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instruction:
What is more important – pay for performance or recognition for performance?
You are a healthcare leader at a local hospital and motivation has been identified as a central issue with your staff. You are looking into the evidence to see if providing raises/bonuses or recognition will be more effective to increase motivation.
Using evidence (from chapters 12, 13 of the e-text for this course), provide an argument for one of the two approaches based on the evidence you have read. Remember to include pros/cons of both approaches in your answer.
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One – Two pages double spaced
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12 – Pay for Performance
Cathy C. Durham and Kathryn M. Bartol
The principle:
Our principle is pay for performance. This principle involves providing monetary rewards through
carefully designed compensation systems that base pay on measured performance within the
control of participants. It also includes incorporating appropriate concerns for procedural and
distributive justice. In most situations, properly designed pay-for-performance systems will lead to
better performance results.
Well-designed pay-for-performance systems make major contributions to performance through two
main mechanisms. First, they positively influence the motivation to perform. Second, they impact the
attraction and retention patterns of organizations (i.e., who joins and who remains), thereby affecting
the caliber of individuals available to perform.
A number of different pay delivery plans qualify as pay-for-performance systems, although they vary
widely with respect to how closely they tie pay to performance. Pay-for-performance systems can
deliver monetary rewards at the individual, small group, and/or division or organizational level.
Evidence suggests that pay for performance at each of these levels can positively impact
performance.
Individual level
At the individual level, there are three major types of pay-for-performance systems: traditional
incentive systems, variable pay configurations, and merit pay plans. Traditional incentive plans
include piece-rate plans and sales commissions. With piece-rate incentive plans, an employee is
paid a specified rate for each unit produced or each service provided. Mitchell, Lewin, and Lawler
(1990) estimate that proper use of piece-rate plans leads to performance gains in the 10–15%
range. Based on their review of the literature, Locke, Feren, McCaleb, Shaw, and Denny (1980)
concluded that the median productivity improvement from piece-rate plans is 30%. A meta-analysis
involving mainly piece-rate pay found that financial incentives are associated with higher
performance in terms of quantity and also found no detrimental impact on quality ( Jenkins, Mitra,
Gupta, and Shaw, 1998). The other traditional incentive, the commission, is a sales incentive that is
typically expressed as a percentage of sales dollars, a percentage of gross profit margins, or some
dollar amount for each unit sold (Colletti and Cichelli, 1993). The available research indicates that
salespeople tend to prefer commissions over other forms of reward (Lopez, Hopkins, and Raymond,
2006) and can be effectively motivated by them (e.g., Banker, Lee, Potter, and Srinivasan, 1996;
Ford, Walker, and Churchhill, 1985; Harrison, Virick, and William, 1996).
The second major type of individual-level pay-for-performance plan, variable pay , is performancerelated compensation that does not permanently increase base pay and that must be re-earned to
be received again. Because base pay tends to move up more slowly with variable pay plans, the
amount of bonus that can be earned needs to be substantial to make up for the fact that part of the
pay is “at risk” (Schuster and Zingheim, 1996). The risk stems from the possibility that desired
performance might not be achieved and therefore the pay not earned. The piece-rate and
commission pay plans discussed above actually constitute forms of variable pay, albeit forms in
which a greater proportion of pay is typically tied to performance than is the case with newer forms
of variable pay. According to a Hewitt survey of Fortune 1000 companies, a growing number of
employers are moving to variable pay: The portion of US companies offering one or more variable
pay plans rose from 51% in 1991 to 78% in 2005 (Dean, 2006). Research suggests that variable pay
plans are useful in boosting performance (e.g., Chung and Vickery, 1976; Lee, 1988; Smilko and Van
Neck, 2004; Yukl and Latham, 1975).
A form of variable pay that is currently popular is a lump-sum bonus for achieving particular goals.
