Making Performance Pay Work: The Impact of Transparency, Participation, and Fairness on Controlling Perception and Intrinsic Motivation

• Author: Tobias A. Krause,Dominik Vogel,Anne-Kathrin Wenzel
• DOI: 10.1177/0734371X17715502
• Published date: 01 June 2019
• Date: 01 June 2019

https://doi.org/10.1177/0734371X17715502

Review of Public Personnel Administration

2019, Vol. 39(2) 232 –255

© The Author(s) 2017

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DOI: 10.1177/0734371X17715502

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Article

Making Performance Pay

Work: The Impact of

Transparency, Participation,

and Fairness on Controlling

Perception and Intrinsic

Motivation

Anne-Kathrin Wenzel1, Tobias A. Krause1,

and Dominik Vogel2

Abstract

Performance pay has been one of the main trends in public sector reform over the last

decade and aims to increase employees’ motivation. However, positive results are sparse.

In a majority of cases, pay scheme designers neglect that intrinsic motivation may be

distorted by the introduction of extrinsic rewards (crowding out). Nevertheless, under

certain conditions, performance pay schemes may also enhance intrinsic motivation

(crowding-in). The perception of rewards has proven to be an especially crucial factor

for the outcome of performance pay. Based on psychological contract theory, this

paper analyzes the relationships between intrinsic motivation, public service motivation

(PSM), personality characteristics, and the design of the performance- appraisal scheme.

The empirical analysis relies on a structural equation modeling (SEM) approach. Model

findings reveal that a fair, participatory, and transparent design reduces the controlling

perception while fostering the intrinsic motivation of employees. In addition,

participants who score high on neuroticism perceive performance pay schemes to be

more controlling and have lower values of intrinsic motivation.

Keywords

performance pay, motivation crowding, performance-related pay, rewards,

performance rating, performance appraisals

1University of Potsdam, Germany

2University of Hamburg, Germany

Corresponding Author:

Anne-Kathrin Wenzel, University of Potsdam, August-Bebel-Straße 89, Potsdam, Brandenburg 14482,

Germany.

Email: anmeier@uni-potsdam.de

715502ROPXXX10.1177/0734371X17715502Review of Public Personnel AdministrationWenzel et al.

research-article2017

Wenzel et al. 233

Introduction

The introduction of performance-related pay in the public sector has been one of the

main trends in public management reform over the last two decades. In 2005, two

thirds of the Organisation for Economic Co-Operation and Development (OECD,

2005) member states had already implemented performance pay for government

employees or were on the way to introducing it. By introducing performance pay,

governments all over the world aim to increase employees’ motivation as well as

strengthen leadership skills and enhance the quality of public services (Burgess &

Ratto, 2003; Cardona, 2006; Marsden & Richardson, 1994; OECD, 1993).

However, previous evaluations have identified severe weaknesses in performance-

related pay schemes in the public sector. According to Perry, Engbers, and Jun (2009,

p. 43), “performance-related pay in the public sector consistently fails to deliver on its

promise.” In most evaluations, researchers could not find evidence for increased moti-

vation or increased quality of public services resulting from the introduction of pay for

performance (Kellough & Nigro, 2002; Marsden, 2009; OECD, 2005; Perry, Mesch,

& Paarlberg, 2006). Instead, performance pay raises many issues in the public sector.

Particularly, low amounts of performance pay, problems in performance assessment of

government employees, and the lack of differentiation in employees’ performance rat-

ings are among the most criticized aspects of performance pay. Researchers claim that

these weaknesses are the reasons that the goals of performance-oriented pay are not

achieved (Anderfuhren-Biget, Varone, Giauque, & Ritz, 2010; Forest, 2008; Gaertner

& Gaertner, 1985; Rainey & Kellough, 2000). Yet, according to Perry et al. (2009), it

is not pay for performance itself that leads to dissatisfaction among government

employees, but rather “its incompatibility with public institutional rules, proponents’

inability or unwillingness to adapt it to these values, and its incompatibility with more

powerful motivations that lead many people to pursue public service in the first place”

(Perry et al., 2009, p. 45).

More detailed studies on the effects of performance pay suggest that a pay system

that is perceived as controlling may be harmful for the intrinsic motivation and public

service motivation (PSM) of employees (Jacobsen & Andersen, 2014; Jacobsen,

Hvitved, & Andersen, 2014). This effect goes back to motivation crowding theory.

Motivation can only be crowded-in, that is, increased, if employees perceive perfor-

mance pay as supportive rather than controlling (Frey, 1997; Frey & Jegen, 2001).

However, it remains largely unexplained as to which variables account for a negative

(“controlling”) perception of performance pay and have therefore an (in)direct influ-

ence on its success. In addition, only a few of the previous studies on intrinsic motiva-

tion have taken the features of the command system into account (Andersen, Kristensen,

& Pedersen, 2015; Dickinson & Villeval, 2008; Jacobsen & Andersen, 2014).

Accordingly, we lack empirical knowledge on the following research question:

Research Question 1: Which variables account for a controlling perception of pay

schemes and how do these variables affect intrinsic motivation directly and

indirectly?