Interest in the relationship between pay and performance is of fundamental interest to nearly everyone in business. Academics, primarily from economics, human resources and psychology have researched and published on the issue for more than 100 years.
In a famous meta-analysis of 92 different samples, four American academics found a correlation of r*= 0.15 between pay level and job satisfaction and r= 0.23 of actual pay level with pay satisfaction. They concluded that level of pay had little relation to either job or pay satisfaction.
This suggests that within an organisation, those who make more money are little more satisfied than those who make considerably less. Contrary to many theories, the relatively well paid are only a little more satisfied than the relatively poorly paid. Yet people refuse to accept the validity of this study.
But most people are happy to take up one of three very clear positions on the topic:
The standard view: Money is a simple and powerful motivator. Money motivates people, and extra money motivates people to work extra-hard and more productively. Employees compete when rewarded by money, which raises productivity or standards. It is not always possible to promote people, so money is a simple, effective, equitable way to reward workers. Money is accepted for all workers, at all times, everywhere – psychologists call this a general reinforcer.
The sceptical view: Money sometimes, but not always, works. If employees are highly paid, money may not be sufficient as an incentive – beyond a level it has very little real effect. Money rewards may also set employees against each other, leading to conflict in the office – openness leads to conflict. It is also often difficult to determine the standard or basis for the decision to award the employee money. Why precisely are people paid as they are and what effect does this have on their productivity and wellbeing? If it is difficult to measure output/productivity, it is difficult to determine equitable pay scales.
The cynical view: Money rarely works as a serious, long-term work motivator. Money trivialises work, which for many professional employees should be its own reward. The amount received may not bear relation to what the employee actually does, particularly emotional labour. Indeed, if the employer finds it motivating to award money, perhaps the salaries are too low. Money as a major reward factor can paradoxically reduce intrinsic motivation – money is an extrinsic factor. There are many other and better ways to motivate employees than to simply throw money at them. Beyond a certain, surprisingly modest level it has little impact on either satisfaction or productivity.
The 10 issues
Below are 10 issues that can arise when trying to measure the relationship between pay and performance.
1. This is a very difficult area to research because it is usually problematic to get valid data on any of the major factors of interest. It is very difficult to get robust and sensitive measures, particularly of productivity/output for any complex job; and there are a number of confounding, mediating and moderator variables between pay and productivity (such as age, personality and values) that are rarely measured. So, it is difficult both to prove and disprove any relatively simple theory such as that money leads to motivation, which determines productivity. There are too many 'it all depends' caveats.