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

AuthorJinsol Park
Published date01 September 2022
Date01 September 2022
Subject MatterArticles
Review of Public Personnel Administration
2022, Vol. 42(3) 416 –443
© The Author(s) 2021
Article reuse guidelines:
DOI: 10.1177/0734371X21990722
What Makes Performance-
Related Pay Effective in the
Public Sector? Target, Pay
Design, and Context
Jinsol Park1
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.
performance-related pay, pay-for-performance, incentives, public performance,
personnel management
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
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
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.

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