Article 1 Edu. Management Fashion P4P

7/23/2019 Article 1 Edu. Management Fashion P4P

1/32Electronic copy available at: http://ssrn.com/abstract=1028753

Management Fashion Pay-for-Performance

KATJA ROST

University of Zurich, IOU Institute for Organization and Administrative Science, Plattenstrasse

14, CH-8032 Zrich, mail: [email protected]

MARGIT OSTERLOH

University of Zurich, University of Zurich, IOU Institute for Organization and Administrative

Science, Plattenstrasse 14, CH-8032 Zrich, mail: [email protected]

Summary

Management fashions promise solutions for allegedly urgent problems. Pay-for-Performance

appears to be such a fashion. It seems to guarantee a more effective monitoring of the

management considering the failure of the board of directors. We show theoretically and

empirically that Pay-for-Performance, like many fashions, did not reach the intended task, but

leads to the contrary. The example Pay-for-Performance shows that many fashions rather

aggravate problems that they pretend to solve. Nethertheless they are able to persist until a new

fashion takes over.

Key words:Pay-for-Performance, Management fashion, Crowding-out


2/32Electronic copy available at: http://ssrn.com/abstract=1028753

1

1 THE RISE OF THE FASHION PAY-FOR-PERFORMANCE

Management fashions promise solutions for problems that are considered urgent. A

management fashion () is a relatively transitory collective belief, disseminated by management

fashion setters, that a management technique leads rational management progress.

(Abrahamson, 1996: 257). Examples for management fashions of the last years are Business

Process Reengineering, ISO 9000 ff., Lean Management, Downsizing, Shareholder Value,

Empowerment, Excellence, Core Competences, Corporate Culture and Open Innovation (Kieser,

2000, 2002; Teichert & Talaulicar, 2002). Object of management fashions are management

concepts (Kieser, 1996; Kieser, 1997). These concepts are supposed to structure and settle

problems that are considered urgent and worth to be solved at a certain time. History shows that

management fashions occur in ever quicker succession (see Figure 1).

FIGURE 1. Development of management fashions(Ghemawat, 2000: 25)

Many management fashions develop and survive, even if there are doubts concerning their

effectiveness, or the latter has turned out to be dysfunctional. At times, they penetrate into

domains, for which they have not been designed; that is where they unfold their detrimental


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effect. A particularly dramatic example for this development is Pay-for-Performance.

Pay-for-Performance wants to compensate the staff according to their individual and specific

performance in order to motivate them for further efforts. The concept follows the idea of the

piece rate paid for piecework. The company Safelite Glass is a prominent example. After the

change from fixed pay rates per hour to piece rates, measured according to assembled glass units

per laborer and day, productivity rose by astonishing 36% (incentive-effect 20% and self-

selection-effect 16%), while salary cost only rose by 9% (Backes-Gellner, Lazear & Wolff,

2001: 295-304; Besanko, Dranove, Shanley & Schaefer, 2004; Lazear, 1999; Wolff & Lazear,

2001). This concept was transferred to managers. Pay-for-Performance intends to link the

interest of the owner (firm performance) with the interest of the CEOs (income) (Jensen &

Meckling, 1976). It is aimed to motivate the CEO to act like the owner of a firm even in

situations which cannot be monitored, e.g. during negotiations (Core, Holthausen & Larcker,

1999; Eccles, 1985; Eisenhardt, 1985; Eisenhardt, 1989; Fernie & Metcalf, 1996; Gomez-Mejia

& Balkin, 1992; Henderson & Fredrickson, 1996; Jensen & Murphy, 1990b; Tosi, Katz &

Gomez-Mejia, 1997; Welbourne, Balkin & Gomez-Mejia, 1995).

Pay-for-Performance features nearly all components of a management fashion (Benders & van

Veen, 2001; Kieser, 1996):

It is perceived new, progressive, innovative, rational and functional (Carson, Lanier, Carson

& Guidry, 2000).

It promises the solution of an acute problem, i.e. the incompetence of the board of directors

(Allen, 1974; Galbraith, 1967 ; Herman, 1981; Mace, 1971). At the beginning of the sixties

the effectiveness of monitoring of the board started to be questioned. It was claimed that their

influence on the decisions of the management is marginal.1

A key factor is heavily promoted and an easy transposition is suggested. This is the linking of

the different interests of shareholders and management by means of monetary compensation

dependent on performance (Jensen & Murphy, 1990a).

1The introduction of Pay-for-Performance actually is a demonstration of distrust for the controlling body

respectively the board, whereby the management should be monitored directly by the shareholders.


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Fashion setters like gurus, mass media or business schools interact as suppliers with the

demanding enterprises (Abrahamson, 1996).

Consultants grasp the concept and promise an enormous improvement of efficiency

(Schiltknecht, 2004; Schtz, 2005).

