Boosting or backfiring? Unveiling the benefits and risks of individual pay for performance with interactional justice as the moderator

Purpose Drawing upon expectancy theory and social exchange theory, our study examines the dual mediating mechanisms that explain how the impact of individual pay for performance (PFP) on job performance manifests positively by enhancing work effort and negatively by damaging team member exchange (TMX). Furthermore, we investigate the moderating role of interactional justice in strengthening PFP's positive effect and weakening its negative effect. Design/methodology/approach To test our research model, we designed a quantitative field study. Our data were collected by surveying 197 employees across six companies. These participants represented a diverse range of job types, including administration, sales, research and development, and engineering departments. Findings Indirect relationship between individual PFP and job performance mediated by enhanced work effort was positive and statistically significant, while the indirect impact of individual PFP on job performance mediated by decreased TMX was positive but non-significant. Furthermore, interactional justice played a crucial moderating role: it amplified the positive effect of individual PFP on work effort and mitigated the negative effect on TMX. Moreover, the overall positive indirect impact of individual PFP on job performance (through work effort as well as TMX) was more pronounced when interactional justice was high. Originality/value Our research provides a more nuanced understanding of the individual PFP effect on job performance by considering its dual nature – both positive and negative aspects – with interactional justice serving as the key moderator.