Evaluating Form and Functionality of Pay-For-Performance Plans: The Relative Incentive and Sorting Effects of Merit Pay, Bonuses, and Long-Term Incentives

Using two-year longitudinal data from a large sample of US employees from a service-related organization, the present study investigates the relative effects of three forms of pay-for-performance plans on employees’ job performance (incentive effects) and voluntary turnover (sorting effects). The study differentiates between three forms of pay: merit pay, individual-based bonuses, and long-term incentives. By definition, these PFP plans have different structural elements that distinguish them from each other (i.e., pay plan form) and different characteristics (functionality), such as the degree to which pay and performance are linked and the size of the rewards, which can vary both within and across plan types. Our results provide evidence that merit raises have larger incentive and sorting effects than bonuses and long-term incentives in multi-PFP plan environments where the three PFP plans are operating simultaneously. Only merit pay has both incentive and sorting effects among the three PFP plans. The implications for the PFP-related theory, as well as for the design and implementation of PFP plans, are discussed.

Effect of a national primary care pay for performance scheme on emergency hospital admissions for ambulatory care sensitive conditions: controlled longitudinal study.

OBJECTIVE: To estimate the impact of a national primary care pay for performance scheme, the Quality and Outcomes Framework in England, on emergency hospital admissions for ambulatory care sensitive conditions (ACSCs). DESIGN: Controlled longitudinal study. SETTING: English National Health Service between 1998/99 and 2010/11. PARTICIPANTS: Populations registered with each of 6975 family practices in England. MAIN OUTCOME MEASURES: Year specific differences between trend adjusted emergency hospital admission rates for incentivised ACSCs before and after the introduction of the Quality and Outcomes Framework scheme and two comparators: non-incentivised ACSCs and non-ACSCs. RESULTS: Incentivised ACSC admissions showed a relative reduction of 2.7% (95% confidence interval 1.6% to 3.8%) in the first year of the Quality and Outcomes Framework compared with ACSCs that were not incentivised. This increased to a relative reduction of 8.0% (6.9% to 9.1%) in 2010/11. Compared with conditions that are not regarded as being influenced by the quality of ambulatory care (non-ACSCs), incentivised ACSCs also showed a relative reduction in rates of emergency admissions of 2.8% (2.0% to 3.6%) in the first year increasing to 10.9% (10.1% to 11.7%) by 2010/11. CONCLUSIONS: The introduction of a major national pay for performance scheme for primary care in England was associated with a decrease in emergency admissions for incentivised conditions compared with conditions that were not incentivised. Contemporaneous health service changes seem unlikely to have caused the sharp change in the trajectory of incentivised ACSC admissions immediately after the introduction of the Quality and Outcomes Framework. The decrease seems larger than would be expected from the changes in the process measures that were incentivised, suggesting that the pay for performance scheme may have had impacts on quality of care beyond the directly incentivised activities.

Executive pay and performance: did bankers’ bonuses cause the crisis?

This paper examines the pay-performance relationship between executive cash compensation (including bonuses) and company performance for a sample of large UK companies, focusing particularly on the financial services industry, since incentive misalignment has been blamed as one of the factors causing the global financial crisis of 2007–2008. Although we find that pay in the financial services sector is high, the cash-plus-bonus pay-performance sensitivity of financial firms is not significantly higher than in other sectors. Consequently, we conclude that it unlikely that incentive structures could be held responsible for inducing bank executives to focus on short-term results.

Pay for performance does not always increase performance

Pay for performance can have a positive or a negative influence on actual performance. The aim of this study was to give an explanation for this contradiction.We demonstrated that the variability of the payment can act as a stressor. According to the transactional model of stress, the influence on performance depends on the subjective interpretation of the variability as challenge or threat. Therefore we manipulated the degree of variability. The data showed decreasing performance for participants who preferred less-variable payments. They performed better under a less-variable rather than more-variable payment. The participants who preferred more-variable payment schemes showed the opposite pattern. These participants showed a higher performance under a more-variable rather than less-variable payment scheme.

The Soviet economy in 1973 : performance, plans, and implications.

"A (ER) 74-62."

Making the office pay : tested office plans, methods and systems that make for better results from everyday routine.

Mode of access: Internet.

Significant progress in pay-for-performance, 1980-1982.

"August 1983."

Merit pay and proposed pay-for-performance regulations : hearing before the Subcommittee on Civil Service, Post Office, and General Services of the Committee on Governmental Affairs, United States Senate, Ninety-eighth Congress, first session.