The fashion Pay-for-Performance soon became popular in practice as well as in literature. Stock

corporations replaced the prevailing fixed salaries of CEOs more and more with variable

performance components such as bonus-, option- or share-programs. American corporations

were the pioneers. The variable part of a CEOs salary in 1993 was already 37% and rose in

2003 to 57% (Bebchuk & Grinstein, 2005). In 2005 the variable part of a CEOs salary in

Switzerland was 59 %, in Germany 57 %, in Austria 50 % and in the United States 81 % (Piazza,

2006). In science, the number of the published articles in the Web of Science regarding the

topic Pay-for-Performance have been increasing breathtakingly since 2002 (see Figure 2).

FIGURE 2. Increase of publications regarding Pay-for-Performance

0

20

40

60

80

100

1970 1975 1980 1985 1990 1995 2000 2005

Numberofscientificpublica

tions

(WebofScience)

In this article we show that the fashion Pay-for-Performance like many management fashions

not only disappoints the anticipated expectations, but also turns out to be dysfunctional.

In the second paragraph we display the theoretical points for the counterproductive effect of Pay-

for-Performance. In the third paragraph we show methods and results of an own meta-analysis. It


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leads to an unambiguous conclusion: Pay-for-Performance nowadays is negatively correlated

with firm performance. We question why the Pay-for-Performance fashion can persist and even

penetrate into domains, in which even fashion setters did not intend them to occur.

2 THEORETICAL REFLECTIONS ABOUT THE EFFECIVENESS OF

PAY-FOR-PERFORMANCE

Despite the ongoing popularity of Pay-for-Performance there are increasingly critical votes from

firm owners (Minder, 2007), representatives of science (Backes-Gellner & Geil, 1997; Bebchuk

& Fried, 2003; Bebchuk & Grinstein, 2005; Benz & Stutzer, 2003; Bertrand & Mullainathan,

2001; Frey & Osterloh, 2005; Rost & Osterloh, 2007a; Schiltknecht, 2004; Tosi, Werner, Katz &

Gomez-Mejia, 2000; Weibel & Bernard, 2006), publishers (Schwarz, 2006) and board members

(Amstutz, 2007; Krauer, 2004; Maucher, 2007). In their opinion, many CEOs take a much too

high salary for insufficient performance. Pay-for-Performance is said to have turned into Pay-

without-Performance (Bebchuk & Fried, 2004). Their opinion is based on the following points

(Ettore, 1997):

No incentive effect. A considerable number of empirical researches result in finding that there

is actually no relation between the performance-related salary of a CEO, and the performance

of an enterprise (Aoki, 1984; Bebchuk & Grinstein, 2005; Bertrand & Mullainathan, 2001;

Dalton, Daily, Certo & Roengpitya, 2003; Deckop, 1988; Dyl, 1985; Herman, 1981; Lawler,

1971; Marris, 1964; McGuire, Dow & Argheyd, 2003; Redling, 1981; Rich & Larson, 1984;

Tosi, 2005; Tosi & Gomez-Mejia, 1989; Tosi et al., 2000).

No market conformity in terms of salaries. In the United States the average salary of a CEO

rose between 1990 and 2005 by 298,2 % (Anderson, Cavanagh, Collins, Benjamin &

Pizzigati, 2006). In Switzerland CEO income has risen since 2002 by 60 %. It is highly

questionable whether this development is market-conform (Rost & Osterloh, 2007a).2.

Pay-for-Performance as an additional income. Companies do not replace part of a CEOs

fixed income with variable performance components, but instead pay the variable share in

addition. (see Figure 3)

2The authors show, that the manager salaries in Switzerland are at least 30 % above the market-related income.


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FIGURE 3. Pay-for-Performance and increase of salaries of CEOs in S&P 500 enterprises (USA:

figure above Jensen, Murphy & Wruck (2004: 31)) and in 200 SPI enterprises (Switzerland

figure below; Rost & Osterloh (2007a))

Durchschnittliches

CEO-GehaltinTsd.

$

61%61%

22%22%

16%16%14%14%

29%29%

56%56%

14%14%

37%37%

49%49%

12%12%

70%70%

18%18%

25%25%

52%52%

23%23%

Increasing salary gap. The salary gap between normal employees and CEOs opens ever

wider. In 1990 the highest-paid managers in the United States earned 25 times more than an

average employee. In 2005 their income was 500 times higher (Anderson et al., 2006;

Bebchuk & Grinstein, 2005). In Switzerland this ratio was 1:54 in 2002 and rose to 1:64 in

2006 (Rost & Osterloh, 2007b).


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As a consequence, Pay-for-Performance has not reached its target. It does not align the interests

of shareholders and management (Berle & Means, 1932). The explosion of the management

salaries and the string of financial scandals in big enterprises, e.g. Enron, WorldCom, Xerox und

Tyco, support this view.

