A benefit of performance pay

In recent years, there's been a justified backlash against performance-related pay. Paying workers for performance doesn't always elicit better results and might even backfire (pdf) if it crowds out intrinsic motivation or causes people to choke under pressure. However, a couple of things I've seen recently suggest there is a case for such pay.

One is a laboratory experiment at the University of Lyon. Researchers split subjects randomly into managers and workers, with workers answering general knowledge questions and managers assigning rewards to them. They found that managers were more likely to give high rewards to workers if they knew that the workers shared their opinions on subjects such as art, climate change or immigration. This confirms what we all know - that it's not just ability that gets rewarded at work, but conformity, being a "good chap."

However, when managers were paid for their team's performance, they became less inclined to reward conformity declined and more inclined to reward performance.

This is consistent with the finding of a new paper,  that, in the UK, "performance pay is associated with a smaller ethnic wage differential" - albeit mainly for Asians rather than blacks and for managerial and supervisory workers.

All this suggests that - under certain conditions - performance pay can reduce favouritism, insofar as it increases the reward for merit rather  than for conformity or skin colour. Performance pay, therefore, not only reduces racism, but also increases efficiency by deterring office politicking.

There is, though, a big caveat here. Performance pay only has these benefits if it is clearly tied to objective performance. Work by John Heywood and Emilio Castilla has shown that when such pay contains  subjective evaluations, it can actually increase ethnic wage inequalities. And, on might imagine, increase the rewards for conformity too.

So, maybe it is only particular types of very well-defined performance pay that we should applaud, and then only lightly.