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Why would managers abandon pay-for-performance plans they initiated with great hopes? Why would employees celebrate this decision? This article explores why managers made their decisions in 12 of 13 pay-for-performance "experiments" at Hewlett-Packard in the mid-1990s. We find that managers thought the costs of these programs to be higher than the benefits. Alternative managerial practices such as effective leadership, clear objectives, coaching, or training were thought a better investment. Despite the undisputed instrumentality of pay-for-perfor-mance to motivate, little attention has been given to whether the benefits outweigh the costs or the "fit" of these programs with high-commitment cultures like Hewlett-Packard was at the time. © 2004 Wiley Periodicals, Inc.
Introduction
Immense pressure for higher performance has led corporations to search continually for managerial practices that will enhance competitiveness. An increasingly large number of corporations have explored how rewards, particularly money, could be linked to desired behavior and/or performance outcomes to improve effectiveness (Gerhart &Rynes, 2003; Pfeffer, 1998; Rigby, 2001). This has led to widespread and growing development of pay-for-performance plans (Schuster &Zingheim, 1992). For example, a survey of 1,681 companies indicated that 61% had implemented variable compensation systems (Hein, 1996).
The powerful role that financial incentives can play in influencing behavior has been widely acknowledged since ancient times (Peach & Wren, 1992). Early motivation theories such as expectancy theory (Vroom, 1964) have demonstrated intuitive appeal, and its basic components have received empirical support (Van Eerde & Thierry, 1996). In addition, decades of empirical research in a variety of areas indicate that financial incentives are a potent motivator. An examination of studies of pay-for-performance programs suggests that performance improves in approximately two out of three programs (Heneman, Ledford, & Gresham, 2000). Gibson (1995) reported on a study by Carla O'Dell and Jerry McAdams (sponsored by World at Work and conducted by the Consortium for Alternative Reward Strategies), which suggested that the average net return on money invested in pay-for-performance programs was an impressive 134%. Surveys of 500 companies reported in the Economist ("Business: Pay Purview," 1998) indicated that those actively using pay-for-performance programs showed twice the shareholder returns as those who were not actively using these programs.
Proponents of pay-for-performance assert that traditional compensation systems can be detrimental to efforts to make an organization less hierarchical...