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To what extent does Performance Related Pay increase motivation in the workplace?

Motivation can be seen as a psychological force directing our efforts towards

achieving a goal, such as performance-related goals in the workplace (Shkoler & Kimura,

2020). Motivation directly predicts organisational performance as when motivated, an

employee will more likely work towards and achieve their goals, facilitating organisational

success (Lee & Raschke, 2016). It is therefore vital that organisations aim for optimal

motivation. This can be achieved through Performance Related Pay (PRP) where employees'

pay is influenced by their level of performance within the organisation. As you are

considering introducing PRP into your company, this report aims to explore its efficacy and

conclude its suitability within your organisation.

Motivation can occur in two ways; intrinsic motivation reflects a person’s internal

desire to complete a task whereas extrinsic motivation is concerned with the influence of

external factors (Ryan & Deci, 2000; Shkoler & Kimura, 2020). PRP utilises monetary

incentives thus, aims to extrinsically motivate employees. Support for PRP has been

demonstrated in a meta-analysis showing that monetary incentives increased work

performance by 20% within for-profit businesses (Condly et al., 2008). This effect was

significantly greater for monetary incentives compared to non-monetary ones. Similarly,

another study found that within a financial company cash rewards produced higher levels of

performance along with more ambitious goals, compared to non-monetary rewards

(Presslee et al., 2013). Monetary rewards having a more significant impact on performance

is grounded in the expectancy theory. Expectancy theory states that motivation is

influenced by the valence, expectancy and instrumentality of the potential reward and as

money would likely be valued at a high level it should facilitate motivation (Lee, 2019). The
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supportive evidence, therefore, implies that PRP can increase motivation to a greater extent

than non-financial motivational incentives indicating its utility within your company.

Regardless of the support, PRP poses risks that would need to be explored to ensure

its effectiveness. Firstly, individual differences are likely to impact the responsiveness to PRP

due to different personality traits. This is underpinned by the trait theory which argues that

differences in personality traits result in differences in situational reactions (Jayawickreme

et al., 2019). This has been demonstrated in research showing that financial incentives more

strongly influenced performance on an online cognitive task in those who were more

extraverted, less conscientious and more emotionally stable (Fulmer & Walker, 2015). The

external validity of this study is hindered as the sample consisted of students who may be

more incentivised by monetary rewards due to their financial situations. However, it still

illustrates how trait-relevant characteristics influence the response to pay incentives and

indicates the importance of understanding your employees’ general traits to ensure

responsiveness to PRP. Your employees are mostly process-driven, indicating high

conscientiousness as they likely work diligently to achieve task mastery. PRP may therefore

not be suitable for these employees as they will be focused on their tasks and find it difficult

to be concerned with an external incentive (Fulmer & Walker, 2015). This research

highlights the benefit of understanding your employee’s personality types to ensure that

PRP will be advantageous for motivation before its implementation. This could be done

using personality tests such as the Big Five Inventory (McCrae & Costa, 1987).

Another motivational theory that impacts performance is the self-determination

theory which proposes that people are inherently active towards their goals, due to an

internal desire to better themselves, a process that does not need to be learned (Deci &

Ryan, 2012). This inherent orientation towards achieving can be impacted by social
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environments which pose risks for PRP. Extrinsic incentives can produce counterproductive

effects by reducing intrinsic motivation thus imposing little or no net influence on

performance. This idea is referred to as the motivation crowding theory (MCT) which argues

that extrinsic incentives can undermine intrinsic motivation (Frey & Jegen, 2001). This has

been explored in a review of meta-analyses showing that in general, when under free-

choice conditions, participants receiving performance-based rewards engaged significantly

less in their target activity compared to the control group (Deci et al., 1999; Murayama et

al., 2010). Performance-related rewards caused disengagement rather than the desired

outcome of increased motivation and performance. PRP may therefore not be an

appropriate motivation strategy due to its diminishing effects on intrinsic motivation.