Locke (2004) identifies four methods of linking bonuses to goals: assigning stretch goals and paying
bonuses only if the goals are achieved, having multiple goal levels and corresponding bonuses that
increase as higher goals are met, offering bonuses that grow incrementally as performance improves
(with no upper limit), and setting specific, challenging goals but making decisions about bonuses
after the fact so that contextual factors can be taken into account . Locke notes that each choice has
its pros and cons. For example, bonuses paid only when stretch goals are met, although highly
motivating, might also encourage employees to take shortcuts or cheat. Also, they could be
discouraging for those who approach but do not reach the goals. Having either multiple or
continuous goal and bonus levels (which are similar to piece-rate pay plus goals) may be less likely
to result in cheating or gaming, but it is unclear whether such approaches can motivate the highest
levels of performance. Setting goals but determining pay after the fact, while accounting for
situational factors, requires bosses to understand the full context of employees’ performance more
than they often can do. Nonetheless, this method has been the approach of choice at both Microsoft
(Shaw, 2004) and General Electric (Kerr and Landauer, 2004). Lacking comparative research to
guide choices, Locke highlights the need for more experimental studies about how best to link
bonuses to goals. The third major type of individual level pay-for-performance plan, merit pay ,
rewards individuals for past work behaviors and outcomes by adding dollar amounts to their base
pay. Merit pay is the most widely used pay system in US organizations (Bretz, Milkovich, and Read,
1992; O’Dell, 1987). Milkovich and Newman (2008) report that 90% of US firms reward employees
through merit pay. Based on a review of 25 studies, Heneman (1992) concludes that merit pay plans
appear to be moderately effective in influencing performance. Taking a longer-term view, Harris,
Gilbreath, and Sunday (1998) provide evidence that the connection between merit pay and
performance may be greater than short-term studies can detect because the cumulative effects of
various types of merit pay adjustments linked to performance, such as those related to promotions,
can be substantial.
Team level
In addition to pay for performance at the individual level, there is considerable interest in pay-forperformance plans focused on small groups or teams (Parker, McAdams, and Zielinski, 2000). Such
pay plans provide monetary rewards based on the measured performance of the group or team.
Small work groups or teams are official (designated or recognized by management) multi-person
work units composed of individuals who operate interdependently in the performance of tasks that
affect others associated within the organization (Guzzo and Dickson, 1996; Hackman, 1987). One
survey found that almost 70% of Fortune 1000 companies are using some type of work group or
team incentives (Lawler, Mohrman, and Ledford, 1995). Usage in smaller organizations may be less,
with one survey showing that 35% of the 140 companies responding, most of which had 2000 or less
employees, reported using team rewards (McClurg, 2001). Evidence suggests that performance
gains can be associated with the use of monetary rewards for groups (Cotton and Cook, 1982;
Gomez-Mejia and Balkin, 1989; Quigley, Tesluk, Locke, and Bartol, 2007; Wageman and Baker,
1997), but that the results are likely to be heavily influenced by situational factors (Balkin and
Montemayor, 2000; DeMatteo, Eby, and Sundstrom, 1998; Lawler, 2003). Increased interest in team
pay is also emerging in the executive suite, particularly with respect to top management teams
(Devers, Cannella, Reilly, and Yoder, 2007).
organizational level
At the organizational level, three pay systems that potentially link pay and performance are
gainsharing , profit sharing , and stock options . Gainsharing is a compensation plan in which an
organization shares with employees a portion of the added earnings obtained through their collective
increases in productivity (Henderson, 1997) or the achievement of other goals, such as customer
satisfaction with quality (Gerhart and Rynes, 2003). Such plans usually involve a significant portion
of an organization’s employees and possibly all. In large organizations, plans may apply to plants,
divisions, or other significant subsystems of the organization. In recent years, gainsharing has been
growing in popularity, extending its reach beyond traditional industrial settings to other realms such
as health care ( Jain and Roble, 2008; Patel, 2006). The available evidence on gainsharing indicates
that such plans have generally led to gains in productivity (Welbourne and Gomez-Mejia, 1995), as
well as to other positive outcomes, such as decreases in absenteeism and the number of grievances
(Arthur and Jelf, 1999).
The second type of organizational-level pay system aimed at performance is profit sharing, which
provides payments to employees based on the profitability of the business. Payments can be made
through current distribution plans (paid in cash), deferred plans (paid toward retirement), or a
combination of both, although most companies establish deferred plans because of the associated
tax advantages. According to one estimate, more than 60% of Fortune 1000 companies have profit
sharing plans (Lawler et al., 1995). Data supporting the performance effects of profit sharing plans is
somewhat unclear. Kruse (1993) found that productivity growth in firms using profit sharing was 3.5–
5.0% higher than in firms that did not use profit sharing. However, Kim (1998) found that profit
sharing companies tend to have higher labor costs than other companies, thereby erasing any
advantage of profit sharing. There are some weaknesses inherent in profit sharing plans as a direct
means of boosting performance. One is that it can be somewhat difficult to establish a clear
connection (sometimes referred to as “line of sight”) between individual actions and impact on
profits, especially in large organizations. Evidence for this is Kruse’s (1993) finding that annual
productivity growth was greater in smaller profit sharing companies than in larger ones (11–17%
productivity growth in companies having fewer than 775 employees, versus 0.0–6.9% in companies
having 775 or more). Another weakness is that accounting and financial management practices and
other factors outside employees’ control can also impact the bottom line. Finally, the deferred nature
of many of these plans may not provide strong valence with respect to motivating performance.
