Premium
The psychological costs of pay‐for‐performance: Implications for the strategic compensation of employees
Author(s) -
Larkin Ian,
Pierce Lamar,
Gino Francesca
Publication year - 2012
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.1974
Subject(s) - compensation (psychology) , executive compensation , overconfidence effect , agency (philosophy) , seniority , principal–agent problem , microeconomics , empirical research , business , marketing , economics , psychology , social psychology , management , sociology , corporate governance , political science , social science , philosophy , epistemology , law
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.