Received: 5 November 2022 Revised: 8 February 2023 Accepted: 15 February 2023

DOI: 10.1111/peps.12583

ORIGINAL ARTICLE

Compensation and performance: A review

and recommendations for the future

Ingrid Smithey Fulmer1 Barry Gerhart2 Ji Hyun Kim3

1
School of Labor and Employment Relations,
University of Illinois at Urbana-Champaign, Abstract
Champaign, Illinois, USA
In this paper, we undertake two primary tasks. First, we
2
Department of Management and Human
describe trends in pay → performance research since 1990.
Resources, Wisconsin School of Business,
University of Wisconsin-Madison, Madison, Examining 30+ years allows us to capture the evolution of
Wisconsin, USA
thinking and methodology over time. For this purpose, we
3
Department of Management and
Organisation, NUS Business School, National
focus on scholarly work appearing in Personnel Psychology
University of Singapore, Singapore, Singapore (PP), as well as in the Journal of Applied Psychology (JAP) and
Academy of Management Journal (AMJ). As our second task,
Correspondence
Ingrid Fulmer, School of Labor and we go beyond analysis of broad trends, to take a deeper
Employment Relations, University of Illinois at
and more substantive dive into the specific topic of pay
Urbana-Champaign, 504 E. Armory Avenue,
Champaign, IL 61820, USA. for performance (PFP) and related areas (pay dispersion,
Email: [email protected]
pay communication/transparency), while at the same time
drawing on the broader literature on PFP that goes beyond
the three journals listed above. We also discuss pay equity,
endogeneity, and international issues. Finally, we suggest
practical implications, as well as future research directions.

KEYWORDS
compensation, pay-for-performance, performance

1 INTRODUCTION

The payment of compensation in exchange for the contributions provided by employees is uniquely important in defin-
ing the employment relationship. Indeed, the very definition of the word “employ” (“to provide with a job that pays
wages or salary,” Merriam-webster.com) implies that compensation is both necessary and sufficient to define the
relationship. Other practices or social exchanges in organizations may be nice to have, wise to have, or even legally

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits
use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or
adaptations are made.
© 2023 The Authors. Personnel Psychology published by Wiley Periodicals LLC.

Personnel Psychology. 2023;76:687–718. wileyonlinelibrary.com/journal/peps 687

688 FULMER ET AL .

required, but are not relationship-defining in the way that compensation is (Rousseau & Ho, 2000). The inducements
(e.g., employers offering pay) and contributions (e.g., employees providing performance) defining this exchange form a
contract, implicit and/or explicit, with different varieties of contracts/employment relationships in existence (Adams,
1963; Barnard, 1968; Fulmer et al., 2003; March & Simon, 1958; Rousseau, 1989; Tsui et al., 1997; Williamson, 1975).
Compensation includes “any direct or indirect payments to employees, such as wages, bonuses, stock, and benefits”
(Gerhart & Milkovich, 1992, p. 484). From an organization’s point of view, successful achievement of performance
goals requires offering compensation at a level and in a form that attracts, retains, and motivates a workforce having
the desired attributes. At the same time, it must carefully manage compensation costs, which are often the single
largest operating cost. For example, U.S. employer costs for employee compensation in the civilian sector in early
2022 (Bureau of Labor Statistics, 2022) averaged $40.90/hour, with $28.16 in the form of wages, salaries, and other
direct pay, and $12.74 ($2.94 legally required) in the form of benefits. Although most organizations do not report
labor cost data in their public filings, there are exceptions in the airlines, healthcare, and financial services industries.
A sampling indicates that compensation accounts for 30 to 58% of operating expenses and 28 to 46% of revenues
(Noe et al., 2023; Table 11.1).
For most employees, compensation received via the employment relationship is their major source of income and
instrumental for achieving so many kinds of needs and/or goals (e.g., security, status, esteem, achievement; Lawler,
1971), or stated differently, in maintaining the overall health and wellbeing of one’s self and one’s family outside of
work (Leana & Meuris, 2015). Pay is also universally valued, with more pay generally preferred to less (Rottenberg,
1956), unlike other job attributes (e.g., responsibility, degree of supervision), whose attractiveness depends on the
employee (Dawis et al., 1968; Lawler, 1971; Schneider, 1987; Weller et al., 2019). Although some have suggested that
once pay rises above a certain level, well-being plateaus (e.g., at around $75,000 in 2010, based on one interpretation
of Kahneman & Deaton, 2010), more recent research has found, based on 1,725,994 experience-sampling reports
from 33,391 employed US adults, that well-being “increased linearly with log(income), with an equally steep slope for
higher earners as for lower earners” and that there “was no evidence for an experienced well-being plateau above
$75,000/y, contrary to some influential past research.” (Killingsworth (2021, p. 1).
Employees evaluate and react to their compensation within a social context where perceptions of fairness/equity
are central. From a societal viewpoint, workers’ compensation has important implications for national productivity
and thus standards of living. Societal considerations can also be seen in the extensive regulatory framework for com-
pensation in many developed countries (e.g., equal employment opportunity, minimum wage and overtime provisions),
the continued focus of labor unions on compensation issues, and the significant attention to income inequality in both
developed and developing countries around the world.
An extensive literature also documents the importance of pay in terms of how it affects what “people do” (Rynes
et al., 2004). This includes findings that higher pay levels substantially reduce turnover (Gerhart, 2023, Exhibit 17.15),
as well as that there is a significant increase in pay that follows (voluntary) turnover (Gerhart, 2023, Exhibit 17.16),
especially among those with high human capital (e.g., 35% in Bidwell, 2015). Of course, the evidence (e.g., meta-analytic
evidence provided by Jenkins et al., 1998; Kim et al., 2022) including work that we review later, also shows substantial
positive effects of PFP on worker performance. Increasingly, scholars are also paying attention to how pay systems
affect performance, turnover and other outcomes in different ways for different people, depending on characteristics
such as individual differences, demographics, and relative workgroup standing (Fulmer & Shaw, 2018).
Accordingly, research on compensation is scientifically and practically important and has been published in the
pages of Personnel Psychology (PP) from its inception. In the introduction to the very first issue of PP, editors Erwin
Taylor and Charles Mosier listed the types of research questions of relevance to the journal, including: “What are the
techniques for establishing wage policies and wage rates that will result in an equitable wage structure, psychologically
acceptable to those who work under it?” (1948, p. 3), as well as the related topic of workers’ motivations, morale, and
attitudes and the effectiveness of methods for improving them. Later in that year, the first two compensation-related
articles were published in PP (Cohen, 1948; Jurgensen, 1948). Fast-forwarding to today, this seventy-fifth anniversary
of PP marks an excellent time to take stock and consider the state of contemporary employee compensation research,
FULMER ET AL . 689

