Individualized Pay-for-Performance Arrangements: Peer Reactions and Consequences

We contribute to understanding the previously unrecognized consequences of individualized employment arrangements on the relationship between pay and performance. Increases in the application of pay-for-performance (PFP) idiosyncratic deals (PFP i-deals) raise questions about how individualized PFP arrangements affect the performance of peers who do not receive such customized deals. As pay systems become more individualized, understanding the economic ramifications of how PFP i-deals affect peer performance is essential for understanding the total unit effects of implementing PFP i-deals. To examine these peer effects, we explored peer responses to PFP i-deals and identified boundary conditions on broad theoretical assumptions underlying the conclusion that PFP increases unit performance. We tested our predictions by applying multilevel random-coefficient discontinuous growth models to a sample of 451 peers nested in 117 business units of a for-profit health-care organization. Immediately after PFP i-deal implementation in the unit, the performance level of peers was negatively affected. Additionally, peer performance trends after PFP i-deal implementation were lower than they were before the PFP i-deal implementation. Our study also identified contextual factors that influence peer responses to PFP i-deal implementation.