The outcomes of variable pay systems: tales of multiple costs and unforeseen consequences

Abstract

Two veins of research predominate in evaluations of variable pay systems. The first seeks to associate superior financial performance with the use of incentive schemes and the second assesses the success of variable pay systems in effecting behavioural and attitudinal change. This paper argues that both of these approaches suffer from limitations and presents a framework for examining a neglected aspect of the implementation of variable pay systems by considering their operational outcomes and impact on organizations. It contemplates why little evaluation of this kind is conducted and presents a detailed qualitative analysis of the findings from six multiple case studies conducted among medium-sized organizations in the engineering sector. The article contributes to the literature in the area by revealing significant unanticipated costs in management time, administration and staff recruitment and training as a result of pay system change through applying the framework developed, identifying the relative effectiveness of the pay systems and illustrating the scope for organizational context to influence pay system outcomes. It concludes by arguing that the scope for error in managing pay systems raises questions about how far pay systems are effective sources of competitive advantage.

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