Management Fashion Pay-for-Performance

KATJA ROST
University of Zurich, IOU Institute for Organization and Administrative Science, Plattenstrasse
14, CH-8032 Zrich, mail: katja.rost@iou.uzh.ch
MARGIT OSTERLOH
University of Zurich, University of Zurich, IOU Institute for Organization and Administrative
Science, Plattenstrasse 14, CH-8032 Zrich, mail: osterloh@iou.uzh.ch

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

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

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

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

2
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 selfselection-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).

The 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.

3
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).

Number of scientific publications

(Web of Science)

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

100
80
60
40
20
0
1970

1975

1980

1985

1990

1995

2000

2005

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

4
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.

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 Paywithout-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)
2

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

5
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

Durchschnittliches CEO-Gehalt in Tsd. $

figure below; Rost & Osterloh (2007a))

25%
12%
14%

16%

14%

22%

29%

61%

56%

37%

52%
70%

49%

23%
18%

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).

6
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.3 In 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 subeffects, 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

The 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 lead
to 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).
4

An 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).

7
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 multitasking-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:

8
Pay-for-Performance reduces performance in the course of the time, i.e. a high pay-forperformance compensation for CEOs reduces firm performance.

3
3.1

EMPIRIC EVIDENCE
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 metaanalyses (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

The 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.

9
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, marketbased firm value. (2) Bonus compensations are meant to increase the short-term, accountingbased firm value. In our models we investigate how Pay-for-Performance affects the marketbased 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.

We 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.

10
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.7 This 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) di =

2 ri
1 ri 2

or (2) di =

ti Ni
Ni

Subsequently we calculate an average effect d for the total sample respectively for each period
of investigation.8 This effect was corrected by means of sampling errors. We are using FixedEffect-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 =

( w i di )
wi

To 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.
8

An 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).

11
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) Q =

wi ( d i d ) 2

i =1

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-forPerformance 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 moderator
variables, 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-

12

Performance ( d =.14***) than studies displaying correlations that are controlled regressionanalytically ( d =.07***). This difference is significant (z=92.17***).

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

Model
Total effect
Method of documenting results:
Correlation
t-Value of the regression coefficient
Group difference
Pay-for-Performance-Link:
Bonus-based effect: Linking of the CEO
salary to accounting performance
Equity-based effect: Linking of the CEO
salary to market performance
Group difference
Caption: **p <0.05, ***p <0.01

# Surveys
Est.
Surv.. Err. Z-Value Heterogeneity
(# Sub groups)
(Q-Value)
***
87 (259)
.08
.001
52.39
4357.17 ***
27 (93)
60 (166)

.14
.07

***

.012
.000

21.08
49.11

700.81
3632.98
92.17

***

48 (134)

.07

***

.004

24.81

1248.19

***

39 (125)

.08

***

.003

34.72

2070.59
5.92

***

***

***
***

**

Longitudinal models. Figure 4 and Table 2 display the development of the incentive effect of
Pay-for-Performance in the course of time. The development of the general correlation between
variable CEO salaries and firm performance suggests the following interpretation: Pay-forPerformance was not always ineffective. It is rather that the effectiveness decreases over the
years (=-.003***). In 1950, a variable CEO income increased the firm performance according
to regression results - after all at d =.21. This is a statistically moderate correlation. Nowadays,
salary and performance are only linked to each other at d =.05, i.e. close to a non-existing link.
Carrying on with these results into the future means that in 2025, according to this estimation, a
variable CEO salary and firm performance will not be linked at all anymore ( d =.00).

13

FIGURE 4. Graphic clarification of the regression results

Incentive effect of Pay-for-Performance

on firm performance

Year
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
0.50
0.40
0.30
0.20
0.10
0.00
-0.10
-0.20
-0.30

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 =.11 on the longterm, market-based value of a firm (=.000). The result documentation in the surveys does
not change this finding (for the t-value: =-.000).9 Therefore 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-forPerformance on firm profit confirms our hypothesis tentatively.
9

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

14

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

Model
Total effect
Pay-for-Performance-Link:
Bonus-based effect: Linking of the
CEO salary to accounting
performance
Equity-based effect: Linking of the
CEO salary to market performance
Method of documenting results:
Correlation
t-value of the regression coefficient
Only correlations:
Bonus-based effect: Linking of the
CEO salary to accounting
performance
Equity-based effect: Linking of the
CEO salary to market performance
Only t-values regression coefficient:
Bonus-based effect: Linking of the
CEO salary to accounting
performance
Equity-based effect: Linking of the
CEO salary to market performance
Caption: **p <0.05, ***p <0.01