in this journal as well as more broadly. With over fifty-seven (!) years of combined interest and experience studying
and writing about compensation, we are excited about this opportunity to reflect on where we’ve been and to offer
suggestions for future directions.
In this paper, we undertake two primary tasks. First, we describe trends in research on pay → performance since
1990. Examining 30+ years allows us to capture the evolution of thinking and methodology over time. One reason
we chose to begin with the year 1990 is that two comprehensive reviews, one on compensation broadly (Gerhart &
Milkovich, 1992) and one on pay for performance (PFP) specifically (Milkovich & Wigdor, 1991) cover the literature up
to approximately 1990. A second reason is that 1990 is roughly when the compensation literature began to move from
a mostly individual (and sometimes team) level of analysis to business unit and organization levels, including strate-
gic perspectives focusing on sustained organization differences in compensation practices and their consequences
for organization/unit performance (Balkin & Gomez-Mejia, 1990; Gerhart & Milkovich, 1990; Gomez-Mejia & Balkin,
1992), with this supra-individual perspective eventually broadening to other individual human resource practices (e.g.,
staffing, Terpstra & Rozell, 1993) and then to systems of human resource practices (e.g., Arthur, 1994; Huselid, 1995;
MacDuffie, 1995; see Becker & Gerhart, 1996 for an overview of this shift).
For this purpose, we focus on scholarly work appearing in PP, as well as in the Journal of Applied Psychology (JAP) and
Academy of Management Journal (AMJ). Because covering every important topic in detail is not feasible, we narrowed
our focus to research where performance is the dependent (endogenous) variable, since “the ultimate dependent
variable when making strategic pay choices is . . .performance” (Gomez-Mejia et al., 2014, p. 58). On the indepen-
dent (exogenous) variable side, we also narrow our focus to direct pay and here we will see that PFP is the most
frequently studied aspect of direct pay. We will also see that performance as both a dependent variable and as part
of a PFP independent variable can be measured at one or more distinct levels (e.g., individual, unit, organization) and
with results- and/or behavior-based performance measures. The performance measures on the two sides of the equa-
tion can be the same (e.g., a PFP plan where individual incentive payouts depend on individual productivity results,
with the goal of increasing individual productivity results) or different (e.g., a PFP plan where individual base pay
increases dependent on individual performance behavior ratings, with the goal of increasing organization profits).
Although other compensation elements (e.g., employee benefits) are of course important, fortunately, these have been
the subject of other recent reviews (e.g., Fulmer & Li, 2022) and/or are covered in detail in book-length treatments
(Gerhart, 2023).
As our second task, we go beyond analysis of broad trends, to take a deeper and more substantive dive into the
specific topic of PFP and related areas (pay dispersion, pay communication/transparency), while at the same time
drawing on the broader literature on PFP. One major reason for our focus on PFP is that, as we will see (Tables 1 and
2), PFP has been the focus of the vast majority of compensation research in PP, JAP, and AMJ that uses performance
as the outcome variable. Another reason is the longstanding argument that PFP is the most strategic dimension of
compensation strategy. Gerhart and Milkovich (1990) noted that labor market and product market competition set a
floor and ceiling, respectively, on pay level (i.e., average pay), often limiting firms’ ability to differentiate based on how
much they pay (which they might like to do because of the high importance of pay level and how visible/quantifiable it
is), but not in how they pay—hence the popularity of PFP (See Gerhart & Rynes, 2003, p. 21 and Haire et al., 1967,
p. 9–10 for similar arguments. See Rahmandad & Ton, 2020 for an example of different within-industry pay level
strategies.).
Understanding the current state of and trends in empirical research on employee compensation and performance
(our first task), and key findings on PFP specifically (our second task) is of critical theoretical and practical, bottom-
line importance. If research finds certain pay systems are less effective than expected, this might be because of design
flaws, poor execution (e.g., poor communication), or lack of alignment with the workplace context. Identifying the rea-
son is important in guiding steps to a remedy. Methodological soundness also matters because research lacking validity
should not inform compensation decisions. We conclude by offering several specific practical recommendations for
managers that emerge from our review, and identifying avenues that we believe will be fruitful for future scholars to
traverse.
690 FULMER ET AL .

2 TASK 1: TRENDS IN COMPENSATION RESEARCH

2.1 Selecting articles

We first searched Personnel Psychology (PP), Journal of Applied Psychology (JAP), and Academy of Management Journal
(AMJ) using Wiley Online Library to identify articles containing the keywords compensation, pay, reward, bonus, incen-
tive, or salary in the title or abstract, published since 1990. Second, given space and time constraints, we narrowed
our substantive focus by including only articles where: (a) performance was the endogenous variable; (b) compensa-
tion (in terms of direct pay) was the exogenous variable (or moderator); (c) the focus was on employees other than the
top 5 executives or boards; and (d) the relationship of compensation with performance could be identified separately.
We excluded studies using turnover as the endogenous variable unless they specifically examined turnover of high
performers.

2.2 Examining trends

Table 1 shows characteristics of each study and Table 2 provides a summary. Since 1990, 39 articles examined compen-
sation → performance, with 13 in the 1990s, 15 in the 2000s, declining to 11 since 2010 (despite being a 13- rather
than 10-year interval). These numbers are consistent with observations of previous researchers who have noted the
scarcity of compensation research, both in absolute terms and relative to the volume of research on other HR prac-
tices such as employee selection and performance appraisal (e.g., Gupta & Shaw, 2014). Examination of Table 1 also
shows that although a range of compensation constructs have been studied, PFP and closely related topics (e.g., PFP
perceptions, PFP exceptions/i-deals) has been by far the most studied (in 26 of 39 studies, with the next most studied
topics being covered in 3 of 39 studies).
With respect to theories, Table 2 shows expectancy theory, based in psychology, and agency theory, based in eco-
nomics, have been used most often (seven and six studies each, respectively), followed by equity, goal-setting and
tournament/sorting theories (five studies each). Also of note are three other theories used twice each, plus another
15 theories used once each (included in the “others” column); a few studies have used multiple theories. Overall, there
is much theoretical diversity, with a few theories used more often than others, but far from dominant. In the most
recent (2010-2022) period, however, only two of the frequently used theories (equity and expectancy) were used more
than once. Agency and goal-setting, more commonly occurring theories in the past, have disappeared from recent
pay → performance research (and tournament theory/sorting nearly so). For interested readers, reviews of the the-
ories above are available from a number of sources (e.g., Bartol & Locke, 2000; Gerhart, 2023 [see Exhibit 9.4 for a
brief summary of theories’ essential features and implications for PFP]; Gerhart & Rynes, 2003). We also note that
some studies in Table 1 (e.g., Petty et al., 1992) have placed little emphasis on delineating and testing theory, taking a
primarily applied focus.
PFP programs are typically classified on two dimensions (Gerhart & Rynes, 2003; Gerhart et al., 2009): (1) use of
results-oriented (e.g., physical production output, sales, profits, total shareholder return) or behavior-oriented (e.g.,
supervisor or customer ratings of specific behaviors) performance measures; and (2) use of performance measured
at the individual or aggregate (e.g., group, unit, organization) level.i (See Nyberg et al., 2018 for a review of aggregate
pay plans.) A third dimension, not included in this section due to it being infeasible to code for most studies (Kim et al.,
2022), but which we return to later, is incentive intensity (magnitude of the pay-performance relationship, Gerhart &
Rynes, 2003). Because “incentive” is often also used to refer specifically to individual incentive plans, we will use the
term PFP intensity. We will say more later regarding the effectiveness implications of these PFP decisions.
Table 2 shows that both results- (27 studies) and behavior-based (11 studies) measures of performance are com-
monly used, but results-based measures, which often lend themselves more easily to research (e.g., in the form of
 FULMER ET AL .