Some managers and compensation consultants oppose that the war for talents demands high

compensation packages (Martin & Moldoveanu, 2003). In their view, recruitment of highly

talented leaders in a global economy needs to pay high salaries (Wuffli, 2006).

In contrast, we reason that the incentive effect of Pay-for-Performance is not positive, but

negative. It worsens the conflicts between shareholders, staff and management. Numerous

experiments, field studies and meta-analyses show that external incentives, particularly money,

under certain circumstances have a negative effect on the performance.3In psychology this has

been discussed under the term corruption effect or hidden costs of rewards (Lepper & Greene,

1978), (Osterloh & Weibel, 2006). In psychological economics it has been introduced as

crowding-out-effect (Frey, 1997). The crowding-out-effect basically consists of four sub-

effects, the over-justification-, the spill-over-, the multi-tasking- and the self-selection-effect. All

four effects are based on the distinction between extrinsic and intrinsic motivation. 4

Over-justification-effect. If intrinsic-motivated persons are caused to act according to external

control, they reduce their intrinsic motivation (Deci, 1975; Deci, Koestner & Ryan, 1999;

Frey & Oberholzer-Gee, 1997; Weibel et al., 2007). Their internal locus of causality is

replaced by an external locus of causality (De Charms, 1968). They tend to enjoy their work

3The crowding-out effect is documented empirically well. (Frey & Jegen, 2001): Deci and his group of researchers

were able to show in numerous laboratory experiments, that monetary rewards for intrinsically motivated tasks leadto a decline in future intrinsic motivation (Rummel & Feinberg, 1988; Tang & Hall, 1995; Weibel, Rost & Osterloh,

2007; Wiersma, 1992). All these meta-analyses indicate, that intrinsic motivation is eliminated by external

incentives displaying controlling character. Furthermore, the crowding-out effect was confirmed by field research

(Frey & Jegen, 2001; Weibel et al., 2007).

4An action is intrinsically motivated, if it is done for its own sake, i.e. out of interest or joy for the matter or in order

to maintain an internalized norm. An action is extrinsically motivated, if it is done instrumentally for the purpose of

reaching a result beyond the action itself . The differtentiation between intrinsic and extrinsic motivation dates back

to Atkinson, De Charms and Deci (Atkinson, 1964; De Charms, 1968; Deci, 1975).


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less because their autonomy is reduced. If the reduced intrinsic motivation is not compensated

by external incentives, e.g. money, the performance decreases (Weibel et al., 2007).

Spill-over-effect. If originally intrinsic-motivated persons are rewarded monetarily for a

certain task, the intrinsic motivation is not only reduced for the task in question, but is also

transferred to other domains. A child who is rewarded for clearing the table, will also ask to

be rewarded for disposing of the garbage (Frey & Osterloh, ???????). Hier das Buch Frey

/osterloh management by Motivation einsetzen

Multi-tasking-effect. Pay-for-Performance promotes strategic behavior of people, because they

only concentrate on tasks with monetary rewards and neglect anything else (Backes-Gellner et

al., 2001; Holmstrm & Milgrom, 1991; Pfaff, Kunz & Pfeiffer, 2000; Pfaff & Stefani, 2003).

For example, transactions that cannot be monitored easily, such as organizational citizenship

behavior, are ignored (Rost, Weibel & Osterloh, 2007). Furthermore, manipulations (Denis,

Hanouna & Sarin, 2005; Efendi, Srivastava & Swanson, 2006; Erickson, Hanlon & Maydew,

2006; Johnson, Ryan Jr. & Tian, 2006; Marciukaityte, Szewczyk, Uzun & Varma, 2006;

OConnor, Priem, Coombs & Gilley, 2006; Osterloh & Frey, 2004) or even fraud (Denis et

al., 2005; Efendi et al., 2006; Erickson et al., 2006; Johnson et al., 2006; Marciukaityte et al.,

2006; OConnor et al., 2006; Osterloh & Frey, 2004; Staffelbach, 2001) are promoted.

Examples are creative accounting and cooking the books (Aboody & Kasznik, 2000;

Baker, Collins & Reitenga, 2003; Chauvin & Shenoy, 2001; Yermack, 1997). The multi-

tasking-effect has caused stock options to become more and more heroin for managers

(Jensen et al., 2004).

Self-selection-effect. Pay for performance attracts extrinsic-motivated persons more than

intrinsic-motivated ones (Backes-Gellner & Wolff, 2001; Bohnet & Oberholzer-Gee, 2000;

Osterloh & Frey, 2005). On one hand, extrinsic-motivated employees reinforce the necessity

for external control measures (control-paradox) (Lepper & Greene, 1978); on the other hand,

intrinsic-motivated persons, who are often particularly willing to perform, feel treated unfairly

and watch out for a different activity (Osterloh, Frey & Homberg, 2007).