WHY

DOES

Regression coefficient
Est.
Std. ZErr. value
-.003 *** .000 -18.45

Constant
Est.
Std.
Err.
6.45

***

.345

-.007 *** .000 -21.72 13.28

***

.61

.000

.000

-.005 *** .001

-.002 *** .000

.70

-.41

.63

-7.40 10.93
10.39 4.91

***

-.011 *** .000 -13.09 21.20

***

--

--

--

.000

-.18

1.46
.46

7.495 54.80
10.61 107.84

.026
.011

1.61

13.15 171.24

.015

.20

PAY-FOR-PERFORMANCE

.70
.64

NOT

-.66

.007
.012

--

***

21.84 471.64
.62

--

-.007 *** .000 -17.21 12.16

-.000

***

Heterogeneity
Qvalue TauModel square
18.67 340.46 .008

Zvalue

--

--

--

17.30 296.03

.005

.31

GET

.03

.011

OUT

OF

FASHION?
We have shown that Pay-for-Performance not only lacks of a positive incentive effect in the
meantime, but also has a negative one. There are three questions left, which can only be
answered after further investigation. For the time being we can only deliver some preliminary
explanations.
Why did bonus payments, which are linked to the accounting-based value of a firm, initially
operate positively?
All fashions as obviously Pay-for-Performance too cause a kind of optimistic excitement in
their initial stage. ...managers apply them successfully in order to flatter, inspire and demand or

15
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 they
do 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,

10

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

16
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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Rajagopalan, N., and Prescott, J. E. 1990. Determinants of Top Management Compensation:
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Rajagopalan, N. 1996. Strategic Orientations, Incentive Plan Adoptions, and Firm Performance:
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Roulstone, D. T. 2001. The Relation Between Insider-Trading Restrictions and Executive
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Sanders, G. WM., and Carpenter, M. A. 1998. Internationalization and Firm Governance. The
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28
TABLE 3. Statistic of studies in the meta-analysis
Author
Abowd (1990)
Aggarwal, and Samwick (1999)
Bebchuk, and Grinstein (2005)
Benito, and Conyon (1999)
Bloom, and Milkovich (1998)
Carpenter, Sanders, and Gregersen (2001)
Cheng, and Firth 2005
Conyon (1998)
Conyon (2006)
Conyon, and Murphy (2000)
Conyon, and Peck (1998)
Conyon, and Sadler (2001)
Coombs, and Gilley (2005)
Cordeiro, and Veliyath (2003)
Core, Holthausen, and Larcker (1999)
Deckop (1988a)
Deckop (1988b)
Frye, Nelling, and Webb (2006a)
Frye, Nelling, and Webb (2006b)
Gibbons, and Murphy (1990
Gregg, Machin, and Szymanski (1992
Hadlock, and Lumer (1997a)
Hadlock, and Lumer (1997b)
Hall, and Liebman (1998a)
Hall, and Liebman (1998b)
Hallman, and Hartzell (1999a)
Hallman, and Hartzell (1999b)
Hallock (1997a)
Hallock (1997b)