TA B L E 1 Theories, compensation constructs, and selected methods to study pay → performance, by time period, in PP, JAP, and AMJ

Performance Endogeneity:
dependent variable Endogeneity: Statistical
Study Compensation construct and type Level of analysis Theory Design approach approach
1990-1999
(N = 13)
Gerhart & Pay level & PFP long term ROA R Organization Expectancy, agency Longitudinal Fixed effects model
Milkovich (1990, incentives, bonus IV (archival)
AMJ) B
Petty et al. (1992, PFP general IV Sales, expense R Unit Quasi experiment
JAP) W
Wright et al. (1993, PFP bonus IV Quantity produced R Individual Goal setting Lab experiment
JAP)
Banker et al. (1996, PFP bonus IV Sales, profit R Unit Organizational control, Quasi experiment
AMJ) W agency
Erez and Somech PFP bonus IV Quantity produced R Individual Self-regulation, social Lab experiment
(1996, AMJ) I loafing, goal setting
Klaas and Pay level IV Financial impacts R Organization Utility Simulation
McClendon
(1996, PP) B
Roth & O’Donnell Pay level (perception) IV Perceived Unit Agency
(1996, AMJ) I II B effectiveness B
Stewart (1996, JAP) PFP commission MV Number of customer Individual Behavioral activation Quasi experiment
W
memberships R theory
(Continues)
691
 692

TA B L E 1 (Continued)

Performance Endogeneity:
dependent variable Endogeneity: Statistical
Study Compensation construct and type Level of analysis Theory Design approach approach
Trevor et al. (1997, PFP salary raise & Turnover quality Individual March & Simon turnover Longitudinal
JAP) W promotion MV using model (archival)
performance
rating B
Bloom & Milkovich PFP bonus IV Shareholder return R Multi-level Agency Longitudinal
(1998, AMJ) B (archival)
Murray and Gerhart Skill-based pay IV Labor cost, defective Unit Expectancy, job design Longitudinal
(1998, AMJ) W rates, labor (archival)
productivity R
Bloom (1999, AMJ) Pay dispersion IV Baseball player and Multi-level Neoclassical economics Longitudinal
B
team performance (archival)
R

IV
Wood et al. (1999, PFP bonus Production hours R Individual Goal setting Lab experiment
JAP)
2000-2009
(N = 15)
Knight et al. (2001, PFP bonus IV Computer game Unit Goal setting, social Lab experiment
AMJ) score R cognitive, agency,
prospect
Stajkovic and PFP general IV Production hours R Individual Social cognitive Quasi experiment
Luthans (2001,
AMJ) W
Beersma et al. PFP incentive IV Speed & accuracy in Multi-level Goal interdependence Lab experiment
(2003, AMJ) computer theory
simulation R
(Continues)
FULMER ET AL .
TA B L E 1 (Continued)

Performance Endogeneity:
FULMER ET AL .

dependent variable Endogeneity: Statistical

Study Compensation construct and type Level of analysis Theory Design approach approach
Brown et al. (2003, Pay level & pay ROA, patient length Organization Efficiency wage, equity Longitudinal
AMJ) B dispersion IV of stay, survival (archival)
rate R
Sturman et al. PFP incentive IV Turnover quality Multi-level Utility (Simulation)
(2003, PP) B using
performance
rating B
Schweitzer et al. PFP bonus MV Unethical behavior B Individual Goal setting Lab experiment
(2004, AMJ)
Currall et al. (2005, Pay satisfaction Student educational Organization Equity
PP) B (perception) on pay outcomes R
structure, benefit,
raise, and level IV
Russo and Harrison PFP general IV Toxic emission R Unit Quasi experiment
(2005, AMJ) W
Salamin & Hom PFP merit, bonus, Turnover quality Multi-level Tournament, sorting Longitudinal
(2005, JAP) I W promotion MV using (archival)
performance
rating B
Combs et al. (2006, Pay in HPWS; incentive, Productivity, Organization HPWS theory
PP) B pay level, internal retention, returns,
promotion IV growth R
Morgeson et al. PFP general (perception) Effort expended B Multi-level Job design Quasi experiment
MV
(2006, PP) W
Peterson and PFP bonus IV Gross profit, Unit Self-regulation Quasi experiment
Luthans (2006, production time,
JAP) W turnover rate R
(Continues)
693
 694

TA B L E 1 (Continued)

Performance Endogeneity:
dependent variable Endogeneity: Statistical
Study Compensation construct and type Level of analysis Theory Design approach approach
Cadsby et al. (2007, PFP piece rate IV Quantity of anagram Individual Agency, expectancy, Lab experiment
AMJ) I completed R sorting
Shaw and Gupta Pay dispersion IV MV Turnover quality Multi-level Tournament, sorting Longitudinal
(2007, PP) B using (archival)
performance
rating B
Kepes et al. (2009, Performance- vs. Productivity; Organization Tournament, expectancy Longitudinal
PP) B politically-based pay accident (archival)
(perception) & pay frequency ratio,
range IV MV out-of-service
percentage R
2010-2022
(N = 11)
Bamberger and Pay communication Computer Individual Expectancy, equity Lab experiment
Belogolovsky (secrecy vs. simulation score R
(2010, PP) I transparency) IV
Chuang and Liao Pay in HPWS; pay level, Service Multi-level HPWS theory, Longitudinal
(2010, PP) I B PFP general, benefits, performance, organizational climate (archival)
fairness of pay helping behavior, theory
(perception) IV market
performance R B
Trevor et al. (2012, Pay dispersion IV National Hockey Organization Equity, sorting Longitudinal Instrumental
AMJ) B League (archival) variable analysis
performance R
Kownatzki et al. PFP bonus, profit Decision speed B Multi-level Organizational control
(2013, AMJ) I II B sharing, benefits,
career prospects
(perception) IV
(Continues)
FULMER ET AL .
 FULMER ET AL .