These four negative effects of external incentives on working performance lead us to the

following hypothesis:


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Pay-for-Performance reduces performance in the course of the time, i.e. a high pay-for-

performance compensation for CEOs reduces firm performance.

3 EMPIRIC EVIDENCE

3.1 Sample

Our research is based on previous empirical studies that examined the relationship between

variable executive pay and firm performance at different dates. The procedure of meta-analysis

allows a statistic analysis of this primary examinations (Hunt, 1997).5

We take all previous studies, which have been published up to today, into consideration. (1) The

data bases Business Source Premier, Elsevier, Emerald and Jstor were scrutinized by using the

following key terms: executive compensation, CEO compensation, CEO remuneration,

top management compensation, tangible rewards, equity based compensation, high

incentives, variable compensation, pay for performance, performance based

compensation, subsequent performance. (2) The cited and citing literature of identified

surveys were scanned for further studies. (3) We include all surveys identified by previous meta-

analyses (Dalton et al., 2003; Tosi et al., 2000).

We included studies which meet the following requirements: (1) The study measures either the

CEOs salary or the salary of the top management. (2) The survey takes performance-dependent

salary components into consideration (we regard this as: Total compensation = fixed salary +

bonus plans + shares and option plans, or cash compensation = fixed salary + bonus plans, or

bonus plans and/or shares and option plans). (3) The survey measures the firm performance

according to the market value of a firm or according to accountings-based measurements such as

5The empircal design has the following advantages: (1) Quantification of surveys and results, (2) Meta-analyses can

also be understood by persons not involved in science, (3) Replicability and impartiality. The empirical design has

the following disadvantages: (1) Comparability of the surveys, (2) Integration of surveys of differing quality, (3)

Publication Bias in favour of published, significant results (4) Nonindependent Effects in case a survey

documents several correlations (Eisend, 2004)). These disadvantages can be minimized by systematical sampling

and by properly applied methods of analysis.


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ROA, ROE or operating results.6 (4) The survey measures the relationship between salary and

firm performance.

The final sample comprises 75 empirical studies (n= 123,797 firms). These studies document

259 statistic correlations between CEO-pay and firm performance (n= 486,422 observations).

Most surveys do not report bivariate correlation coefficients, but only indicate the t-values of the

regression coefficients. The latter are not supposed to be used in meta-analyses. We consider

these studies in the analyses and check subsequently for systematic biases. First, there is the

danger of systematically biasing the results against economic authors, especially when such

researches are exempted. Economic journals most unlikely demand, that the correlation

coefficients should be documented. Second, authors often consider analog control variables in

regressions, because the correlation between CEO salary and performance is one of the most

frequently analyzed phenomena. Third, a controlled-correlation measures the extent of a

correlation more accurately.

3.2 Measurements

Year. We coded the studies in terms of the time period, in which the relationship between pay

and performance were measured. For panel studies we determine the average year of the

investigated time period.

Pay-for-Performance-link. In order to examine the effect of Pay-for-Performance of the CEO on

firm performance, we distinguish between two frequently applied measures of the link between

pay and performance. (1) Shares- and option-plans are meant to increase the long-term, market-

based firm value. (2) Bonus compensations are meant to increase the short-term, accounting-

based firm value. In our models we investigate how Pay-for-Performance affects the market-

based value of a firm, respectively the accounting-based value of a firm. On top of that we

determine the overall correlation between Pay-for-Performance and average performance.

6We allotted the different performance evalutaitons according to the survey of (Tosi et al., 2000) to the market value

respectively to the enterprise profit in the books.


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Moderation effects. We check whether the form in which the results are documented (1 =

correlation coefficient, 2 = t-value of the regression coefficient) biases the investigation results

systematically.

3.3 Method

Computations for the meta-analysis were performed by using the Comprehensive Meta Analysis

(Borenstein, 2000). This software package transforms correlation values into Fishers Z, uses the

approach of Hunter and Schmidt (2004) and allows to search for sampling error, measurement

error and range restriction. Before running the analyses, we plotted a studys effect size against

its standard error. The studies were distributed symmetrically about the combined effect size and

point out the absence of publication bias.

For each single study we determine a total effect d.7This effect is calculated with the indication

of the correlation coefficient r respectively with the indication of the t-value of the regression

coefficient as follows:

(1) =id21

2

i

i

r

r

or (2) =id

i

ii

N

Nt

Subsequently we calculate an average effect dfor the total sample respectively for each period

of investigation.8This effect was corrected by means of sampling errors. We are using Fixed-

Effect-models as integration models, i.e. the correlations are weighted by the sample size of a

study. This assumption is based on an overall population parameter of all surveys, whereby the

effects of a single study randomly differ from the error in the overall sample. The total effect is

calculated from the study-specific weights w, as follows:

(2) =d

i

ii

w

dw )(

7To ensure an acceptable level of independence among studies with multiple subgroups, our unit of analysis is the

study. If a study documents more than one statistic correlation (subgroups), we summarize these effects first on the

level of the single study.

