Performing for Pay? The Effects of ‘Merit Pay’ on Motivation in a Public Service

Abstract : Despite the growing use made of performance‐related pay schemes, their true impact remains sadly under‐researched. This article, a case study of the scheme introduced into the Inland Revenue in 1988, and typical of recent UK public‐sector schemes, is an attempt to reduce the area of mystery. We assess the scheme by its likely impact on employee motivation, which we gauge through a variety of employee and management opinions and attitudes, as expressed in more than 2000 responses to a questionnaire. Our conclusion is that, although the scheme was thought by staff to have a number of virtues, it was very unlikely to have raised employee motivation appreciably; it may indeed have been demotivating on balance. We also consider the likely reasons for this result. If the scheme did not improve employee motivation, it is hard to see how it could have enhanced employee performance. The study has potentially important implications for the government policy of seeking to improve the functioning of the public sector through performance‐related pay.