Does Pay-For-Performance Strain the Employment Relationship? The Effect of Manager Bonus Eligibility on Non-Management Employee Turnover
Pohler, D., & Schmidt, J. (2016) Does Pay-For-Performance Strain the Employment Relationship? The Effect of Manager Bonus Eligibility on Non-Management Employee Turnover. Personnel Psychology, 69: 395-429.
Are performance incentives a good or a bad thing for employees and organizations? We find evidence that managerial eligibility for bonuses may strain the employment relationship and increase nonmanagemnet employee turnover, unless there are also HR practices that train and incentivize managers to treat employees well.
We tested the organization-level effects of manager pay-for-performance practices on nonmanagement employee turnover within the context of agency theory and equity theory—two frameworks commonly applied to understand compensation policy and practice. We also propose an alternative theoretical perspective that predicts that managerial pay-for-performance policies may strain the employment relationship and increase nonmanagement employee turnover, unless there are HR practices that train and incentivize managers to treat employees well. We compare these alternative models to establish how well each framework explains the observed effects. Agency theory and equity theory receive limited empirical support in our lagged panel data set of organizations, whereas broader empirical support is established for the strain effect of manager pay-for-performance on the employment relationship. We discuss the implications of our findings for compensation theory, research, and practice.