Indeed, Kruse (1993) found that productivity growth was higher for plans paying cash rewards than
for those making deferred payments.
A third type of organizational level reward system is employee stock ownership . One study of
Fortune 1000 companies showed that 71% had stock ownership programs of some type (Lawler et
al., 1995). During the 1990s, the most rapidly growing approach was via stock options, which give
employees the right to purchase a specific amount of stock at a designated price over a specified
time period (Brandes, Dharwadkar, Lemesis, and Heisler, 2003). The basic rationale is that
employees will be more concerned about the longterm success of the organization and increase
their efforts if they can reap the benefits as reflected in the rising price of the organization’s stock.
Additionally, extending ownership can both attract new talent and enhance perceptions of fairness
(and thus retention) in current employees. In 2000, a study of 490 organizations reported that
companies with stock option plans that were broadly dispersed (beyond the executive level)
performed better and had higher average compensation levels than companies without broad-based
plans, and also that increases in productivity seemed to counterbalance any dilution of earnings per
share that occurred when the options were exercised (Sesil, Kroumova, Kruse, and Blasi, 2000).
Since 2000, however, conditions have changed radically. In a much-debated ruling in 2005, the
Financial Accounting Standards Board required companies to recognize stock options as a cost on
their income statements in the year they were awarded rather than merely list them in the footnotes
– a change that diluted earnings per share in the year options were granted and rendered options
less attractive to many employers (Deshmukh, Howe, and Luft, 2008). Further, the value of options
plummeted early in the decade and then again beginning in 2007, when a crisis in the mortgage
markets ultimately led to the historic “Wall Street bailout” by the US government in 2008 and to
widespread fear of a steep global recession. When an option is “underwater” (when its exercise price
exceeds the current market price), the value is neutralized and employees’ anticipated wealth –
along with any motivational potential that might have existed in holding the option – evaporates
(Delves, 2001). And, even in times of rising stock prices, the effect may be less than hoped for. One
study found that when stock prices have risen above the option price, lower-level employees tend to
exercise their options shortly after vesting, a factor that may truncate some of the longer-term
motivational potential of the incentive (Huddart and Lang, 1996). Overall effects There is some
debate regarding whether there are best practices that are applicable to most organizations
(Gerhart, Trevor, and Graham, 1996; Huselid, 1995), or whether it is important to match pay systems
to particular strategies (Montemayor, 1994; Youndt, Snell, Dean, and Lepak, 1996). The weight of
evidence seems to be shifting toward the strategy argument (e.g., Shaw, Gupta, and Delery, 2001;
Yanador and Marler, 2006), but more research needs to be done on how best to align pay systems
with strategy to ultimately enhance organizational performance (Gerhart, 2000).
The direct impact of pay plans on performance is not the only effect to consider. Growing evidence
suggests that there are indirect pay plan effects stemming from influences on attraction and retention
patterns in organizations. For example, several studies support the notion that the level of
compensation influences attraction to organizations (e.g., Saks, Wiesner, and Summers, 1996;
Schwoerer and Rosen, 1989; Williams and Dreher, 1992). Moreover, individuals appear to be more
attracted to organizations in which the pay system rewards individual rather than group performance
and for job outcomes rather than acquiring new skills (Cable and Judge, 1994; Highhouse,
Steierwalt, Bachiochi, Elder, and Fisher, 1999). Individuals may also be more attracted to
organizations that offer fixed pay, rather than variable pay, unless there is sufficient upside potential
to balance the pay risk (Bartol and Locke, 2000).
