Pay for performance works; pay for performance is pernicious.  Pay for performance motivates people; pay for performance hinders organizational cooperation and learning.  Pay for performance keeps everyone focused on the agency’s mission; pay for performance undermines teamwork and morale.  The debate continues — often heatedly.

Yet what, exactly, is this pay for performance about which people are arguing?  This isn’t obvious.  For the label “pay for performance” can be used to describe a disparate variety of reward schemes.  Indeed, there exist a number of quite distinct features of any pay-for-performance plan.  And these features can affect how well any such system might achieve its purposes.  Indeed, one possible reason why people disagree about the value of pay for performance is because their (usually implicit) operational definitions of the concept are quite different.

Any pay-for-perfromance plan must answer at least three core questions:  (1) Who gets rewarded?  (2) What is the reward?  (3)  What is rewarded?  These three core question can be further divided into a serious of design questions.  

For example, who gets rewarded?  Does the reward go to individuals or to teams?  If the reward goes to individuals, what individuals are eligible?  (Are only line staff eligible?  Or are support staff or the managers of line staff eligible?)  If the reward goes to teams, who is on these teams (and who isn’t)?  And if the reward goes to a team, can this reward be distributed among individual members.

A second design consideration concerns the nature of the reward?  Is the reward cash, some other extrinsic reward, or an intrinsic reward?  If the reward is cash, is the cash a one-time bonus, or an increase in the base pay?  And, how much cash is involved—for individuals, for teams, and in total?

Third, there are a series of design questions about the nature of the performance that is rewarded.  For example, does the reward go to those (individuals or teams) that perform in the top 20 (or 5) percent?  Or does the reward go to any individual or team that achieves its own performance target?

In total, there are at least two dozen different design decisions that any organization seeking to reward performance has to make (regardless of whether it makes these choices after conscious deliberation or simply by default).  And these choices are important, for they influence the incentives that any pay-for-performance creates.  Is the reward scheme designed to engage everyone in the organization or only some subset of people.  Of those it does seek to engage, does it motivate everyone or only those whose probability of winning is in doubt?  Finally (and perhaps most importantly) does it motivate people to share successful strategies or to hoard them?

This paper will categorize the various design decisions involved in creating any pay-for-performance plan and identify the potential implications for motivation and performance that different choices could create.