How different pay-for-performance remuneration plans affect executive performance

Abstract

Orientation: The design of remuneration plans and pay-for-performance is recognised as a long-standing management practice. Almost all remuneration plans include incentive and bonus schemes in order to motivate the desired performance of individuals by rewarding them based on performance.Research purpose: The primary aim of the study was to assess how different pay-for-performance remuneration plans affect performance.Motivation for the study: Research and literature indicates that pay-forperformance can indeed influence employee performance; however there are instances where there are negative effects associated with pay-forperformance. Pay-for-performance is in instances considered controversial owing to the large remuneration packages that executives in particular receive.Research design, approach and method: The research methodology that was utilised was a quantitative study, by undertaking a structured cross sectional survey of executives and managers. The survey was distributed to 201 potential respondents and the results of 118 respondents were utilised in the data analysis. Four different types of pay-for-performance plans were assessed, namely Merit Pay, Bonus Pay, Full Shares, and Share Appreciation Rights. Expectancy Theory was utilised as a basis in an attempt to explain the motivation of executives and managers with respect to the influence that different types of pay-for-performance plans have on performance.Main findings/results: All of the pay-for-performance plans were found to have a positive effect on the motivation of employees; however it was found that the most significant factor relating to motivation of employees was expectancy as opposed to the preference of the type of reward (valence). The rewards preferences, as determined by this study, in order of preference were Merit Pay, Full Shares, Bonus Pay, and Share Appreciation Rights.Practical/Managerial implications: This study confirms that it is more important to understand individuals and what motivates them than the actual rewards offered. Different rewards have different motivational effects, however the reward itself is not the dominant determinant with regards to motivational as a whole.Contribution/value-add: This study further clarifies the influence that different pay-for-performance remuneration plans have on the future performance of executives and managers.