Unpacking the Evolving Process of Pay-for-Performance System Implementation

Abstract

Compensation researchers and practitioners often wrestle with issues of how organizations manage pay-for-performance (PFP) systems. Research has mostly addressed employee work outcomes of pay practices and has largely considered the PFP system as a static mechanism. We build a cyclical process model of how PFP systems are enacted, transformed, and managed in firms, ultimately providing a theoretical basis for enhancing the understanding of PFP system design and effectiveness. Drawing upon agency theory, cybernetic theory, and Bowen and Ostroff (2004)’s HRM system strength approach, our model identifies critical factors—PFP system formalization, PFP distinctiveness, PFP consistency, and PFP consensus —that influence control over PFP system implementation in organizations. In particular, our model addresses the critical role of managers in implementing and synthesizing PFP systems, which ultimately influences the design of PFP systems over time. Our model explains how the misalignment of espoused and enacted PFP practices is created and resolved in organizations.