Science shows pay for performance works, if used properly

Most companies say they pay for performance. Even in cultures and societies where financial incentives are not used regularly, it is difficult to find situations where managers insist that performance levels have nothing to do with pay.

In the United States and most of Western Europe, pay-for-performance plans are nearly universally used. In Hong Kong, outside of the finance sector, pay for performance has not been the norm historically, but is increasing in popularity in the private and public sectors.

Pay for performance is certainly popular; but it is also polarising. Several speech givers and book writers – for example, Daniel Pink and Alfie Kohn – have become extremely popular (and, incidentally, have generated millions of dollars in personal earnings from book sales and speaking fees) preaching a doctrine that using money to motivate is not only ineffective, but somehow harms people and the companies they work for.

But what does science have to say on this issue? Should managers use pay for performance to increase individual performance levels? Are they helpful or harmful? As it turns out, science, in general, is fairly clear in answering questions such as these. There are five “stylised facts” about the science of pay for performance.

Fact 1: financial incentives are effective. The most general conclusion about pay for performance is that its use increases work performance. Most people don’t like to admit that they are motivated by money. The scientific evidence, in general, is very clear on this issue: When people are providing incentives for doing more or better quality work, they do more or with better quality. I have conducted a number of summaries of the scientific literature over the past 15 years using a researcher’s judgement but also using sophisticated techniques. The evidence from my studies and others are overwhelming. Financial incentives are effective. This does not mean that people aren’t motivated by many other factors as well; they are. But when designed appropriately, pay for performance leads to better work.

Fact 2: financial incentives do not decrease intrinsic motivation. There is a popular belief that if you pay someone for doing something that they like to do, they will end up liking it less. This idea is intriguing; it is also completely false. Recent summary studies show just the opposite. Financial incentives and intrinsic motivation go hand in hand. If we are motivated by our interest or fascination with a subject or a type of work and we are paid for our performance, then we perform even better. The positive effects of intrinsic motivation are even more positive in the presence of incentives.