Pay for performance can also have a positive effect on retention. Research indicates positive
relationships between employee perceptions of pay for performance and both pay satisfaction
(Heneman, Greenberger, and Strasser, 1988; Huber, Seybolt, and Venemon, 1992; Williams,
McDaniel, and Nguyen, 2006) and job satisfaction (Kopelman, 1976), factors that are related to
intention to leave and turnover (Chapter 7). General level of pay is also a factor encouraging
retention (Batt, 2002). There is some evidence that profit sharing is an important determinant of
organizational commitment (Florkowski and Schuster, 1992; Coyle-Shapiro, Morrow, Richardson,
and Dunn, 2002), which has which has been shown to be related to lower turnover. Based on a
meta-analysis, Williams and Livingstone (1994) argue that pay-for-performance systems encourage
better performers to remain with the organization while inducing poorer performers to leave. One
caveat is that a high degree of pay dispersion, in which pay is much higher for relatively few
employees at the top of the pay structure than for others, can lead to higher probabilities of turnover
among managers (Bloom and Michel, 2002). These negative effects seem to be lessened when pay
levels generally are high (Brown, Sturman, and Simmering, 2003). Interestingly, due to the flexibility
and control over labor costs that it provides, variable pay may also reduce turnover. By having more
money allocated to bonuses or other forms of variable pay, an organization can shrink its payroll
costs during downturns rather than downsize. Gerhart and Trevor (1996) provide evidence that
variable pay plans lessen organizational employment variability, allowing for greater employment
stability for employees and their organizations.
What is Required to Make the Principle Work?
Define performance
First, it is essential to identify explicitly what performance is desired. Clearly defining performance,
however, requires looking beyond individual jobs and thinking strategically about the organization as
a whole. It means developing a business model based on what drives the business (e.g., customer
satisfaction), after which goals can be set at the various levels of the organization and
determinations made about what will be rewarded. Without a business model (or with the wrong
one), management risks setting goals and rewarding employees for the wrong things – and finding
its employees doing those wrong things very efficiently, to the organization’s detriment. Focusing on
what drives the business leads to the setting of appropriate performance goals for individual
employees at all organizational levels. Then, the act of tying incentives to the achievement of those
goals will have not only motivational but also informational value, because people will receive a clear
message about what specific behaviors and/or outcomes are expected via communications about
the reward system. A temptation to resist is that of defining performance in terms of job aspects that
are easily quantifiable, thereby ignoring job dimensions that may be critically important but difficult to
measure. This can lead an organization to fall into the trap of “rewarding A while hoping for B” (Kerr,
1995). For pay for performance to be effective, strategically important job dimensions – even hardto-measure ones – must be identified, communicated, assessed, and rewarded.
Communicate
Because it is impossible to be motivated by incentives one does not grasp, it is critically important
not only to design a pay plan that is understandable but also to communicate both clearly and
frequently how the program works and what employees must do to bring about the results that will
trigger a payout. Communication also implies providing feedback along the way about progress
toward targets (Smilko and Van Neck, 2004). Young, Burgess, and White (2007) describe the effects
of a failure to communicate in a pay-forquality project for physicians. Participants found the rules
complicated, failed to fully understand the plan, and were not sufficiently engaged by meager
attempts to explain it. Thus, although 75% of those eligible received a bonus payment in the first
year, very few knew whether they had received their payment or, if they did, realized that it was for
their performance on the program’s quality measures. Some physicians were so unaware of the
financial rewards available to them that they discarded, unopened, the mail that included their bonus
checks.
Ensure competence
Employees must have the appropriate knowledge, skills and abilities (KSAs), and self-efficacy
(Chapter 10) to perform at the desired level. Instituting pay for performance is a futile exercise if
employees are unable to perform at the level required to receive the reward. Hiring people who are
efficacious and who possess (or can readily obtain through training) the relevant KSAs is essential.
Make pay systems commensurate with employees’ values
Pay for performance will only work if the rewards being offered are valued and the amount is viewed
as sufficient, given what employees are being asked to accomplish. Employers can generally
assume that money is a value to their employees, both practically and symbolically. Some
employees, however, may not value the incremental gain being offered for high-level performance if
the amount is viewed as paltry and thus not worth the additional effort. Further, a pay system can fail
if it is perceived as undermining employees’ other values. For example, individuals may be
uninterested in obtaining even a substantial amount of additional pay if they believe that achieving
performance goals means sacrificing greater personal values, such as time to pursue their own
interests (e.g., family life), a low-stress work environment, or a commitment to high-quality work or to
standards of ethical behavior.
Use non-financial motivators too
Most employers assume that money is an effective motivator because it enables employees to buy
things that they want or need. Also, money is important from a justice standpoint, giving high
performers what is due them for their exceptional contributions to the organization’s success.
