Pay-for-performance, Sometimes: An Interdisciplinary Approach to Integrating Economic Rationality with Psychological Emotion to Predict Individual Performance

Abstract

This interdisciplinary study integrates economics- and psychology-based explanations to promote a clearer understanding of how employees respond to the pay-for-performance (PFP) system. By examining the combined performance predictions in the common, but rarely studied, situation in which employees do not meet expectations, we can more clearly view how economic rationality and psychological factors combine to explain employee behaviors in response to PFP. We test our hypotheses using unique longitudinal data from the health care industry. The theoretical insights contribute to a PFP theory that explains how and why PFP functions, and in doing so reconciles prior research inconsistencies.