TA B L E 1 (Continued)

Performance Endogeneity:
dependent variable Endogeneity: Statistical
Study Compensation construct and type Level of analysis Theory Design approach approach
Belogolovsky & Pay communication Computer Individual Signaling Lab experiment Fixed effects model
Bamberger (secrecy vs. simulation score R
(2014, AMJ) I transparency) IV
Han et al. (2015, PFP general (perception) Performance rating Individual Expectancy
IV MV
JAP) I B of individual
performance B
Maltarich et al. PFP commission IV Revenue R Individual Economics, expectancy, Longitudinal
(2017, AMJ) W psychological contract (archival)
theory
Abdulsalam et al. PFP i-deals (perception) Sales R Individual Social comparison, equity Longitudinal
IV
(2021, JAP) W (archival)
Han et al. (2021, PP) Reward interdependence Sales R Unit Social hierarchy Longitudinal
IW
(perception) MV (archival)
SimanTov-Nachlieli Pay communication Work behavior B Individual Uncertainty Lab experiment
& Bamberger (perception) IV management
(2021, JAP) I II
Kong et al. (in press, PFP general (perception) Performance rating Individual Transactional theory of Longitudinal
IV
AMJ) I W of individual stress, role (archival)
performance B engagement
I
Includes at least one non-U.S. sample. II Includes samples from two or more countries. B Between-organization design. W Within-organization design. IV Compensation as independent
variable. MV Compensation as moderator. R Results-based performance measure. B Behavior-based performance measure.
695
 696

TA B L E 2 Use of theories and selected methods to study pay → performance, by time period, in PP, JAP, and AMJ

Summary count
Theory 1 Performance measure
Goal Job Social Tournament/
Agency Equity Expectancy setting design cognitive Sorting Utility Others 2 Results Behavior Both
1990-1999 4 0 2 3 1 0 0 1 4 11 2 0
2000-2009 2 2 2 2 1 2 4 1 3 10 5 0
2010-2022 0 3 3 0 0 0 1 0 8 6 4 1
Total 6 5 7 5 2 2 5 2 15 27 11 1

Level of analysis Endogeneity: Design approach Endogeneity: Statistical approach

Fixed
Longitudinal Lab Quasi effects Instrumental Selection Grand
Individual Unit Organization Multi-level (archival) experiment experiment model variable bias Total
1990-1999 5 4 2 2 5 3 3 1 13
2000-2009 3 3 4 5 4 4 4 1 15
2010-2022 7 1 1 2 6 3 0 1 1 11
Total 15 8 7 9 15 10 7 2 1 1 39
1
A few studies used multiple theories, making the sum of the theories used larger than the number of studies. For instance, expectancy and agency theories are separately counted for
Gerhart and Milkovich (1990).
2
Includes efficiency wage, self-regulatory, social loafing, March & Simon turnover model, organizational control, neoclassical economics, goal interdependence theory, prospect, HPWS,
organizational climate, signaling, psychological contract, social comparison, transactional theory of stress, role engagement, uncertainty management, and social hierarchy theories.
FULMER ET AL .
FULMER ET AL . 697

individual incentives, which have frequently been reviewed in meta-analyses), are used about twice as often. In the
most recent time period, however, results and behavior measures were used almost equally.
The individual (15 studies) and aggregate (unit, organization; 15 studies combined) levels of analysis are used
equally, but in the most recent time period (2010-2022), there has been a shift to use of mostly individual level data. As
another observation, we have long known that aggregating individual level relationships such as PFP → performance
does not necessarily reproduce individual-level statistical relationships (e.g., Ostroff, 1993; Robinson, 1950). However,
individual-level relationships play a key role in the aggregate level PFP → performance relationship and indeed this has
become a focus of attention in the strategy literature under the term “microfoundations” (Felin et al., 2015). For PFP
research to provide insight into these issues, use of multi-level data is necessary. However, we have seen only two such
studies in the most recent time period.
Another design feature we show in Table 1 (see B and W superscripts in column 1) that we think aspiring compen-
sation researchers should be aware of is whether a study is between-organization or within-organization. The former
presents more of a challenge if collecting primary data (which is not always necessary—e.g., consulting firm data have
been used in such research), whereas the latter presents more of a (potential) challenge in assuring that variation in
compensation practices within a single organization is sufficient.
The remaining columns in Table 1 summarize how research has dealt with endogeneity challenges. Much attention
has been devoted to endogeneity using a design approach (e.g., longitudinal data, experiments, quasi-experiments).
Although use of laboratory experiments seems to have remained fairly consistent over the decades, it appears that
quasi-experiments (e.g., Petty et al., 1992), seen in the 1990s and 2000s, have not been used since 2010. Another note-
worthy takeaway from Table 2 is that statistical approaches to address endogeneity are almost never used, regardless
of the decade. Indeed, Table 2 indicates only 4 such instances in 39 articles over 30 years. When endogeneity has
already been addressed to some degree through design, especially in the case of an experiment, this is more under-
standable. However, almost all experiments are conducted in the laboratory. Field research in compensation, at best,
makes use of quasi-experimental designs (which as noted have not been done of late), which are unlikely on their own
to fully address endogeneity concerns. Clearly, there is room for future research to better address endogeneity. We
will return to this topic later.
Finally, returning to column 1 in Table 1 (see I and II superscripts in column 1), we see that 27 studies used only U.S.
samples. Three studies used multiple countries, one of which was comparative (using cultural distance between each
country and the headquarters country; Roth & O’Donnell, 1996).

3 TASK 2: FOCUS ON PFP→ PERFORMANCE

To this point, we have focused on trends in compensation research examining pay → performance in three journals
over a 30+ year timeframe. We now shift our focus in two ways. First, we narrow our substantive focus to how PFP
influences performance. As we saw in Table 1, this has been by far the most studied topic. Further, emphasis on PFP
→ performance is consistent with our earlier discussion of the literature’s emphasis on PFP as an especially strate-
gic compensation dimension. Second, we expand our focus to include literature beyond PP, JAP, and AMJ. However,
many of the individual studies we highlight continue to come from these three journals. In examining PFP → per-
formance, we include closely related areas such as performance measurement/distribution, pay transparency, and
pay dispersion. Based on our examination of trends above, we address the need for more attention to endogene-
ity and international issues. Finally, we address diversity/inclusion issues, which in compensation typically means
examining pay equity. We begin with a brief review of beliefs about the role performance should have in determin-
ing pay and by describing two broad conceptual mechanisms (incentive and sorting effects) that capture many of
the more specific and varied mechanisms in the wide array of theories (Tables 1 and 2) used in PFP → performance
research.
698 FULMER ET AL .

