Some are punished and some are rewarded : A study of the impact of performance pay on job satisfaction

Purpose – To investigate whether significant differences exist in job satisfaction (JS) between individuals receiving performance‐related pay (PRP) and those on alternative compensation plans. Design/methodology/approach – Using data from four waves (1998‐2001) of the British Household Panel Survey (BHPS), a Heckman‐type econometric procedure is applied that corrects for both self‐selection of individuals into their preferred compensation scheme and the endogeneity of wages in a JS framework. Findings – It is found that while the predicted JS of workers receiving PRP is lower on average compared to those on other pay schemes, PRP exerts a positive effect on the mean JS of (very) high‐paid workers. A potential explanation for this pattern could be that for lower‐paid employees PRP is perceived to be controlling, whereas higher‐paid workers derive a utility benefit from what they view as supportive reward schemes. Research limitations/implications – As the study utilises data from the UK only, its results cannot be generalized to other countries characterized by distinct labour market contexts. Furthermore, the quality of the estimates depends on the quality of the identifying restrictions which, in these types of studies, are always somewhat ad hoc . However, the available tests for evaluating the quality of the identifying restrictions indicated that they are appropriate for the models used. Practical implications – The findings of the paper suggest that using performance pay as an incentive device in the UK could prove to be counterproductive in the long run for certain low‐paid occupations, as far as employee JS is concerned. Originality/value – This paper is the first to have attempted to correct for the selectivity issue when considering the effect of PRP on JS. Its implications should be of interest to human resource managers when designing the compensation strategies of their organizations.