Title: Pay for performance versus non-financial incentives in small and medium-sized enterprises

Authors: Rainer Baule; Christian Soost

Addresses: Chair of Banking and Finance, University of Hagen, Universitätsstraße 41, 58097 Hagen, Germany ' Chair of Statistics and Econometrics, University of Siegen, Kohlbettstr. 15, 57072 Siegen, Germany

Abstract: The use of pay for performance (PFP) in organisations has come to be a standard tool in human resource management within the past three decades. However, economic-psychological literature questions the effectiveness of PFP plans, as they might crowd out intrinsic motivation, leading to reduced labour efforts of employees. This paper discusses the situation of PFP in relation to non-financial incentives in German small and medium-sized enterprises (SMEs). We find that variable pay is well-established in German SME and discuss the effects of financial and non-financial incentives on intrinsic motivation. We identify three key factors for the success of SME: social environment, non-financial incentives, and intrinsic motivation. These factors are strongly connected and can be used to offer employees a different kind of workplace in contrast to big companies. We point out that PFP in SME can be hazardous and the use of this kind of compensation must be implemented implemented.

Keywords: pay for performance; PFP; small and medium-sized enterprises; SMEs; non-financial incentives; intrinsic motivation; crowding-out; social environment; performance-related pay; human resource management; HRM; Germany.

DOI: 10.1504/IJEV.2016.074400

International Journal of Entrepreneurial Venturing, 2016 Vol.8 No.1, pp.24 - 45

Available online: 28 Jan 2016 *

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