3.1 Employee and employer views on the role of performance in pay (and its use)

What role should performance have in determining pay? Classical research, nearly all in PP, has shown that employees
and managers largely agree that pay should be based on merit/performance. For example, 180 managers from 72 dif-
ferent (U.S.) companies rated nine possible factors in terms of the importance they should receive in determining the
size of employees’ salary increases; job performance was deemed most important, followed by the nature of job and
amount of effort expended (Dyer et al., 1976). Research by Fossum and Fitch using U.S. data (1985) also found perfor-
mance to be most important and rated considerably higher than length of service. Similar findings are reported in other
studies using not only U.S. data, but also data from China and Russia (Giacobbe-Miller et al., 1998; Sherer et al., 1987;
Zhou & Martocchio, 2001). In addition, Williams, McDaniel, and Nguyen’s (2006) meta-analysis found employees’ pay
satisfaction positively related to their perception of the degree to which their organization uses PFP (r = .31).
Employers also believe in paying for performance, especially for more critical jobs. Virtually all private sector (and
many other) organizations use PFP, usually in multiple forms (Gerhart, 2023), suggesting that employers believe pay
is a key motivator. Even in unionized organizations where within-job pay increases may depend on seniority, advance-
ment to higher job levels with higher pay typically also includes a performance element. In addition, we know that both
pay level and proportion of PFP as a share of pay are greater in jobs at higher levels in the organization where con-
tributions and performance are particularly critical to the broader business (Gerhart, 2023, Exhibit 10.2). These facts
suggest that organizations believe that those making the most valuable contributions need/should receive higher pay
in return.

3.2 PFP → Performance fundamental mechanisms: Incentive and sorting effects

As we have seen, a wide range of theories have been used to study PFP. Here, to simplify, we describe PFP effects
as operating via two broad conceptual mechanisms in these theories: incentive and/or sorting effects (Cadsby et al.,
2007; Fulmer & Shaw, 2018; Gerhart & Fang, 2014; Gerhart & Rynes, 2003; Lazear, 1986). The incentive effect is
the focus of all the most commonly used theories above. The incentive effect describes how PFP changes the perfor-
mance of the current workforce, primarily through its impact on motivation of individual workers. The sorting effect,
which is a more recent focus, operates by changing who the workers are, not by changing the behaviors of current
workers. The classic study by Lazear (1986) examined workforce productivity (number of car windshields installed at
Safelite) before and after implementation of an individual incentive. Productivity increased by 44%. However, produc-
tivity of workers present before and after implementation increased by 22%, leaving 44%–22% = 22% unexplained.
Lazear found that the remaining 22% productivity increase came from lower productivity workers (whose relative pay
decreased) becoming more likely to leave under the new PFP plan and to be replaced by higher productivity workers
(who benefited most from the new PFP plan). He termed this a sorting effect.
Returning to Table 1 and 2, four studies examine and find support for sorting effects (Cadsby et al., 2007; Salamin
& Hom, 1997; Shaw & Gupta, 2007; Trevor et al., 2012). Most notable perhaps is Cadsby et al. (2007), both because it
introduced the use of a multi-stage (eight rounds) laboratory experiment to study sorting and because it included both
conditions where subjects were assigned (regardless of their preferences) to PFP (vs. fixed rate) pay and conditions
where subjects could choose PFP or fixed pay. Importantly, Cadsby et al. (2007) found that when given a choice, 35
of 115 switched from the pay condition initially (randomly) assigned. As a result, productivity went from being 10%
higher in the PFP condition when conditions were (randomly) assigned to being 38% higher in the PFP condition after
subjects could choose pay condition. This implies that sorting accounted for (38–10)/38 = 74% of the positive effect of
PFP (See analysis in Gerhart, 2023, chapter 9.) That, in turn, means that 74% of the PFP effect would have been missed
using a one-round between-subjects design with random assignment, because of the absence of pay condition choice
and thus opportunity for “mobility” by subjects to their preferred pay condition.
FULMER ET AL . 699

Nevertheless, we have seen that the incentive effect continues to be by far the main focus, meaning that most
research underestimates the effect of PFP that would be observed when employee mobility/sorting is included in the
design. Bearing that in mind, we now turn to evidence on incentive effects (where sorting is not included). The “clean-
est” form of evidence for the incentive effect comes from meta-analytic studies of individual incentive plans, where
individual performance is measured as results (e.g., productivity) (e.g., Jenkins et al., 1998; Kim et al., 2022; Weibel
et al., 2010). Interestingly, here, we have a case where Table 1 does not capture the large literature (in terms of primary
studies, which in recent decades are mostly published elsewhere) on the effect of PFP using individual, results-based
performance measures (i.e., individual incentives), whereas these meta-analyses do. Kim et al.’s (2022) meta-analysis,
the most recent and complete, included 82 effect sizes and 7978 subjects/employees. Consistent with Jenkins et al.
(1998), they found performance to be higher (by .54 SD) under incentive (vs. fixed/hourly) pay, which worked out to be
a 24% performance difference.
Knowing the direction (positive or negative) and magnitude of the effect of any HR practice, including a compensa-
tion program, is of course important. However, to fully understand the (net) payoff, one must also incorporate the costs
of the program. This is not common in the literature. One example, in the meta-analysis by Kim et al. (2022), found that
the 24% performance improvement under incentives (vs. fixed/hourly pay) was still around 20% even after accounting
for the fact that payouts were higher in incentive conditions than in fixed pay conditions. A model that can be used to
incoporate a fuller set of costs and benefits is utility analysis (Brogden, 1949; Schmidt & Hunter, 1998). We are aware
of only two studies in compensation that have used utility analysis, both appearing in PP. Klaas and McClendon (1996)
found in a study of bank tellers that higher pay level increased employee performance, but not enough to cover the
higher labor costs. Sturman et al. (2003) found in a study of exempt (i.e., professional and managerial) employees that
although stronger PFP cost more, the resulting increase in performance (via sorting effects) and the overall net value
created was greater. Note that both studies used a single employer and Klaas and McClendon (1996) studied bank
tellers, a low wage position (and one with relatively low SDy in dollar terms). Thus, these studies demonstrate how to
use utility analysis to study net compensation effects, although the specific results are not necessarily generalizabile.
One other issue that may prove to be critical in both traditional PFP→performance research and in estimation of
the utility of PFP is the nature of the performance distribution. Performance has been assumed, explicitly or implicitly,
to be normally distributed, including in utility analysis. However, in at least some jobs, performance appears to be
nonnormally distributed such that there are some individuals with extraordinarily high performance in the upper tail
who may create extraordinary value for the organization that is not well-captured in current models (and that is not
necessarily compensated accordingly). For example, if performance is measured using only a 1 to 5 rating scale where
5 is the highest possible performance, and in a case where the rating scale is applied in a reliable and valid manner, the
five performance rating category could include employees who create 30% more value than the average employee in
the three category as well as employees who create 400% more value than the average employee in the three category.
To the degree that performance is not normally distributed, the value of selecting and retaining these extremely high
performing individuals is likely underestimated conceptually, as well as in attempts (e.g., utility analysis) to quantify
it (O’Boyle & Aguinis, 2012; Aguinis & O’Boyle, 2014; for a counterpoint, see Beck et al., 2014). A related literature
concerns “stars” (e.g., Call et al., 2015; Groysberg et al., 2008; Kehoe & Bentley, 2021), where again certain individuals
are known to have disproportionate influence on organizational outcomes.
Of particular relevance for future research is how well the pay distribution maps onto the performance distribution
in the presence of high performers/stars, and what the consequences are when it does not. This mismatch in distri-
butions could occur, as noted above, by the failure of most performance rating systems to differentiate among high
performers and extreme high performers, all of whom receive the same rating. Pay system constraints can further
exacerbate the situation. Merit budgets are typically set at a fixed total dollar amount, and for a given performance
rating (e.g., a 5) a manager may be given a range for raise allocations to allow some discretion to differentiate among
people receiving the same rating; even so, to keep total raises awarded from exceeding the budget there is always a
maximum raise that can be awarded to any individual. This constrained raise amount may effectively decouple pay
from actual performance for very high performers. Even in PFP systems with a more direct relationship between
700 FULMER ET AL .

