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Renegotiating Performance: the Role of Performance Pay in Renegotiating the Effort Bargain


  • David Marsden


Much of the academic and policy literature on performance related pay focuses on its role as an incentive system. Its role as means for renegotiating performance norms has been largely neglected. The introduction of performance related pay, based mostly on appraisals by line managers, in the British public services in the 1990s can be considered as a large-scale social experiment in the change from a seniority - to a performance-based payment system. When reviewing academic research and management inside information on the schemes, a recent government report concluded that they had failed to motivate staff and their operation had been divisive. Nevertheless, other information suggests that productivity rose. This article seeks to resolve the paradox by showing that performance pay was the instrument of a major renegotiation of productivity norms, and that this rather than motivation was the key story. It concludes that when analysing incentive systems, more attention needs to be given to contract theory, and in particular to the articulation of different levels of principal-agent relationships within organisations. The key to the rise in productivity in the British public services lay in how the appraisal activities by line managers were articulated with incentives and goal setting for the different levels of organisational performance in order to secure the passage to different performance norms.

Suggested Citation

  • David Marsden, 2003. "Renegotiating Performance: the Role of Performance Pay in Renegotiating the Effort Bargain," CEP Discussion Papers dp0578, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0578

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    References listed on IDEAS

    1. Marsden, David & Richardson, Ray, 1992. "Motivation and performance related pay in the public sector: a case study of the Inland Revenue," LSE Research Online Documents on Economics 3647, London School of Economics and Political Science, LSE Library.
    2. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    3. Drago, Robert & Garvey, Gerald T, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 1-25, January.
    4. James M. Malcomson, 1997. "Contracts, Hold-Up, and Labor Markets," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 1916-1957, December.
    5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    6. Teulings,Coen & Hartog,Joop, 2008. "Corporatism or Competition?," Cambridge Books, Cambridge University Press, number 9780521049399, March.
    7. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, January.
    8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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