The effects of performance measurement and compensation on motivation: An empirical study

Summary

This research paper, "The effects of performance measurement and compensation on motivation: An empirical study" by Van Herpen, Van Praag, and Cools (2005), empirically investigates the intricate relationship between performance measurement, compensation systems, and employee motivation. Drawing upon economic and psychological theories, the study hypothesizes that the structure and execution of a compensation system directly influence employee motivation. The methodology employed a survey-based approach to gather data, focusing on employees' perceptions of their complete compensation system, which encompasses both monetary rewards and promotion opportunities. These perceptions were analyzed based on three criteria: transparency, controllability, and fairness. The key findings reveal a nuanced impact of compensation on different types of motivation. The study demonstrates a significant positive relationship between the perceived characteristics of the overall compensation system and extrinsic motivation. Specifically, the perceived fairness of monetary compensation was identified as having the strongest positive effect on employees' extrinsic motivation. Conversely, the transparency and controllability of the compensation system, while important design criteria, did not show a direct effect on the level of extrinsic motivation. Regarding intrinsic motivation, the research found that the design of monetary compensation itself did not influence it. However, promotion opportunities played a crucial role, with two perceived characteristics of these opportunities significantly and positively affecting intrinsic motivation. Beyond motivation, the study also concluded that the compensation system significantly impacts employees' work satisfaction and their intent to leave the organization. These results carry important implications for both managerial practice and policy development, suggesting that careful design of compensation systems can be a powerful tool for enhancing employee motivation and overall organizational outcomes.