The psychological costs of pay-for-performance: Implications for the strategic compensation of employees
Version of Record online: 12 MAR 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 33, Issue 10, pages 1194–1214, October 2012
How to Cite
Larkin, I., Pierce, L. and Gino, F. (2012), The psychological costs of pay-for-performance: Implications for the strategic compensation of employees. Strat. Mgmt. J., 33: 1194–1214. doi: 10.1002/smj.1974
- Issue online: 10 AUG 2012
- Version of Record online: 12 MAR 2012
- Manuscript Revised: 18 FEB 2012
- Manuscript Received: 19 OCT 2010
- principal-agent models;
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.