8An effect of 0.8 is assumed a large effect, an effect of 0.5 an average one and an effect factor of 0.2 a small one

(Rustenbach, 2003).


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In order to estimate the development of the incentive-effect of Pay-for-Performance over the

time period, we run a fixed-effect meta-regression analysis.

The results are furthermore checked for their internal homogeneity. A significant Q-value is

evidence for not considered moderator variables, i.e. the dissimilarity between the effects in

different studies results from sampling errors.

(3) =Q2

1

)( ddw ik

i

i =

For the descriptive information of all surveys refer to Table 3 in the appendix.

3.4 Results

Cross-sectional models. In a first step we examine the incentive effect of Pay-for-Performance

without considering the year of investigation. Our analyses determine a correlation between CEO

salary and performance of d=.11*** (refer to Table 1) According to this the variable CEO

income contributes at 1.20 % to the increase of the firm performance, i.e. in fact not at all.

Previous investigations have shown the same results (Aoki, 1984; Bebchuk & Grinstein, 2005;

Bertrand & Mullainathan, 2001; Dalton et al., 2003; Deckop, 1988; Dyl, 1985; Herman, 1981;

Lawler, 1971; Marris, 1964; McGuire et al., 2003; Redling, 1981; Rich & Larson, 1984; Tosi,

2005; Tosi & Gomez-Mejia, 1989; Tosi et al., 2000). Here the market value of an enterprise is

increased by d=.11*** by shares- and option plans, while bonus compensations increase the

accounting value of a firm by d=.12***. The incentive effect of both types of Pay-for-

Performance appears therefore, despite marginal differences (z=5.92**), equally ineffective.

However, a differentiation of both types reduces the heterogeneity in the sample

(QTotal=4357.17***/ QBonus-pay=1248.19***/ QEquity-pay=2070.59***). This indicates moderatorvariables, such as the time factor.

A systematic bias of our results due to the way they have been documented during the survey is

considered minor. The heterogeneity is reduced only marginally in a differentiated analysis

(QTotal=4357.17***/ QCorrelation=700.81***/ Qt-value=3632.98***). Studies documenting bivariate

correlations determine, as expected, a significantly higher incentive effect of Pay-for-


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Performance ( d=.14***) than studies displaying correlations that are controlled regression-

analytically ( d=.07***). This difference is significant (z=92.17***).

TABLE 1.Results of the meta-analysis (Fixed-effect-Model)

Model # Surveys(#Sub groups)

Est.

Surv.. Err. Z-Value Heterogeneity(Q-Value)

Total effect 87 (259) .08***

.001 52.39 4357.17***

Method of documenting results:

Correlation 27 (93) .14***

.012 21.08 700.81***

t-Value of the regression coefficient 60 (166) .07 *** .000 49.11 3632.98 ***

Group difference 92.17***

Pay-for-Performance-Link:

Bonus-based effect: Linking of the CEOsalary to accounting performance 48 (134) .07

*** .004 24.81 1248.19

***

Equity-based effect: Linking of the CEO

salary to market performance 39 (125) .08 *** .003 34.72 2070.59 ***

Group difference 5.92 **

Caption: **p


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FIGURE 4.Graphic clarification of the regression results

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

Incentivee

ffectofPay-for-Performanc

o

nfirmp

erformance

Equity-based effect: Linking of the CEO salary to market performance

Bonus-based effect: Linking of the CEO salary to accounting performance

Overall effect: Linking of the CEO salary to firm performance

Over the years Pay-for-Performance has a constant incentive effect of d=.11on the long-

term, market-based value of a firm (=.000). The result documentation in the surveys does

not change this finding (for the t-value: =-.000).9Therefore it was and is irrelevant for

the firm performance, whether and how many options and shares firms give to their CEOs.

This tautological correlation between Pay-for-Performance and the market-based value

of a firm is substantiated by Jensen et al. (2004). The authors show that the variable salary

of CEOs consisting of shares and options fluctuates in line with the S & P-500 index.

Pay-for-Performance reduces the short-term, accounting-based value of a firm over the

years (=-.007***). The result documentation in the surveys does not change this finding

(for the t-value: =-.007***, for correlations: =-.011***). In 1950, a CEO-bonus caused

indeed an impressive increase of the firm profit of d=.34. In 2007, however, a higher

CEO-bonus causes a slight decline of the enterprise profit ( d=-.04). If this result is

extrapolated, the negative correlation will surface clearly in the year 2020 ( d=-.12).

