“It’s [Not] All ‘Bout the Money”: How do Performance-based Pay and Support of Psychological Needs Variables Relate to Job Performance?

Abstract

The use of performance-based pay is increasing rapidly, but empirical evidence on how and why it relates to job performance, as well as its relative strategical importance, remains unclear. The present study examined the relative importance of performance-based pay variables and support of psychological needs variables for task and contextual performance in a sample of 582 white-collar employees in Sweden. Multiple regression results, based on survey and register data, showed that the instrumentality of the pay system related to lower levels of task and contextual performance. However, supplementary relative weight analysis (RWA) showed that, in relative terms, instrumentality of the pay system was of minor importance for performance. Performance-based pay-raise amount was positively related to contextual performance but not predictive of task performance. Procedural pay-setting justice was unrelated to both outcomes. Among the support of psychological needs variables, feedback and job autonomy had positive associations with both outcomes while social support from colleagues was not predictive of performance. Considering the explained variance (16–17%), the performance-based pay variables combined accounted for up to a third (12.6–29.2%) while support of psychological needs variables accounted for more than half of the explained variance (56.1–68.1%) in task and contextual performance. The results indicate that organizations would benefit from putting support of psychological needs to the forefront of their motivational strategies as a complement to administrating complex compensation systems.