6 Pay and Performance: Individuals, Groups, and Executives

Abstract

In this chapter, we address three pay for performance (PFP) questions. First, what are the conceptual mechanisms by which PFP influences performance? Second, what programs do organizations use to implement PFP and what is the empirical evidence on their effectiveness? Third, what perils and pitfalls arise on the way from PFP theory to its execution in organizations? We address these questions in general terms, but also highlight unique issues that arise in PFP for teams and for executives. We highlight the fact that research and practice in the area of PFP requires one to deal with a number of trade‐offs. For example, strengthening PFP links can generate powerful motivation effects, but sometimes these are in unintended and unanticipated directions, resulting in undesirable effects. In addition, there are also trade‐offs in deciding the degree of emphasis to give to individual versus team performance and to results versus behaviors in PFP plans. What all this means is that, as in other areas of management, “one best way” advice (e.g., do or do not use individual PFP plans) or “sound‐bite” conclusions (e.g., PFP does not exist; PFP does or does not motivate) are rarely valid, but rather depend on the circumstances and the organization. In the realm of executive pay, we question the current conventional wisdom in the management literature that there is little or no PFP. We close the chapter with a discussion of our key conclusions and suggestions for what we think would be the most interesting and useful future research areas. We encourage the management literature, which has increasingly become interested in the concept of evidence‐based management, to execute this concept more effectively in its research and when talking or writing about pay.