Performance Myopia: The Effect of Pay-For-Performance Incentives on Exploration and Coordination

Abstract

Incentives are one of the core practices of strategic human resource management and their effect on motivation and performance has been studied extensively. Particular attention is devoted to pay-for-performance (PFP) incentives while research on the effect of PFP incentives on performance has produced contradictory results. More importantly, incentives are not an isolated process; the effect of incentives goes beyond individual or organisational performance because they affect an entire organisation. Although incentives are included in most organisational design frameworks, the effect of incentives on other organisational design components has been neglected. The study uses the organisational design framework to focus on neglected relations between incentives and other organisational design components. The purpose of the study is to explore what are the organisational design components and how they are influenced by PFP incentives. A case study research design was used. The data was collected in a small company in which the incentive system was changed to PFP incentives as a part of substantial changes in the organisational design. Data was collected through interviews with employees, supported by internal documentation and observation. Thematic analysis was used to analyse the data. In the case, the PFP incentives led to higher performance although the PFP incentives restricted the new exploratory strategy and harmed cooperation. The effect of the PFP incentives on exploration and cooperation was slow, and hardly visible, predominantly as a result of unintentionally deviated attention. The study points out that focusing solely on performance when designing incentive systems may be myopic because PFP incentives may have a detrimental effect on other organisational design components. Based on the results, the paper provides a set of suggestions to consider when implementing PFP incentives.

Employee’s psychological experiences with bank’s pay for performance system in South Africa

“…Performance management system or pay-for-performance (P4P) system remains one of the most popular strategic pillars to monitor performance (Park & Conroy, 2022) and reward (Nyberg et al, 2016), and is often used to motivate and retain employees (Kebels, 2022) in organisations, more specifically in the competitive banking sector (Liaquat et al, 2024) as important institutions in any country (Coste et al, 2021). Banks operate to make and maximise their profits and as a result, they need motivated, engaged and competent relevant motivational strategies such as P4P to attract and retain employees through both intrinsic and extrinsic rewards (Chen et al, 2023;Kong et al, 2023;Kralova & Kral, 2019;Maltarich et al, 2017;Nyberg et al, 2016;Vroom, 1964). However, most organisations' P4P systems tend to focus only on the rewards that are offered without thinking about the psychological experiences and after-effects of such rewards.…”