performance and pay, such as a piecework or commission system, again, for budget reasons, there are often caps or
maximum payments that restrict the payout to any individual.
A concern that arises when pay distributions do not align with performance distributions, either due to faulty
assumptions about performance distributions or due to budget constraints that limit the PFP distribution, is that valu-
able employees will either search for alternative organizations where pay better corresponds to their performance
value and/or that these other organizations will identify such employees as being significantly underpaid and seek to
poach them (e.g., Lee et al., 2008).We could envision future research linking these distributional issues to PFP, by for
example, studying how PFP can be better designed to cost-effectively incentivize and retain these extraordinarily high
performers while also appropriately motivating and retaining the well-performing non-stars (e.g., solid performers but
not likely to become stars) who work alongside stars, and who make up the majority of the workforce.
Finally, our summary above focuses on mean effects of PFP. Of course, PFP effects can differ, depending on hori-
zontal fit with other employment practices and vertical fit with corporate/business strategy (Gerhart & Rynes, 2003;
Gomez-Mejia et al., 2014). Issues of fit can also include (Kim et al., 2022) whether PFP effectiveness varies depending
on the type of work (e.g., interesting/creative or not) and type of performance (e.g., quality vs. quantity).

3.3 PFP intensity, risks, results, and behaviors

Recall that PFP intensity refers to how large the payoff is to performance under PFP. According to agency theory,
increases in PFP intensity are expected to generate gains in motivation, but the challenge is to prevent risk-bearing
concerns among agents (employees) from undermining these gains. This helps explain why PFP intensity is typically
stronger in higher level/paid jobs where differences in performance are more consequential (similar to SDy in util-
ity theory, e.g., Sturman et al., 2003) and are tied to individually separable, results-based performance, but where
risk bearing is more feasible due to the overall higher levels of salaries being paid. Another trade-off is that higher
PFP intensity, although increasing motivation, at the same time can increase the possibility of undesired/unintended
effects. The equal compensation principle (Milgrom & Roberts, 1992, p. 228) essentially says that when different per-
formance goals are not incentivized equally, an employee will focus on those activities most incentivized in the PFP
plan and ignore others. This explains many of the potential pitfalls of PFP which include (Gerhart & Fang, 2015, p.
490): “excessive risk taking, excessive competition within the firm, focusing too little on performance measures (e.g.,
quality, customer service, long-term performance) not explicitly included in the PFP plan, and focusing too much on
(including gaming or manipulating) performance measures (e.g., sales, stock returns) that are included in the plan.” All
these concerns are further complicated, with behaviors and outcomes more difficult to predict, under complex PFP
systems when multiple PFP types are utilized at the same time (Park & Sturman, 2016; 2022).
Most unintended, negative outcomes of PFP seem to occur with the use of individual incentives (Gerhart, 2017)
or something very similar (e.g., sales commissions) where PFP intensity is strong, pay depends solely (or nearly so) on
results alone (e.g., mortgage revenue generated) and the equal compensation principle is ignored by omitting perfor-
mance criteria risk factors (e.g., such as risk of loan default in incentives for loan originators in the subprime mortgage
crisis) or ignoring whether acceptable behaviors are used to achieve results. Including subjective (behavior-based)
measures of performance and making sure pay depends on them, and not just on results, is one step to reduce the like-
lihood of unintended negative consequences. Likewise, reducing the strength of PFP intensity that is based on results
is another.
Although it is well-known that subjectivity in performance evaluation (e.g., via typical behavior-based performance
ratings) can cause its own array of problems (too much/too little performance differentiation, rater biases, lack of
credibility; Pulakos et al., 2019), behavior-based performance measures continue to be a central element in PFP in
organizations for the very reason that it does allow subjectivity, or to use a more positive term, judgment. In addi-
tion, results-based performance measures, especially those allowing separation of individual contributions, are simply
not available for all jobs. Behavior-based measures typically are. As research in PP has documented, subjective and
FULMER ET AL . 701

