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CEP discussion paper
Matchmaking: the Influence of Monitoring Environments on the Effectiveness of Performance Pay Systems
Richard Belfield and David Marsden August 2002
Paper No' CEPDP0543:
Full Paper (pdf)

JEL Classification: J33;M12

Tags: performance-related pay; incentives; performance measurement; organizational commitment

This study uses cross-section and panel data from the 1998 Workplace Employee Relations Survey to explore contextual influences on the relationship between performance-related pay (PRP) and organizational performance. While it finds strong evidence that the use of PRP can enhance performance outcomes, it also determines that this relationship is qualified by the structure of workplace monitoring environments. In addition, it presents evidence that managers learn about optimum combinations of pay system and monitoring environment through a process of experimentation. Lastly, although there exists a robust positive association in these data between use of PRP and pay inequality, it appears that these higher levels of inequality carry no performance penalty.