How Important Is Pay and What Are the Effects (Positive and Negative) of Pay for Performance?: Evaluating Claims and Evidence

ABSTRACT Compensation plays a pivotal role in shaping employee behavior, motivation, and well‐being. Although extant research has explored various dimensions of compensation, questions about how important pay is to employees and concerns (on the part of employers and/or employees) about the unintended negative (in addition to intended positive) consequences of pay and pay for performance (PFP) decisions remain. For employers, these include claims that PFP can provoke undesirable employee behaviors and undermine employee intrinsic motivation and creativity, and that PFP‐related organizational change is difficult to implement successfully. For employees, concerns include claims that PFP programs negatively affect employee health, well‐being, and financial security. We address and evaluate these concerns in light of theory and evidence and emphasize the need to examine not only the potential negative but also the potential positive consequences of pay and PFP decisions. The strength of PFP effects is greater to the degree that pay is important to employees. Further, in the global context, where much of the world has lower income and higher poverty rates than in the higher productivity economies (e.g., the United States, Europe), we often study pay's importance and thus PFP's impact may be greater.