“A Little Is Better Than Zero” or “Pay Enough or Don’t Pay at All”? Evidence on the Size of Pay-for-Performance Across the Sectors

• Date: 01 June 2018
• DOI: 10.1177/0091026017747298
• Published date: 01 June 2018
• Subject Matter: Articles

https://doi.org/10.1177/0091026017747298

Public Personnel Management

2018, Vol. 47(2) 119 –143

© The Author(s) 2017

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DOI: 10.1177/0091026017747298

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Article

“A Little Is Better Than

Zero” or “Pay Enough or

Don’t Pay at All”? Evidence

on the Size of Pay-for-

Performance Across the

Sectors

Chung-An Chen1

Abstract

Regarding the effect of pay-for-performance (PFP), standard economic reasoning

suggests that “a little is better than zero,” meaning that even small performance

payments can improve employees’ work morale. An alternative view, “pay enough

or don’t pay at all,” suggests that paying too little may instead erode employees’

work morale. Using the U.S. General Social Survey (GSS) data, the present study

finds evidence that the two views actually complement each other: Small payments

can improve employees’ work effort (e.g., working hours), but can also potentially

compromise their work attitudes (e.g., job satisfaction). In addition, employees in

different working sectors may have different understanding of what “small size” really

means. Findings are followed by theoretical and practical implications.

Keywords

performance pay, pay size, self-determination theory, public–private comparison,

motivation crowding

Introduction

Pay-for-performance (PFP) practices are commonly used to enhance employee

work morale in a bid to improve their effort, attitudes (e.g., job satisfaction), and,

1Nanyang Technological University, Singapore

Corresponding Author:

Chung-An Chen, Nanyang Technological University, 14 Nanyang Drive, HSS-05-15, Singapore 637332,

Singapore.

Email: cchongan@gmail.com

747298PPMXXX10.1177/0091026017747298Public Personnel ManagementChen

research-article2017

120 Public Personnel Management 47(2)

eventually, performance. Ideally, the presence of a PFP system should contribute to

better work attitudes and more effort among employees, as human motivation

increases when they expect that their effort can be recognized and eventually

rewarded (Vroom, 1964). Indeed, Brown and Sessions (2003) find that employees

who participate in PFP schemes are more optimistic about future employment and

satisfied with their work environment. Other empirical studies also provide evi-

dence suggesting a positive impact of PFP presence on work effort, attitudes, and

performance (Green & Heywood, 2008; Lavy, 2009; Lazear, 2000). The undergird-

ing logic is that piece rates instead of time rates can generate the maximum surplus

for workers (Lazear, 2000). Of course, not all PFP cases are successful, especially

those in the public sector context (Kellough & Lu, 1993; Perry, Engbers, & Jun,

2009).1 Also, even in cases where PFP works well, its positive impact may be mod-

erated by a few factors, such as worker ability and worker income. Incompetent

employees and low-paid employees are less likely to have a favorable view of PFP

(Kennedy, 1995; McCausland, Pouliakas, & Theodossiou, 2005), a system that cre-

ates even more pay uncertainty and more work intensification.

While most existing studies treat PFP as a dichotomous variable (i.e., either existent

or nonexistent) and focus on whether organizations should employ PFP, scholars often

neglect an equally important issue: the size of performance payment. How much

should employers pay so that monetary reward can positively influence work morale?

The answer is not yet conclusive. The first view, also a more conventional one, can be

stated as “a little is better than zero.” Grounded in principal–agent theory (Jensen &

Meckling, 1976), this view suggests that human beings are mainly driven by external

forces. Any increase of monetary reward, even just a little, can positively affect

employees’ work motivation. An alternative and often neglected view, also referred to

as “pay enough or don’t pay at all” (Gneezy & Rustichini, 2000), suggests that PFP

does not improve work morale unless the payment is sufficiently large; that is, there is

a threshold payment that must be attained, without which there will be no improve-

ment to work morale. Small payment can be detrimental to work morale, which is even

worse than not paying at all. This view is grounded in modern psychological theories

such as motivation crowding theory (Frey & Jegen, 2001) and self-determination the-

ory (SDT; Gagné & Deci, 2005; Ryan & Deci, 2000). I will elaborate on the two con-

flicting views in a later section.

Following the debate, the present study asks the following research questions: (a)

In implementing PFP, should we believe that “a little is better than zero,” or should we

“pay enough or don’t pay at all”? Which perspective makes more sense? If the answer

is the latter one, (b) how large should the size be so PFP does not cause an adverse

effect? This question is especially pertinent in the public and nonprofit sectors, where

the size of payment is generally much smaller than that in the business sector (Perry

et al., 2009). In addition, theoretically speaking, the detrimental effect of a small size

of payment can be attributed to the loss of intrinsic motivation when monetary reward

is introduced (Georgellis, Iossa, & Tabvuma, 2011). While public and nonprofit

employees largely rely on intrinsic reward for work motivation (Mann, 2006; Perry &

Wise, 1990; Schepers et al., 2005), (c) should we expect more salient motivation