Economics, Public Service Motivation, and Pay for Performance: Complements or Substitutes?

ABSTRACT This article summarizes what we can learn from personnel economics about the likely empirical veracity of the statements regarding the efficacy of pay for performance in the public sector: If pay is based on public service performance, and if people work for pay, then pay for performance will align motivation and performance. I argue instead that the predominant conclusion from the economics literature, which focuses on the private sector, is that in many contexts usually thought to characterize public as well as private sector employment, motivation, pay, and performance are more likely to be substitutes at critical margins. The consequence is that performance pay may have unintended adverse consequences. It is not widely used in many complex private sector organizations and probably should not be widely used in similar public sector operations.