Statistic of each study

Study effects
# subgroups1 Year Average
r/t-value Upper Lower effect Z-value p-value Total sample size
sample size
limit limit
6
1984
646
t
0.15 0.08 0.12
7.22
0.00
3876
4
1995
4547
t
0.06 0.03 0.04
5.67
0.00
18186
6
1998
15409
t
0.05 0.03 0.04 12.20
0.00
92454
1
1990
1698
t
0.14 0.05 0.10
3.93
0.00
1698
1
1985
1773
t
0.06 -0.03 0.02
0.70
0.48
1773
2
1995
735
t
0.16 0.06 0.11
4.23
0.00
1470
2
1997
2016
t
0.04 -0.02 0.01
0.38
0.70
4032
2
1991
1090
t
0.06 -0.03 0.01
0.68
0.50
2180
2
1998
7009
t
0.11 0.07 0.09 10.71
0.00
14018
1
1997
2176
t
0.08 0.00 0.04
2.00
0.05
2176
1
1993
374
t
0.20 0.00 0.10
1.88
0.06
374
2
1998
1064
t
0.21 0.13 0.17
8.10
0.00
2128
2
1998
2297
t
0.10 0.04 0.07
4.56
0.00
4594
4
1994
888
t
0.14 0.07 0.11
6.32
0.00
3552
6
1983
495
t
0.06 -0.02 0.02
1.12
0.26
2970
2
1979
432
t
0.17 0.04 0.10
3.03
0.00
864
2
1979
432
t
0.04 -0.09 -0.02
-0.71
0.48
864
4
1996
4200
t
0.02 -0.02 0.00
0.00
1.00
16800
4
1996
4200
t
0.02 -0.02 0.00
0.00
1.00
16800
3
1980
5504
t
0.22 0.19 0.20 26.69
0.00
16511
4
1988
1250
t
0.06 0.00 0.03
2.15
0.03
5000
2
1980
5600
t
0.18 0.15 0.17 17.75
0.00
11200
2
1980
5600
t
0.08 0.04 0.06
6.01
0.00
11200
3
1990
3977
t
0.24 0.20 0.22 24.29
0.00
11931
2
1988
5727
t
0.05 0.01 0.03
3.56
0.00
11453
2
1991
153
t
0.39 0.18 0.29
5.15
0.00
306
2
1991
183
t
0.14 -0.07 0.04
0.71
0.48
366
2
1992
9804
t
0.12 0.09 0.10 14.30
0.00
19608
2
1992
9804
t
0.03 0.00 0.02
2.59
0.01
19608

29
Author

Statistic of each study

Study effects
1
# subgroups Year Average
r/t-value Upper Lower
sample size
limit limit
Hambrick, and Finkelstein (1995)
1
1980
752
t
-0.01 -0.15
Hermalin, and Wallace (2001)
3
1991
624
t
0.12 0.03
Ingham, and Thompson (1994)
3
1988
208
t
-0.02 -0.18
Jensen, and Murphy (1990a)
4
1979
4283
t
0.11 0.08
Jensen, and Murphy (1990b)
4
1978
4283
t
0.07 0.04
Jinbae (2004)
1
1982
1300
t
0.08 -0.03
Leonard (1990)
2
1983
400
t
0.23 0.10
Lilling (2003a)
2
1999
6755
t
0.09 0.06
Lilling (2003b)
2
1999
6755
t
0.15 0.12
Main (1991)
1
1985
241
t
0.32 0.08
Main, Bruce, and Buck (1996a)
2
1986
324
t
0.18 0.03
Main, Bruce, and Buck (1996b)
2
1986
324
t
0.18 0.03
Mehran (1995)
4
1980
306
t
0.22 0.12
Micknight, and Tomkins (1999)
2
1994
99
t
0.46 0.21
Murphy (1985)
6
1973
4500
t
0.11 0.09
Murphy (1999a)
2
1975
2192
t
0.14 0.09
Murphy (1999b)
8
1984
835
t
0.23 0.19
Murphy (1999c)
2
1993
2183
t
0.16 0.10
Porac, Wade, and Pollack (1999)
2
1993
263
t
0.06 -0.11
Rajagopalan (1996)
2
1990
235
t
0.13 -0.05
Roulstone (2001)
2
1996
4719
t
0.04 0.00
Sanders (1999)
2
1995
740
t
0.15 0.05
Schaefer (1998)
2
1993
3650
t
0.09 0.05
Stammerjohan (2004)
8
1985
408
t
0.03 -0.04
Veliyath (1999)
2
1988
235
t
0.17 -0.01
Wade, Porac, and Pollack (1997)
2
1992
266
t
0.22 0.06
Wen-Chung, Shin-Rong, and Yu-Wen (2006)
4
1999
1764
t
0.04 0.00
Zajac, and Westphal (1994)
1
1989
2025
t
-0.04 -0.12
Zhou (1999a)
4
1993
2247
t
0.18 0.14
Zhou (1999b)
4
1993
2247
t
0.05 0.01
Grossman, and Cannella (2006)
2
1993
725
t
0.10 -0.01
Belkauoi & Picur (1993)
1
1985
247
r
0.23 -0.02

effect Z-value p-value Total sample size

-0.08
0.08
-0.10
0.09
0.05
0.02
0.16
0.07
0.13
0.20
0.11
0.10
0.17
0.34
0.10
0.12
0.21
0.13
-0.02
0.04
0.02
0.10
0.07
-0.01
0.08
0.14
0.02
-0.08
0.16
0.03
0.04
0.11