According to this, the probability of a downturn of the accounting-based value of a firm

will rise in the future when a bonus is granted! This finding about the effect of Pay-for-

Performance on firm profit confirms our hypothesis tentatively.

9For surveys documenting the correlation coefficient, there are insufficient cases for reliable regression estimations.


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TABLE 2.Regression results (Fixed-effect-Model)

Regression coefficient Constant Heterogeneity

Model

Est. Std.Err.

Z-value

Est. Std.Err.

Z-value

Q-value

Model

Tau-

square

Total effect -.003***

.000 -18.45 6.45***

.345 18.67 340.46 .008

Pay-for-Performance-Link:

Bonus-based effect: Linking of the

CEO salary to accounting

performance -.007***

.000 -21.72 13.28***

.61 21.84 471.64 .007

Equity-based effect: Linking of the

CEO salary to market performance .000 .000 .70 -.41 .63 -.66 .62 .012

Method of documenting results:

Correlation -.005

***

.001 -7.40 10.93

***

1.46 7.495 54.80 .026t-value of the regression coefficient -.002 ***.000 10.39 4.91 *** .46 10.61 107.84 .011

Only correlations:

Bonus-based effect: Linking of the

CEO salary to accounting


.000 -13.09 21.20***

1.61 13.15 171.24 .015

Equity-based effect: Linking of the

CEO salary to market performance -- -- -- -- -- -- -- --

Only t-values regression coefficient:

Bonus-based effect: Linking of theCEO salary to accounting


.000 -17.21 12.16***

.70 17.30 296.03 .005

Equity-based effect: Linking of theCEO salary to market performance -.000 .000 -.18 .20 .64 .31 .03 .011

Caption: **p


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to induce actions... (Kieser & Hegele (1998: 40); referring to Eccles & Nohria (1992: 29 f.)).

Fashion motivates to test new solutions.

Why did the effect of bonus payments turn out to be negative in the course of the time?

Bonuses in enterprise practice are mostly designed nonlinear but granted within an incentive

zone (Jensen et al., 2004). First, the values of a profit interval are determined arbitrarily and

definitely not by the market (Becker & Kramarsch, 2006). Often they are estimated very low by

the CEOs and the subsequent leaders, because a manager is judged according to the target

achievement of his employees. Second, the nonlinear design shows misleading effects: Once

employees realize that the maximal bonus has been reached, they shift their efforts into the

following year. If they realize that they are not able to reach what has been targeted, they stop

their efforts. On a long term, bonus plans therefore cause a circle of manipulations that keep

multiplying. This could be an explanation for the declining incentive effect of bonus payments

according to Figure 4.

Why is Pay-for-Performance still applied by enterprises, despite these negative effects and

recently even transferred to organizations that are not profit-oriented?

Numerous firms are aware of the questionable effects of Pay-for-Performance. Nevertheless theydo not abolish the once introduced systems. One reason might be that nobody believes anymore,

fixed salaries can be adjusted to the performance accurately. On top of that, many authorities

have adapted Pay-for-Performance on the occasion of New Public Management, even for

physicians and judges. Lately, it is said, Pay-for-Performance should even be introduced for

researchers at universities, e.g. by means of periodical evaluations, in which publications and

citations are counted. The effects are exactly as counterproductive as with CEOs: In the case of

physicians, the treatment of seriously ill patients becomes unattractive (Osterloh & Rost, 2005).10

Judges react with less thorough verdicts (Schneider, 2007). Also scientists react strategically:

They increase the number of their publications (at times with the help of close editors) at the cost

of the quality of their research (Frey, 2003; Frey & Osterloh, 2006). An explanation for this

development can be deduced from the neo-institutional organization theory (Meyer & Rowan,

1977; Walgenbach & Beck, 2003). According to this firms noncritical adapt measurements,

10On the crowding-out effect of intrinsic motivation with dentists compare (Bgh Andersen, 2007).


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which may initial improve the performance of some organizations. In the meantime

conceivabilities of rational organizational design are developed; these are taken for granted and

are not questioned anymore. Disregarding these elements is considered as a lack of modern

thinking - at least as long as no new fashion has come up.

