Chapter 2: Pay for Performance: A Review of Theory and Research

The material presented in this chapter can be used to assess the desirability of merit pay. By the end of the chapter, the reader should be familiar with the general requirements and potential benefits and costs associated with merit pay. The first part of the chapter presents various theories that provide the rationale for making pay contingent on performance. The second part of the chapter looks at the extent to which it is possible to link pay to performance. Empirical research shows the actual relationship between pay and performance in a variety of organizational settings where merit pay is used. The third part of the chapter reviews the potential risks or dysfunctional consequences that may be encountered when pay is linked to performance.