PE research is dominated by cognitive processing, measurement and construct validity issues, as PFP linkages exist but it’s most of other disciplines than psychology. The origins of general separation of PE research from PFP research are in psychology but recent research has linked PE and performance improvement, especially multisource and 360-degree evaluation and found that most organizations use PFP systems and most workers want to be paid on the basis of performance. Nevertheless, literature on PE has little examination of consequences of linking pay to performance and there’s large literature in PFP effects in disciplines mostly outside psychology.
The roots of the split begun with motivational theories stating monetary rewards weren’t a major determinant of work motivation, except maybe for low-income as the Need Hierarchy theory (Maslow), the Motivation-hygiene theory (Herzberg) and the Cognitive Evaluation theory (Deci & Ryan).
Meyer, Kay and French have come with the “Split Roles” in PE stating that distracting and demoralizing aspects of criticism and authoritarian nature of evaluation ð 2 functions of performance appraisal should be kept completely separate (in time) because it was foolish to have a manager in self-conflicting role of counselor and judge over same employee’s salary
But “criticism has negative effect on goal achievement while praise has little effect in either direction” so empirical research on these led to a Feedback Intervention theory (laboratory, meta-analysis – Kuger & DeNisi 1996) about FI effect on performance, stating that demoralizing feedback is more likely to have detrimental effects as negative feedback can impair performance true at least when draws attention away from the task but usually it’s focused on task and doesn’t have that effect. The overall test of differences for feedback direction is not significant and decline in performance due to negative feedback was not supported with research
Multisource Feedback (field research), 360-degree PE, is believed to be potentially more useful than supervisory-only with increasingly incorporate team-based production, more flat organizational structures and work organized around horizontal rather than vertical flows. It showed improved reliability and validity and that individuals usually improve performance after but average effect sizes are modest and wide variations in improvement across individuals. Over-raters tend to improve most following feedback and it’s consistent with Kluger & DeNisi that effort increases after negative feedback.
There’s evidence of growing use of PFP and is generally positive but there are some caveats as pay isn’t the only important motivator and there’s an upside potential and downside risk. The variety of psychological theories explain money’s role in motivation: equity and justice, drive, goal, self-efficacy, prospect, expectancy, agency and tournament theories
Management must choose a performance measure. Individual contributions often hard to identify or performance more difficult to measure objectively can lead to subjective measures (supervisory ratings). The organization use multiple measure to balance multiple, sometimes, conflicting objectives. Managers must think about some key choices regarding the emphasis on results-oriented measures relative to behavior-based, the intensity of incentives and risk aversion influencing their effectiveness and emphasis on individual relative to group contributions. Lately, criticisms on focusing too much on individual have arise due to ineffective, inciting grievances and reducing product quality, often obscures apparent differences in individual performance that arise from the system rather than the people themselves, discourages team-work but group-based plans also have disadvantages as most employees prefer pay based on individual (strongest among the most productive and achievement-oriented), unfavorable sorting effects causing highest performers to choose alternative opportunities where individual results rewarded more heavily, weakened incentive effects
Some studies have been focusing on intervening processes, finding a correlation of HR practices with org-level outcomes but researchers need to begin measuring mediating psychological variables as employee attitudes, beliefs and behaviors to tease out causal processes and provide guidance about how best to implement PE and PFP. Contextual variables as strong communications, inspirational leadership, highly participative culture or limited alternative employment opportunities might ameliorate or reverse potentially negative sorting effects. Multisource PE has potential advantages as higher credibility, reliability and lower deficiency but few companies use it for administrative purposes. Research suggests a variety of actions associated with improvements in performance following feedback and that linking it to money or other administrative consequences is unwise. The Merit Pay is the most common PE-pay combination, even if they have subjective supervisory appraisals.
In summary, PE is used to provide developmental feedback and motivate employees linking PE-rewards but psychological research has focused mainly on PE while other disciplines on PF. The main challenge is to managers ensure compensation systems aren’t motivating the wrong kinds of behaviors. Monetary rewards and intrinsic motivation usually don’t work in opposition among working adults and on average performance improves after negative feedback
Pay has considerable effectiveness as motivator. While PE literature focused on developmental and ability side of performance, the PFP literature focused on the evaluative and motivational side.
The prevailing view is that specific predictions of these theories are not supported by empirical evidence: CET has stronger (and mixed) support but largely untested in ongoing work settings (different setting to laboratory) and the theories’ influence on practice remains substantial.
Every pay program has advantages and disadvantages, differ in sorting and incentive effects, incentive intensity and risk, use of behavior versus results, and emphasis on individual versus group measures. Reduce risk, garnering most of their benefits, by using a mix of programs.