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TABLE 3.Statistic of studies in the meta-analysis

Author Statistic of each study Study effects# subgroups

1 Year Average

sample size

r/t-value Upper

limit

Lower

limit

effect Z-value p-valu

Abowd (1990) 6 1984 646 t 0.15 0.08 0.12 7.22 0.0

Aggarwal, and Samwick (1999) 4 1995 4547 t 0.06 0.03 0.04 5.67 0.0Bebchuk, and Grinstein (2005) 6 1998 15409 t 0.05 0.03 0.04 12.20 0.0

Benito, and Conyon (1999) 1 1990 1698 t 0.14 0.05 0.10 3.93 0.0

Bloom, and Milkovich (1998) 1 1985 1773 t 0.06 -0.03 0.02 0.70 0.4

Carpenter, Sanders, and Gregersen (2001) 2 1995 735 t 0.16 0.06 0.11 4.23 0.0

Cheng, and Firth 2005 2 1997 2016 t 0.04 -0.02 0.01 0.38 0.7

Conyon (1998) 2 1991 1090 t 0.06 -0.03 0.01 0.68 0.5

Conyon (2006) 2 1998 7009 t 0.11 0.07 0.09 10.71 0.0

Conyon, and Murphy (2000) 1 1997 2176 t 0.08 0.00 0.04 2.00 0.0

Conyon, and Peck (1998) 1 1993 374 t 0.20 0.00 0.10 1.88 0.0

Conyon, and Sadler (2001) 2 1998 1064 t 0.21 0.13 0.17 8.10 0.0

Coombs, and Gilley (2005) 2 1998 2297 t 0.10 0.04 0.07 4.56 0.0

Cordeiro, and Veliyath (2003) 4 1994 888 t 0.14 0.07 0.11 6.32 0.0Core, Holthausen, and Larcker (1999) 6 1983 495 t 0.06 -0.02 0.02 1.12 0.2

Deckop (1988a) 2 1979 432 t 0.17 0.04 0.10 3.03 0.0

Deckop (1988b) 2 1979 432 t 0.04 -0.09 -0.02 -0.71 0.4

Frye, Nelling, and Webb (2006a) 4 1996 4200 t 0.02 -0.02 0.00 0.00 1.0

Frye, Nelling, and Webb (2006b) 4 1996 4200 t 0.02 -0.02 0.00 0.00 1.0

Gibbons, and Murphy (1990 3 1980 5504 t 0.22 0.19 0.20 26.69 0.0

Gregg, Machin, and Szymanski (1992 4 1988 1250 t 0.06 0.00 0.03 2.15 0.0

Hadlock, and Lumer (1997a) 2 1980 5600 t 0.18 0.15 0.17 17.75 0.0

Hadlock, and Lumer (1997b) 2 1980 5600 t 0.08 0.04 0.06 6.01 0.0

Hall, and Liebman (1998a) 3 1990 3977 t 0.24 0.20 0.22 24.29 0.0

Hall, and Liebman (1998b) 2 1988 5727 t 0.05 0.01 0.03 3.56 0.0

Hallman, and Hartzell (1999a) 2 1991 153 t 0.39 0.18 0.29 5.15 0.0Hallman, and Hartzell (1999b) 2 1991 183 t 0.14 -0.07 0.04 0.71 0.4

Hallock (1997a) 2 1992 9804 t 0.12 0.09 0.10 14.30 0.0

Hallock (1997b) 2 1992 9804 t 0.03 0.00 0.02 2.59 0.0


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1 Year Average

sample size

r/t-value Upper

limit

Lower

limit


Hambrick, and Finkelstein (1995) 1 1980 752 t -0.01 -0.15 -0.08 -2.14 0.0

Hermalin, and Wallace (2001) 3 1991 624 t 0.12 0.03 0.08 3.43 0.0

Ingham, and Thompson (1994) 3 1988 208 t -0.02 -0.18 -0.10 -2.43 0.0

Jensen, and Murphy (1990a) 4 1979 4283 t 0.11 0.08 0.09 12.14 0.0

Jensen, and Murphy (1990b) 4 1978 4283 t 0.07 0.04 0.05 6.89 0.0

Jinbae (2004) 1 1982 1300 t 0.08 -0.03 0.02 0.88 0.3

Leonard (1990) 2 1983 400 t 0.23 0.10 0.16 4.69 0.0

Lilling (2003a) 2 1999 6755 t 0.09 0.06 0.07 8.72 0.0

Lilling (2003b) 2 1999 6755 t 0.15 0.12 0.13 15.45 0.0

Main (1991) 1 1985 241 t 0.32 0.08 0.20 3.14 0.0

Main, Bruce, and Buck (1996a) 2 1986 324 t 0.18 0.03 0.11 2.73 0.0

Main, Bruce, and Buck (1996b) 2 1986 324 t 0.18 0.03 0.10 2.62 0.0

Mehran (1995) 4 1980 306 t 0.22 0.12 0.17 6.00 0.0

Micknight, and Tomkins (1999) 2 1994 99 t 0.46 0.21 0.34 4.86 0.0

Murphy (1985) 6 1973 4500 t 0.11 0.09 0.10 16.71 0.0

Murphy (1999a) 2 1975 2192 t 0.14 0.09 0.12 7.68 0.0Murphy (1999b) 8 1984 835 t 0.23 0.19 0.21 17.46 0.0