-2.14
3.43
-2.43
12.14
6.89
0.88
4.69
8.72
15.45
3.14
2.73
2.62
6.00
4.86
16.71
7.68
17.46
8.64
-0.56
0.83
1.51
3.79
5.91
-0.42
1.69
3.25
1.55
-3.57
15.62
2.60
1.71
1.73

0.03
0.00
0.01
0.00
0.00
0.38
0.00
0.00
0.00
0.00
0.01
0.01
0.00
0.00
0.00
0.00
0.00
0.00
0.57
0.41
0.13
0.00
0.00
0.67
0.09
0.00
0.12
0.00
0.00
0.01
0.09
0.08

752
1872
624
17130
17130
1300
800
13510
13510
241
648
648
1224
197
27000
4384
6683
4366
526
470
9438
1480
7299
3266
470
532
7056
2025
8988
8988
1450
247

30
Author
Belliveau, O'
Reilly, and Wade (1996)
Bilimoria (1992)
Boyd (1994)
Buck et al. (2003)
David, Kochhar, and Levitas (1998)
Douglas, and Santerre (1990)
Finkelstein, and Boyed (1998)
Finkelstein, and Hambrick (1989)
Gomez-Mejia, Tosi, and Hinkin (1987)
Henderson, and Frederickson (1996)
Johnson (1982)
Kerr, and Kren (1992)
Kerr & Kren (1997)
Kroll, Theorathorn, and Wright (1993)
Kumar, Ghicas, and Pastena (1993)
Lewellen (1968)
Mangel, and Singh (1993)
McQuire, Chru, and Elbing (1962)
Miller (1988)
O Reilly, Main, and Crystal (1988)
Pavlik (1991)
Rajagopalan, and Prescott (1990)
Sanders, and Carpenter (1998)
Wallace (1972)
Werner, and Tosi (1995)
Winfrey (1990)

Statistic of each study

Study effects
1
# subgroups Year Average
r/t-value Upper Lower effect Z-value p-value Total sample size
sample size
limit limit
1
1985
122
r
0.55 0.25 0.41
4.75
0.00
122
10
1985
40
r
0.34 0.14 0.24
4.74
0.00
396
1
1980
193
r
0.33 0.06 0.20
2.79
0.01
193
1
1998
1602
r
0.45 0.37 0.41 17.42
0.00
1602
1
1993
500
r
0.21 0.03 0.12
2.69
0.01
500
2
1985
65
r
0.50 0.20 0.36
4.20
0.00
130
4
1987
600
r
0.11 0.03 0.07
3.57
0.00
2400
3
1977
110
r
0.23 0.02 0.13
2.33
0.02
330
8
1981
284
r
0.27 0.19 0.23 10.97
0.00
2272
1
1988
189
r
0.08 -0.20 -0.06
-0.82
0.41
189
1
1975
126
r
0.17 -0.17 0.00
0.00
1.00
126
9
1987
63
r
0.30 0.14 0.22
5.30
0.00
567
2
1990
242
r
0.19 0.02 0.10
2.29
0.02
483
3
1986
26
r
0.22 -0.24 -0.01
-0.09
0.93
78
1
1985
353
r
0.50 0.33 0.42
8.38
0.00
353
14
1947
45
r
0.54 0.42 0.48 12.76
0.00
630
1
1988
79
r
0.45 0.04 0.26
2.32
0.02
79
13
1956
45
r
0.49 0.35 0.42 10.49
0.00
585
2
1986
5321
r
0.04 0.00 0.02
2.06
0.04
10642
1
1984
105
r
0.49 0.15 0.33
3.46
0.00
105
1
1985
216
r
0.29 0.03 0.16
2.36
0.02
216
1
1990
226
r
0.29 0.04 0.17
2.56
0.01
226
1
1992
258
r
0.20 -0.04 0.08
1.28
0.20
258
4
1965
87
r
0.21 -0.01 0.10
1.86
0.06
346
3
1984
278
r
0.19 0.05 0.12
3.44
0.00
834
3
1985
171
r
0.39 0.23 0.31
7.23
0.00
514

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

31