"S. 958, the Merit Pay Reform Act of 1983, and amendments to expand its coverage with regard to regulations proposed by the Office of Personnel Management; May 26, June 9, and July 14, 1983"--Pt. 2.

Paying for long-term performance: restructuring bankers’ pay for risk regulation

The purpose of this paper is to propose hybrid capital securities as a new approach to compensation for senior bank executives and risk-takers instead of cash or equity-based compensation currently adopted by the industry. The global financial turmoil indicated that misaligned pay-for-performance compensation arrangements encouraged management short-termism and rewarded excessive risk-taking behaviour in Anglo-Saxon system. Rather than regulating specific instruments and processes, we believe that it is much more efficient to overhaul the compensation scheme to align it with risk management and governance. This empirical paper investigates the European hybrid market by employing data from the Merrill Lynch Global Index System from 2000 to 2010. Our paper contributes to both literature and practices by designing a structured scheme to tie the executive’s interests to long-term performance of the bank, the goal of regulators and the economy at large which consequently reduce the probability of future bank failures.

An Empirical Analysis of Continuing Improvements Following the Implementation of a Performance-Based Compensation Plan

Performance improvements subsequent to the implementation of a pay-for-performance plan can result because more productive employees self-select into the firm (selection effect) and/or because employees allocate effort to become more effective (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sources of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these employees to further improve their productivity. In contrast, the less productive sales employees’ performance declines before they leave the firm.

Give some to get some - Analysing the relationship between worker satisfaction with human resources management and perceived individual performance in a Portuguese hospital

The purpose of this study is to investigate the association between the satisfaction with HRM practices in an organization and the workers' perceived performance. We are interested in learning if indeed workers that are more satisfied with the organization’s practices will also perceive themselves as more hardworking than others, thus confirming the happy-productive worker hypothesis, from an individual perception standpoint. Data originates from a large Portuguese hospital, with a sample of 952 clinical and nonclinical hospital workers. Data was originally explored using SPSS software and later tested in AMOS software where a multiple regression model was constructed and tested. Results indicate that overall satisfaction with HRM practices are related with the workers’ perceived performance; most of the HRM satisfaction subscales also relate, except for pay and performance appraisal, that do not seem to be good predictors of the workers perceived performance. The present study is based on a single large public hospital, and thus, these findings need to be further tested in other settings. This study offers some clues regarding the areas of HRM that seem to be more related with the workers’ perceived performance, and hence provide an interesting framework for managers dealing with healthcare teams. This study contributes to the happy-productive worker hypothesis research, by including seldom used variables in the equation and taking a different perspective. Results provide new clues for investigation and practice regarding the areas of action in HRM that seem to be more prone to elicit perceived effort from the workers.

Effect of executive compensation on firm performance

The paper finds evidence that the equity-based CEO pay is positively related to firm performance and risk-taking. Both stock price and operating performance as well as firm's riskiness increase in the pay-performance sensitivities (PPS) provided by CEO stock options and stock holdings. PPS can explain stock returns better as an additional factor to the Fama-French 3-factor model. When CEOs are compensated with higher PPS, firms experience higher return on asset (ROA). The higher PPS also leads to the higher risk-taking. While CEO incentive compensation has been perceived mixed on its effectiveness, this study provides support to the equity-based CEO compensation in reducing agency conflicts between CEOs and shareholders.

Federal white-collar pay system : report on a market-sensitive study.

"August 1989."

The influence of financial participation and participation in decision-making on employee job attitudes

This study investigates the direct and indirect effects of financial participation (FP) and participation in decision-making (PDM) on employee job attitudes. The central premise is that both financial participation and participation in decision-making have effects on job attitudes, such as integration, involvement and commitment, perceived pay equity, performance-reward contingencies, satisfaction and motivation. After reviewing the theoretical and empirical literature and testing two theoretical frameworks, developed by Long (1978a) and Florkowski ( 1989), a new model was constructed to consider a combined effects of both FP and PDM, herein referred to as employee participation (EP). The underpinning of the model is based on the assumption that both ( a) the combination of financial participation and participation in decision-making ('employee participation'), and (b) participation in decision-making produce favourable effects on employee job attitudes. The test of the new model showed that employee participation does not produce more favourable effects on employee job attitudes, than does participation in decision-making on its own. The data were gathered from a questionnaire study administered in a large British retail organization that operates two types of ownership schemes - profit-sharing and SAYE schemes.