Individual Variable Pay for Performance, Incentive Effects, and Employee Motivation

A core question in research on compensation and motivation is whether individual variable pay for performance (IVPFP) can undermine intrinsic motivation in the workplace. We investigated the mediating role of incentive effects on the relationship between the amount of IVPFP received and both extrinsic and intrinsic motivation. In a cross-lagged study of 304 employees from eight European countries, we found that incentive effects mediated the negative association between IVPFP and intrinsic motivation and the positive association between IVPFP and extrinsic motivation. In addition, IVPFP was directly and positively associated with intrinsic motivation. These findings support the proposition from self-determination theory that financial rewards can have both a controlling effect that decreases intrinsic motivation and an informing effect that increases intrinsic motivation. Theoretical and practical implications for compensation and motivation in the workplace are discussed.