Nonetheless, exclusive reliance on financial incentives would be an unwise policy because it would
ignore other important sources of work motivation. Nonmonetary motivators include a diverse
assortment of activities, such as providing interesting and important work assignments (Chapter 6),
engendering commitment to the realization of a vision (or to a visionary leader; Chapter 20),
assigning challenging goals in conjunction with ongoing performance feedback (Chapter 9), granting
autonomy regarding how a job is accomplished (Chapter 11), providing public and/or private
recognition for outstanding contributions (Chapter 13), or simply enabling one to do work that one
loves.
Use money in conjunction with intrinsic motivation
Amabile (1993) argues that it is possible to achieve “motivational synergy” by encouraging both
intrinsic and extrinsic motivation (see Chapter 26). She posits that intrinsic motivation arises from the
value of the work itself to the person. It can be fostered through such measures as matching
employees to tasks on the basis of their skills and interests, designing work to be optimally
challenging, and bringing together diverse individuals in high-performing work teams. Amabile further
suggests that, when creativity is particularly important, it may be best to hold off heavily emphasizing
extrinsic motivators during the problem presentation and idea generation stages when intrinsic
motivation appears to be most important. Extrinsic factors may be particularly helpful during the
sometimes-difficult validation and implementation stages. A meta-analytic study (Eisenberger and
Cameron, 1996) and a set of laboratory and field studies (Eisenberger, Rhoades, and Cameron,
1999) also indicated that tangible rewards can enhance, rather than undermine, the effects of
intrinsic motivation. Some (e.g., Ryan and Deci, 2000), however, contest this view.
Target the appropriate organizational level
Performance-based pay must be at the appropriate level. Increasingly, firms are rewarding
performance at the group and/or organizational levels rather than at the individual level alone, in
hopes of boosting organizational performance through enhanced information sharing, group decision
making, and teamwork (Bartol and Hagmann, 1992; Parker et al., 2000). Lawler (1971) argues that
the distinction between individual and group pay plans is important because individual and group
plans are viewed differently by employees and have different effects. A key decision for
management, then, concerns whether incentive pay should be based on individual or group
performance. Further, if the organization chooses to reward group performance, decisions must be
made about what constitutes a “group” for performance-measurement purposes. For example, will
group-based pay be based on the performance of a team, a work unit, a division, or the entire
organization?
There has been little actual research to offer guidance regarding the level of performance to which
incentives should be tied, although several views have been advanced by compensation experts
(e.g., Gomez-Mejia and Balkin, 1992; Mitchell et al., 1990; Montemayor, 1994). Key factors that
should be considered when making this important decision include:
◆ Nature of the task . Pay for performance at the individual level is considered most appropriate
when the work is designed for individuals, where the need for integration with others is negligible,
where group performance means only the sum of members’ individual performances, or where the
work is simple, repetitive, and stable. For sequential teams that perform various tasks in a
predetermined order, so that group performance cannot exceed that of the lowest individual member,
it has been recommended that base pay be skill based, and team incentives be team bonuses with
payouts distributed as a percentage of base pay. Alternatively, groupbased incentive programs,
through which all members receive equal shares of a team bonus, are generally considered
appropriate when teams are composed of individuals from the same organizational level, when
members have complementary roles and must depend upon each other and interact intensively to
accomplish their work, so that group performance is enhanced by cooperation, and when the nature
of the technology and workflows allow for the identification of distinct groups that are relatively
independent of one another. Emerging research (Beersma, Hollenbeck, Humphrey, Moon, Conlon,
and Ilgen, 2003) suggests that, when highly interdependent teams have members who are high in
extraversion and high in agreeableness, they produce more accurate work under a cooperative
reward system than teams with members who are relatively low on these personality dimensions.
The increased accuracy, which was found to be due largely to the greater sharing of information
(Chapters 17 and 18), came at the expense of speed. The decrement in speed was also related to a
tendency for free riding by the lowest performer under the cooperative reward scheme. In contrast, a
competitive reward system led to greater speed, but lower accuracy, regardless of the personalities
of members. When the work is highly interdependent and a cooperative reward system is in place, it
may be helpful to select individuals who are high on extraversion and agreeableness.
◆ Some coaching of the team (Chapter 15) may help the group develop norms that discourage free
riding (Hackman and Wageman, 2005), thus enabling accurate work with less decrement in speed.