objective measures of performance overlap in part, but subjective assessments provide independent information.
Heneman (1986, p. 820) advised “not treating ratings and results as substitutes” based on his meta-analysis finding of
a mean corrected correlation of .27 between the two. Another study (Bommer et al., 1995) found a somewhat higher
correlation (corrected mean r = .39), but again the overlap was limited (variance shared = .392 = 15%, thus leaving
85% unshared). Importantly, they also noted each type of performance measure has problems (e.g., objective measures
can be “excessively narrow” and subjective measures can be “excessively prone to contamination” such as supervisory
biases). Thus, they suggested “an integrative approach” (using both), which may not only balance out each’s problems,
but is also necessary because “no measure could ‘objectively’ measure all relevant performance aspects. Some key
measures are necessarily subjective” (p. 599).
This advice has stood up well to the test of time. Indeed, recent research demonstrates the value of subjective
performance evaluation providing important unique performance information that can temper downside risk of PFP
based only on objective performance (e.g., by facilitating the adjustment of standards when they become unattainable;
Maltarich et al., 2017) and can motivate employees to engage in behaviors by including these in performance evalua-
tion (e.g., helping behavior, He et al., 2021; mentoring and building long-term customer relationships, Takahashi et al.,
2021) that might otherwise be ignored (e.g., as in Wright et al., 1993). These work by offsetting overreliance on objec-
tive (results-based) performance measures, consistent with the equal compensation principle (Milgrom & Roberts,
1992). Of course, the benefits of using subjective (behavior-based) evaluations in conjunction with objective measures
are enhanced further by taking steps to improve the construct validity and reliability of subjective measures (i.e., by
having clear, agreed-upon performance dimensions and standards; use of multiple raters, Viswesvaran et al., 1996).

3.4 Pay transparency

Pay transparency involves organizational communication along multiple dimensions, including: (1) providing informa-
tion about pay outcomes (e.g., disclosing the range of pay for an employee’s own job level and/or similar information on
job levels above/below, or publishing a list of all employees’ pay, such as is done for many state and local government
workers); (2) providing information about how pay is determined (e.g., bonus formula or salary determination process);
(3) formal or informal policies about whether employees are allowed to discuss pay among themselves, and (4) the
modes and channels to use to communicate about pay (for reviews that consider these dimensions, see Arnold & Ful-
mer, 2019; Colella et al., 2007; Fulmer & Arnold, 2020; Fulmer & Chen, 2014; Marasi & Bennett, 2016). A lack of pay
transparency is referred to as pay secrecy. Historically, in the U.S. private sector, for nonunion employees, there has
been little perceived pay transparency in terms of ability to discuss pay with coworkers or ability to access company-
provided information on pay, with pay secrecy perceptions continuing to be reported in recent years (e.g., 2017–18;
Sun et al., 2021). In the U.S., Executive Order 13665, which amended existing Executive Order 11246 and became
effective in 2016, as well as recent laws in a growing number of states and other countries, seek to change that, driven
by the belief that more transparency will reduce pay discrimination by shining a light on pay inequities. Whether pay
transparency is beneficial depends on the perspective (employee, organization, societal) and circumstances (Brown
et al., 2022; Colella et al., 2007; Fulmer & Arnold, 2020). Consistent with the logic above, an organization with known
pay inequities may decide to avoid pay transparency. An organization may also avoid transparency to limit worker
mobility by limiting their information on pay, making comparisons difficult. Of course, mobility is a key to workers
moving to their most productive job/organization match (Gerhart & Feng, 2021; Weller et al., 2019), so while the pri-
vate return to an organization of pay secrecy may be positive, the effect on individual workers and on society may be
negative (Colella et al., 2007).
Initially, employee reactions (perceptions of fairness, satisfaction, motivation, performance) to pay transparency
were expected to be uniformly positive. For example, in 1967, Lawler wrote: “The total picture is one arguing strongly
for organizations adopting more open policies with respect to pay” (p. 188). He reasoned that otherwise, “it seems
unlikely that employees will ever see a clear relationship between pay and performance. . . ” (p. 188) and without this,
702 FULMER ET AL .

organizations would miss out on a likely “net gain in the form of increased motivation. . . and increased satisfaction with
pay.”ii In their review, Colella et al. (2007) more fully developed the fairness-based logic for these predictions and, like
Lawler (1967), they argued that perceived fairness would be higher with greater transparency. The case for more open
pay is based on evidence (e.g., Lawler, 1967; Milkovich & Anderson, 1972) that employees are inaccurate in estimating
the pay of others. Specifically, peer pay was typically overestimated. In equity theory terms, that means the outcomes
of a likely social comparison would be overestimated, making underreward inequity more likely. Pay in lower-level
jobs was also typically overestimated, while pay in higher level jobs was typically underestimated (see Cullen & Perez-
Truglia, 2022; for similar findings on underestimating pay at higher job levels). Thus, the payoff to promotion (and thus
to performance, which plays a key role in promotion) would be underestimated, reducing motivation.
However, Milkovich and Anderson (1972) found that the case for more transparency was a bit more complex. First,
even where a transparency practice was in place, employees continued to be inaccurate in estimating the pay of others,
in the same ways as observed by Lawler (1967). Second, those most accurate in estimating peer salaries were the most
(not the least) dissatisfied with their pay (caveat: N = 14 only in that group). They concluded (p. 300) “results refute
the contention that . . .satisfaction with . . . pay and pay differentials are a direct function of perceptual accuracy of the
compensation practices of an organization.” This would prove prophetic. Although it does appear that employee per-
ceptions of process fairness is higher (due to sharing of information), employee distributive fairness reactions to this
information can be positive or negative (Smit & Montag-Smit, 2019). In the case of peers at the same job level, those
having higher relative pay generally react more positively to transparency, while those with lower relative pay react
more negatively (SimanTov-Nachlieli & Bamberger, 2021). For example, in a university system where more detailed
pay transparency (pay of individuals made public) was implemented, results included employees (having pay below the
median) making more social comparisons, being less satisfied, and having increased job search intentions (Card et al.,
2012). Alterman et al. (2021), found in their Study 1 (a survey of working executive MBA students) that greater per-
ceived transparency increased (decreased) turnover intentions (indirectly via effects on organizational trust) where
distributive justice was low (high). In their Study 2, using archival field data, they found no effect of transparency on
voluntary turnover where distributive justice was low, but found a positive effect (reduction in voluntary turnover)
when it was high. To the degree distributive justice is lower for those with pay below the median, the Alterman et al.
(2021) results together with those of Card et al. (2012) suggest pay transparency effects will be more positive for those
with higher relative pay, and lower for those with lower relative pay.
Brown et al. (2022) reconceptualize pay transparency/secrecy through the lens of information asymmetry among
senders (organizations or colleagues) and receivers (employees), and then summarize research on the impact of pay
transparency on a variety of outcomes and in different contexts. Earlier we focused on perceived fairness, satisfac-
tion, and turnover (or intentions). Turning to work motivation and performance, Brown et al. (2022) find that most
studies show a positive relationship with transparency, consistent with Lawler (1967). Belogolovsky and Bamberger
(2014), for example, found, using a lab experiment, a positive effect of transparency on performance, via an incentive
effect, but also via a sorting effect (consistent with Alterman et al., 2021; Card et al., 2012; SimanTov-Nachlieli & Bam-
berger, 2021). Note that, in an organization, obtaining the benefits of this sorting effect would require coping with
pay dissatisfaction (perhaps concentrated among low performers) and sufficient turnover for these employees to be
replaced by higher performers (Gerhart & Feng, 2021).
There is also evidence of individual differences in how employees react to pay transparency (e.g., due to equity
sensitivity, Bamberger & Belogolovsky, 2010; for a review, see Fulmer & Chen, 2014) and in the preferences of low- and
higher-paid individuals for sharing their own pay with others when transparency is taken to that point (Smit & Montag-
Smit, 2019). A concern for social relationships is likely a factor here (Brown et al., 2022). Compensation activation
theory (Fulmer & Shaw, 2018) argues that greater pay transparency will likely enhance the effects of some types of
pay (e.g., PFP) on individuals motivated by status-seeking or social dominance concerns, since greater availability of
pay information helps facilitate the comparisons needed to ascertain one’s relative standing in the group.
Pay transparency has links to the literature on pay dispersion (Brown et al., 2022) given that the effects of pay
dispersion likely depend on whether it is viewed as fair or not, and that evaluation (and to some degree its accuracy)
FULMER ET AL . 703

