewards at the individual, small group/team, and/or division or organizational level. Evidence suggests that pay for performance at each of these levels can positively impact performance.

Individual Level

At the individual level, there are three major types of pay-for-performance systems: traditional incentive systems, variable pay configurations, and merit pay plans. Traditional incentive plans include piece-rate plans and ...