The psychological costs of pay‐for‐performance: Implications for the strategic compensation of employees
Year: 2012
Type: article
Abstract: Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. We instead focus on the strategic compensation of nonexecutive employees, arguing that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance‐based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance‐based compensation, building a theoretical framework predicting more prominent use of team‐based, seniority‐based, and flatter compensation. We argue that compensation is strategic not only in motivating and attracting the worker being compensated but also in its impact on peer workers and the firm's complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory. Copyright © 2012 John Wiley & Sons, Ltd.
Source: Strategic Management Journal
DOI: 10.1002/smj.1974
Authors: Ian Larkin, Lamar Pierce, Francesca Gino
Institutions: Harvard University, Washington University in St. Louis
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3124528338