Performance pay, monetary gifts, and the moderating role of wage level

We conducted a field experiment to compare the effects of financial performance pay and monetary gifts on employee performance. We randomly assigned store managers at a German discount supermarket chain to receive either performance pay based on profit increases or an unconditional gift in the form of a lump-sum payment. Our findings indicate that, on average, performance pay significantly outperformed gifts, yielding profit increases of approximately 8 %. However, managers’ base wages appear to moderate the effectiveness of performance pay versus gifts. Performance pay appears to have a stronger performance effect for managers with higher wages. In contrast, for gifts, we find tentative evidence of a stronger effect at lower wages. We argue that the effectiveness of both incentives depends on a reference point defined by the desired bonus-to-wage ratio (i.e. performance-pay-to-wage or gift-to-wage ratio). For performance pay, which can vary based on effort, higher-wage managers must exert more effort to meet this ratio. For gifts, which are fixed amounts, lower-wage managers may perceive the same bonus as more generous, which can strengthen reciprocity.