Alternatively, further research into MCT argues that the extent of the undermining

effects depends on how the incentive is perceived, whether it's supportive or controlling. A

meta-analysis found that the relationship between intrinsic motivation and performance

was influenced by the salience of extrinsic motivators (Cerasoli et al., 2014). In line with

MCT, extrinsic incentives reduced intrinsic motivation but only when they were deemed as

highly important to performance. When the incentives were indirectly salient, intrinsic

motivation strongly predicted performance. Similarly, another study found that when

participants were presented with autonomy-supportive monetary rewards that were seen

as a token of appreciation, intrinsic motivation and performance on an online task were

high. Whereas, presenting the monetary reward in a controlling manner resulted in

decreased performance (Thibault Landry et al., 2020). The findings of this study were

demonstrated across two experiments with different participants indicating good inter-rater

reliability. A limitation surrounding both studies is that they are correlational and do not

necessarily convey causality. It cannot be concluded that supportive extrinsic motivators

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cause an increase in performance, instead, it shows that it is likely as strong correlations

were found. The results, therefore, convey that if PRP is implemented in a supportive way

within your company it will likely positively impact motivation.

Along with needing to be supportive, fairness is another main issue surrounding the

efficacy of PRP. Regarding equity theory, motivation is largely influenced by perceived

fairness, with inequity producing demotivating effects and lower productivity (Al-Zawahreh

& Al-Madi, 2012). This indicates implications surrounding PRP as performance is a difficult

construct to measure and inaccuracy in its measurements would result in unfair pay and

feelings of inequity. It is a reductionist approach to base performance solely on objective

measures like reaching targets as this may not accurately reflect the employees’ overall

contribution to the company, such as their efforts and team presence. Subjective evaluation

from a superior could help overcome this where judgments are made based on personal

opinions to allow for additional factors to be considered (Bol, 2008; Tran & Järvinen, 2022).

Objective and subjective measures of performance will ultimately produce a more accurate

judgment of an employee’s performance so that PRP can be administered fairly. This

method may be well suited to your company due to your top-down manner as employees

will often have someone of a higher position to contribute to their performance assessment.

Although subjectivity can aid more robust judgments on performance, this can only

occur when decisions are made with transparency. This is referred to as manager discretion

where employees trust their superiors to make fair, professional judgments regarding their

performance. Through research, perceived manager discretion has been shown to strongly

influence the relationship between performance-related bonuses and intrinsic motivation.

Perceived manager discretion was found to produce undermining effects on intrinsic

motivation within an HR organisation concerned with pay policies (Hewett & Leroy, 2019).
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Low levels of perceived manager discretion combined with high bonuses negatively

influenced intrinsic motivation. A strong relationship was found, however, causality is not

guaranteed. Regardless, the findings still indicate the importance of trust as having little

trust in the administration of PRP, would likely cause feelings of unjust and reduced intrinsic

motivation. High manager discretion is therefore vital to ensure that PRP positively impacts

motivation.

Another avenue that could control for the risks surrounding individual PRP, could be

collective PRP, where rewards are issued based on financial targets being reached as a team.

Research has illustrated its effectiveness showing that where individual PRP weakened the

relationship between measures of intrinsic motivation and organisational innovation,

significant positive effects were found when collective PRP was introduced (della Torre et

al., 2020). Introducing collective PRP can help overcome the undermining effects of

individual incentives. Rewarding the whole team for their organisational success would

diminish competitive behaviours and combining that with individual PRP would ensure that

individuals who perform to the highest standards are still praised for their efforts. This idea

has support from meta-analyses which found that team-based incentives produced larger

effects on performance compared to individual incentives (Condly et al., 2008; Garbers &

Konradt, 2014).

PRP can be a useful strategy for increasing motivation within the workplace but only

if it is managed properly. It must first be well aligned with the personality traits of your

employees to ensure responsiveness. How PRP is presented must then be carefully

considered to eliminate undermining effects on intrinsic motivation, it must be perceived as

supportive and fair. Finally, introducing collective PRP may be a sufficient scheme to control

competitive behaviours and encourage a healthy working environment. Due to their

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correlational nature, causality cannot be concluded from much of the research. However,

most findings show strong relationships, so I feel that it can still be concluded that PRP is an

effective strategy for influencing motivation if adapted to your organisation's contextual

factors.
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