Performance-related pay, fairness perceptions, and effort in public management tasks: a parallel encouragement design

Abstract

This randomized study explores the causal mechanisms linking contingent pay to individual performance on a series of tasks mimicking real public management activities. Employing a parallel encouragement design in a laboratory setting, we disentangle the overall, direct, and indirect performance effects of perceived fairness as well as a pay scheme that reproduces the merit system provisions adopted by the Italian government. The overall performance effect of that contingent pay scheme turned out to be insignificant when averaged across the four experimental tasks. However, a significant pay-for-performance effect was detected for the most routine task. Moreover, we observed heterogeneity in the treatment effect depending on the participants’ relative positioning in the performance ranking. Overall, the data do not provide support for a mediation model linking contingent pay-for-performance through perceived fairness. Workers tend to perceive pay-for-performance as fairer than equal pay. The effectiveness of pay-for-performance seems to be greater for more routine tasks. Public organizations and their managers should be aware that the effects of pay-for-performance may be unpredictable because they depend on a multitude of factors.