What Makes Performance-Related Pay Effective in the Public Sector? Target, Pay Design, and Context

• Author: Jinsol Park
• DOI: http://doi.org/10.1177/0734371X21990722
• Published date: 01 September 2022
• Date: 01 September 2022
• Subject Matter: Articles

https://doi.org/10.1177/0734371X21990722

Review of Public Personnel Administration

2022, Vol. 42(3) 416 –443

© The Author(s) 2021

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DOI: 10.1177/0734371X21990722

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Article

What Makes Performance-

Related Pay Effective in the

Public Sector? Target, Pay

Design, and Context

Jinsol Park1

Abstract

While performance-related pay (PRP) has been implemented in most OECD countries

over the past four decades, its effectiveness is still up for debate. What is under-

investigated in the previous literature is under what conditions the public sector can

effectively implement an optimal design of a PRP system. This study investigates how

the target of PRP, the design of performance pay, and organizational context affect

the effectiveness of PRP. The findings indicate that PRP has a positive association with

organizational performance but the aspects of performance it affects differ depending

on to whom it is implemented and how PRP is designed. This study also finds that the

positive effect of PRP for top executives is attenuated if organizational outcomes are

not easily observable. This article suggests that public managers should pay careful

attention to employee characteristics, pay design, and organizational contexts for the

successful implementation of PRP in the public sector.

Keywords

performance-related pay, pay-for-performance, incentives, public performance,

personnel management

Introduction

Performance-related pay (PRP), the pay scheme that attempts to link individual effort

and outputs to compensation, has long been practiced both in private and public sec-

tors. The underlying assumption behind PRP is that organizational performance will

1University of Kentucky, Lexington, USA

Corresponding Author:

Jinsol Park, Martin School of Public Policy and Administration, University of Kentucky, 1177 Patterson

Office Tower, Lexington, KY 40506, USA.

Email: jinsol.park@uky.edu

990722ROPXXX10.1177/0734371X21990722Review of Public Personnel AdministrationPark

research-article2021

Park 417

increase as incentives are tightly aligned with individual performance that achieves

organizational goals (Heinrich & Marschke, 2010; Moon, 2000). Since the late 1970s,

the public sector has embraced this notion with the new public management wave and

broadly applied pay-for-performance systems for government employees (Bellé,

2015; Perry et al., 2009; Spano & Monfardini, 2018). While it has already been four

decades since PRP first received attention in many OECD countries, its popularity has

not declined; rather, it is receiving renewed interest in many countries (Bellé, 2015;

Jones & Hartney, 2017).

Despite broad implementation in the public sector across the globe, the literature

that synthesized the studies on PRP are inconclusive about PRP’s effects on organiza-

tional performance (Hasnain et al., 2012; Perry et al., 2009; Weibel et al., 2009). It is,

however, not a surprising conclusion considering the multifaceted dimensions of PRP.

The public sector can employ PRP in a variety of ways with respect to pay design (e.g.,

incentive size; whether to link incentives to individual, team, departmental, or entire

organizational performance), the target of PRP (e.g., senior civil servants only, or all

employees; employees with high motivation or with low motivation), and performance

measurement (e.g., who measures performance; whether performance is measured

with quantitative or qualitative criteria; how performance is linked to compensation).

Additionally, PRP outcomes may vary depending on the organizational context in

which PRP is implemented. These complex facets of PRP imply that it is important to

disentangle the relationship between various dimensions of PRP and organizational

outcomes by considering specific conditions under which an incentive system is

effective.

The complex relationship between PRP and organizational performance has already

been emphasized in previous literature (Heinrich, 2007; Perry et al., 2006, 2009;

Weibel et al., 2009). For example, Perry et al. (2009) called for scholarly attention to

find “effective contingent pay designs for public contexts,” by noting that “a variety of

antecedent employee and organizational characteristics and environmental conditions,

together with pay system design, affect critical intermediate variables . . . [which], in

turn, influence affective and performance outcomes” (p. 41). This study is a response

to this earlier call, given the research focusing on moderating factors in the public sec-

tor is still limited (Bregn, 2013; Weibel et al., 2009). Specifically, by utilizing the data

of 30 public enterprises in South Korea over the 2012 to 2018 period, this study exam-

ines how the target of PRP, pay system design, and organizational contexts moderate

the relationship between PRP and organizational performance.

The findings of this study add evidence to the view that it is important to design an

incentive system with careful attention to the target of the program (e.g., top execu-

tives versus mid- and low-level employees), pay design (e.g., organization-based

incentives versus individual- or team-based incentives), and organizational context

(based on the observability of organizational outcomes). First, this study finds that

PRP generally has a positive association with organizational performance—but its

effect depends on whom PRP targets. When implemented for chief executives, PRP

has a positive association with financial performance; when implemented for mid- and

low-level employees, it has a positive association with managerial performance.