Performance-related Pay doesn’t encourage Performance

The clue ought to be in the name. Performance-related pay is pay for performance, and the better performance you turn in and the harder you work the more you will get to take home. Except, academics are now suggesting, more often than not the opposite may be the case.

New research by the London School of Economics has argued that, far from encouraging people to strive to reach the heights, performance-related pay often does the opposite and encourages people to work less hard.

The findings are, of course, deeply controversial, given the depths of anger still felt by many over the role of performance-related pay in causing or contributing to the current economic crisis.

“We find that financial incentives may indeed reduce intrinsic motivation and diminish ethical or other reasons for complying with workplace social norms such as fairness,” argued Dr Bernd Irlenbusch, from the LSE’s Department of Management.

“As a consequence, the provision of incentives can result in a negative impact on overall performance,” he added.

Companies therefore needed to be aware that the provision of performance-related pay could result in a net reduction of motivation across a team or organisation, he suggested.

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