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CEP discussion paper
Does Performance Pay De-Motivate, and Does It Matter?
Stephen French, Katsuyuki Kubo and David Marsden
August 2001
Paper No' CEPDP0503:
Full Paper (pdf)

JEL Classification: J33;J45;M12

Tags: performance-related-pay; incentives; performance measurement; organisational commitment; public sector.

The sheer scale and speed of the shift of payment system from time-based salaries to performance-related pay, PRP, in the British public services provides a unique opportunity to test the effects of incentive pay schemes. This study is based on the first large scale survey designed to measure the effects of performance related pay on a) employee motivation and work behaviour across the British public services; and b) workplace performance. The latter uses an index of organisational performance based on line-manager judgements. While there is evidence of a clear incentive effect for those gaining above average PRP, it is likely that it is offset by a more widespread de-motivating effect arising from difficulties of measuring and evaluating performance fairly. These motivational outcomes are found to affect workplace performance. Organisational commitment appears to offset some of the negative effects of PRP. In contrast to the many studies of top executives, sales and sports personnel, our study examines PRP for large numbers of ordinary employees.