Ability to measure performance . Good performance measures are critically important in any pay-forperformance plan. Pfeffer (1998) argues that performance can often be more reliably assessed at
aggregate than at individual levels. He concludes that individual incentive pay should be replaced by
collective rewards based on organizational or subunit performance that highlight the
interdependence among organizational members. Although many are unwilling to go as far as Pfeffer
in discounting the potential value of individual incentives, most agree that group incentives are a
suitable alternative when the identification of individual contributors is difficult due to the nature of
the task. For gainsharing plans in particular, it is not only necessary that there be good performance
measures for the unit or plant, but also that there be a reliable performance history in order to
develop a gainsharing formula. When group performance is rewarded with gainsharing, however, it
is nonetheless important, particularly in Western cultures, to provide a means for identifying
individual contributions to the group effort (e.g., through peer evaluations), so that members keep in
mind their accountability at both the individual and group levels. Organizational culture . Group
incentive plans are best suited to situations in which the organizational culture emphasizes group
achievements (Chapter 33). Group incentives work best when free riding is unlikely (e.g., because
members hold each other accountable or because employees are professionals who possess high
intrinsic motivation). If a corporate culture is strongly individualistic and competitive, group plans
such as team incentives will likely encounter considerable resistance from organizational members
accustomed to focusing on individual accomplishments and/or may lead to lower levels of
cooperative behavior (Hill, Bartol, Tesluk, and Langa, 2009). Management’s purpose . Group
incentives are recommended in situations in which there is a need to align the interests of multiple
individuals into a common goal, or when management wishes to foster entrepreneurship at the
group level. At the organizational level, profit sharing is often used to communicate the importance of
the firm’s financial performance to employees, heightening their awareness of the overall financial
performance of the organization by making a portion of their pay vary with it. This is thought to be
most motivating when employees believe that they can substantially influence the profit measure,
such as in smaller organizations and those in which the means by which profits are achieved are
well understood.
Some have proposed mixed models, whereby incentive pay is based partially on individual
measures of performance and partially on group measures. Wageman (1995), however, found that
teams having mixed forms of reward (i.e., rewards based on both individual and group performance),
mixed tasks (i.e., some tasks performed solely by individuals and some by interdependent groups),
or both, had lower performance than those with task and pay designs that were clearly either
individual level or team level. She proposes that mixed tasks and rewards may lead to inferior
performance by adding a group element to what is primarily an individual task, thereby undermining
attention to the task.
It also may be more difficult to develop supporting norms for cooperation in the team (Quigley et al.,
2007). In addition, teams executing mixed tasks may need more time to adjust because of the
greater complexity of tasks that have both individual and group performance components. In fact,
one study (Johnson, Hollenbeck, Humphrey, Ilgen, Jundt, and Meyer, 2006) has shown that it even
may be more difficult for a team to shift from a competitive to a cooperative reward structure than
from cooperative to a competitive one. When a competitive reward structure was shifted to a
cooperative one, team members seem to engage in “cutthroat cooperation” in which team members
retained much of their competitive behavior within the new reward systems intended to foster
cooperation. Another complicating factor is that some workers may prefer individual pay over teambased pay (Cable and Judge, 1994; Haines and Taggar, 2006; Shaw, Duffy, and Stark, 2001). The
question remains, then, how best (or when) to mix individual and group-based incentive plans.
Make pay commensurate with the level of risk employees are required to bear
Risk refers to uncertainty about outcomes (Sitkin and Pablo, 1992), and, by definition, pay-forperformance systems involve uncertain outcomes for employees. Employees tend to be risk-averse
concerning pay because they have no way of minimizing their income risk through diversification, as
investors are able to do with their stock portfolios. At least four factors can affect employees’
perceptions concerning the riskiness of a pay-for-performance plan. First is the proportion of
employee pay that is performance based. Although the average percentage of variable pay in the
USA is only 5%, the proportion ranges widely, from 0 to 70% (and even to 100% for salespersons;
Gomez-Mejia and Balkin, 1992). The higher the proportion of variable pay, the more risk the
employee must bear, in a tradeoff between income security and the potential for higher earnings
(Gomez-Mejia, Balkin, and Cardy, 1998). At some point the level of risk may be perceived as so
great that it would be unacceptable to the majority of employees, regardless of the potential for high
pay. The second factor that influences employees’ regardless of the potential for high pay. The
second factor that influences employees’ perceptions of risk is their self-efficacy (Chapter 10) that
they can achieve the performance goals on which pay is contingent. Those who are confident of their
ability to perform at a high level should perceive contingent pay as less risky than those who are less
confident of their ability. Third, to the extent that the performance measure on which pay is based is
influenced by factors outside individual employees’ control (e.g., technology or
