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CEP discussion paper
The Paradox of Performance Related Pay Systems: 'Why Do We Keep Adopting Them in the Face of Evidence that they Fail to Motivate?'
David Marsden August 2009
Paper No' CEPDP0946:
Full Paper (pdf)

JEL Classification: J33; M52

Tags: pay for performance; public sector pay

This paper considers one of the paradoxes of incentive pay used in Britain’s public services, namely that despite much evidence that it does not motivate employees, it continues to be widely used. It is argued that behind this evidence, there are significant examples in which its use has been associated with improved performance. A good part of this is to be explained by the way performance pay links pay and appraisal, and the pressure this puts on line managers to set clearer goals for their staff. There is also some evidence that the goal setting is the outcome of a form of integrative, or positive sum, negotiation between individual employees and their managers, and that it is not just ‘top down’.