Performance pay has been one of the main trends in public sector reform over the last decade and aims to increase employees’ motivation. However, positive results are sparse. In a majority of cases, pay scheme designers neglect that intrinsic motivation may be distorted by the introduction of extrinsic rewards (crowding out). Nevertheless, under certain conditions, performance pay schemes may also enhance intrinsic motivation (crowding-in). The perception of rewards has proven to be an especially crucial factor for the outcome of performance pay. Based on psychological contract theory, this paper analyzes the relationships between intrinsic motivation, public service motivation (PSM), personality characteristics, and the design of the performance- appraisal scheme. The empirical analysis relies on a structural equation modeling (SEM) approach. Model findings reveal that a fair, participatory, and transparent design reduces the controlling perception while fostering the intrinsic motivation of employees. In addition, participants who score high on neuroticism perceive performance pay schemes to be more controlling and have lower values of intrinsic motivation.

The introduction of performance-related pay (PRP) in the public sector has been one of the main trends in public management reform in the last two decades. However, it seems that PRP regimes have been loosened or even backed off the reform agenda, often with the notion that they were not used as planned, failed to deliver, and ultimately were stalled as being an incompatible control instrument to the existing administrative culture. Focusing on the local government level in Germany, France and Italy, the authors explore the question why PRP systems have failed to manifest a core position in the performance oriented reform agendas. Diffusion and implementation practice in the three countries shows significant differences and leads to relevant heterogeneity and variance of implementation of PRP.