Murphy (1999c) 2 1993 2183 t 0.16 0.10 0.13 8.64 0.0

Porac, Wade, and Pollack (1999) 2 1993 263 t 0.06 -0.11 -0.02 -0.56 0.5

Rajagopalan (1996) 2 1990 235 t 0.13 -0.05 0.04 0.83 0.4

Roulstone (2001) 2 1996 4719 t 0.04 0.00 0.02 1.51 0.1

Sanders (1999) 2 1995 740 t 0.15 0.05 0.10 3.79 0.0

Schaefer (1998) 2 1993 3650 t 0.09 0.05 0.07 5.91 0.0

Stammerjohan (2004) 8 1985 408 t 0.03 -0.04 -0.01 -0.42 0.6

Veliyath (1999) 2 1988 235 t 0.17 -0.01 0.08 1.69 0.0

Wade, Porac, and Pollack (1997) 2 1992 266 t 0.22 0.06 0.14 3.25 0.0

Wen-Chung, Shin-Rong, and Yu-Wen (2006) 4 1999 1764 t 0.04 0.00 0.02 1.55 0.1

Zajac, and Westphal (1994) 1 1989 2025 t -0.04 -0.12 -0.08 -3.57 0.0Zhou (1999a) 4 1993 2247 t 0.18 0.14 0.16 15.62 0.0

Zhou (1999b) 4 1993 2247 t 0.05 0.01 0.03 2.60 0.0

Grossman, and Cannella (2006) 2 1993 725 t 0.10 -0.01 0.04 1.71 0.0

Belkauoi & Picur (1993) 1 1985 247 r 0.23 -0.02 0.11 1.73 0.0


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1 Year Average

sample size

r/t-value Upper

limit

Lower

limit


Belliveau, O'Reilly, and Wade (1996) 1 1985 122 r 0.55 0.25 0.41 4.75 0.0

Bilimoria (1992) 10 1985 40 r 0.34 0.14 0.24 4.74 0.0

Boyd (1994) 1 1980 193 r 0.33 0.06 0.20 2.79 0.0

Buck et al. (2003) 1 1998 1602 r 0.45 0.37 0.41 17.42 0.0

David, Kochhar, and Levitas (1998) 1 1993 500 r 0.21 0.03 0.12 2.69 0.0

Douglas, and Santerre (1990) 2 1985 65 r 0.50 0.20 0.36 4.20 0.0

Finkelstein, and Boyed (1998) 4 1987 600 r 0.11 0.03 0.07 3.57 0.0

Finkelstein, and Hambrick (1989) 3 1977 110 r 0.23 0.02 0.13 2.33 0.0

Gomez-Mejia, Tosi, and Hinkin (1987) 8 1981 284 r 0.27 0.19 0.23 10.97 0.0

Henderson, and Frederickson (1996) 1 1988 189 r 0.08 -0.20 -0.06 -0.82 0.4

Johnson (1982) 1 1975 126 r 0.17 -0.17 0.00 0.00 1.0

Kerr, and Kren (1992) 9 1987 63 r 0.30 0.14 0.22 5.30 0.0

Kerr & Kren (1997) 2 1990 242 r 0.19 0.02 0.10 2.29 0.0

Kroll, Theorathorn, and Wright (1993) 3 1986 26 r 0.22 -0.24 -0.01 -0.09 0.9

Kumar, Ghicas, and Pastena (1993) 1 1985 353 r 0.50 0.33 0.42 8.38 0.0

Lewellen (1968) 14 1947 45 r 0.54 0.42 0.48 12.76 0.0Mangel, and Singh (1993) 1 1988 79 r 0.45 0.04 0.26 2.32 0.0

McQuire, Chru, and Elbing (1962) 13 1956 45 r 0.49 0.35 0.42 10.49 0.0

Miller (1988) 2 1986 5321 r 0.04 0.00 0.02 2.06 0.0

O Reilly, Main, and Crystal (1988) 1 1984 105 r 0.49 0.15 0.33 3.46 0.0

Pavlik (1991) 1 1985 216 r 0.29 0.03 0.16 2.36 0.0

Rajagopalan, and Prescott (1990) 1 1990 226 r 0.29 0.04 0.17 2.56 0.0

Sanders, and Carpenter (1998) 1 1992 258 r 0.20 -0.04 0.08 1.28 0.2

Wallace (1972) 4 1965 87 r 0.21 -0.01 0.10 1.86 0.0

Werner, and Tosi (1995) 3 1984 278 r 0.19 0.05 0.12 3.44 0.0

Winfrey (1990) 3 1985 171 r 0.39 0.23 0.31 7.23 0.0

Note:1For surveys with several sub group statistics the chart combines statistics..


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