The Effects of Performance Measurement and Compensation on Motivation : An Empirical Study

The design and implementation of a performance measurement and compensation system can strongly effect the motivation of employees. Building on economic and psychological theory this study develops a conceptual model that is used to empirically test this effect. We find that the employee's perception of the compensation system influences the motivation of agents. Our survey results demonstrate a significant positive relationship between the perceived characteristics of the compensation system and extrinsic motivation. Intrinsic motivation is not affected by the design of the monetary compensation system, but is affected by promotion opportunities. The compensation system also significantly affects other indicators of motivation, namely work satisfaction and turnover intent. Further research could extend these results by investigating the relationship between extrinsic and intrinsic motivation on the one hand and individual and company performance on the other