depends on having information about the pay of peers and other social comparisons (Shaw, 2014; Trevor et al., 2012).
Likewise, research on i-deals in PFP (Abdulsalam et al., 2021; Maltarich et al., 2017) is also connected to the degree
that there are offsetting effects (positive for those receiving i-deals, potentially negative for those not) driven by social
comparisons, which again depend on having sufficient information on pay and performance.

3.5 Challenges in defining and measuring PFP

A construct definition issue is that, at the individual level, PFP in organizations is often thought of as the annual merit
pay exercise. Understandably, that sometimes leads to skepticism about whether there is enough PFP to be meaning-
ful/motivating. For example, in recent years, the average annual merit increase has been 3%–4%. Survey data show
that 85% of employees receive either a three or a four merit rating on a five-point scale with a three receiving an aver-
age merit increase of 2.6% versus 3.6% for a 4 (Gerhart, 2023, Chapter 10). On an annual salary of $80,000, that would
amount to a difference of $800/year, $15.38/week, less still after taxes.
However, PFP is likely much stronger if observed over a longer time period, thus capturing the fact that higher per-
formers are promoted (at their current or a new employer) to higher job levels, which, in turn have not only higher
base pay levels, but also higher levels of short- and long-term incentives (Gerhart & Fang, 2014; Gerhart & Milkovich,
1992; Trevor et al., 1997). A promotion to a higher job level brings a much larger pay increase. The modal midpoint
progression (% difference between adjacent job level pay midpoints) is 15% (WorldatWork & Deloitte, 2019). Thus,
for example, someone receiving 3 promotions within a few years would increase their pay (beyond merit increases) by
1.15 × 1.15 × 1.15 = 1.52× (Gerhart, 2017). Further, we know that performance is linked to promotion. For example,
Gerhart and Milkovich (1989) reported that a 1-point higher performance rating on a 4-point scale was associated
with 48% more promotions over a 6-year period, relative to those with a mean performance rating. In addition, short-
term incentives such as merit bonuses, which have grown substantially in use (Gerhart & Fang, 2014), are often more
strongly linked to performance than merit raises and likewise can have stronger effects on performance (Nyberg et al.,
2016). In summary, PFP can be conceptualized and measured over different time periods and with different mea-
sures of pay. PFP will be stronger to the degree the time period is longer than a single year and to the degree that
the measure of pay includes not only annual merit pay increases, but also short-term and long-term incentives (and
promotion-based increases). Further, measuring PFP over time as how the magnitude of percentage pay growth dif-
fers as a function of performance over that same time period offers PFP information beyond knowing whether simply
knowing whether an employee is covered or not by different types of PFP plans.

3.6 Pay dispersion

Another construct definition issue concerns pay dispersion, particularly among individuals doing similar jobs (i.e., hor-
izontal dispersion), and what it adds beyond PFP. Pay dispersion refers to variation/differentiation in pay or unequal
pay among members of a group. The most basic theoretical use has been to suggest that more pay dispersion makes
sense when required interdependence/cooperation is limited (vs. substantial, as in teams). The argument is that less
pay dispersion/inequality is more equitable and thus more likely to foster cooperation. Shaw (2014, p. 524) describes
this framing as “a dramatization” that got people’s attention, but “a significant oversimplification.” Simply put, equality
≠ equity. Indeed, under equity theory, we would expect an employee with higher contributions (e.g., performance) to
perceive inequity (i.e., feel under-rewarded) if his/her pay is the same as (rather than higher than) an employee/social
comparator having lower performance. This is consistent with research reviewed above that performance is generally
viewed as the most legitimate basis for pay.
In line with this logic, research on pay dispersion has determined that how the dispersion in wage rates arises mat-
ters. To the degree that dispersion is caused by use of PFP, which is commonly the case, it is seen as more legitimate
704 FULMER ET AL .

(versus when due to non-performance factors, such as organizational politics), with more positive/less negative con-
sequences (Kepes et al., 2009). Dispersion, when created via use of PFP, has been associated with better performance,
less turnover and enhanced attraction of high performers (Shaw, 2014; Trevor et al., 2012). Several excellent compre-
hensive reviews of pay dispersion already exist that elaborate on this and on other contingencies; in the interest of
space, we refer the reader to those for further information (Conroy et al, 2014; Downes & Choi, 2014; Gupta et al.,
2012; Shaw, 2014).
As noted earlier in discussing the potentially mixed effects of enhanced pay transparency, we and others (e.g., Ful-
mer & Li, 2022) anticipate a complex interrelationship among pay dispersion, PFP, and pay transparency. Greater
transparency enhances the link between expected performance and pay, which would normally be a positive for
performance outcomes, but transparency also enhances the opportunity for social comparisons. Other research on
ease of social comparisons (that do not involve transparency per se, but proximity) finds that under some circum-
stances, easier social comparisons can result in negative effects, offsetting some of the positive incentive effects of
performance-based pay differences (e.g., Obloj & Zenger, 2017). The research on this is relatively recent and evolving,
so it remains to be seen whether and under what conditions the positive effects of PFP-caused dispersion are affected
by greater pay transparency.

3.7 Endogeneity in compensation research

Earlier, we summarized how researchers address (or do not address) endogeneity in compensation research. Endo-
geneity exists when the covariance is nonzero between the exogenous variable (compensation here) and the
regression equation error term (e.g., Wooldridge, 2002, p. 50). When endogeneity is present, using ordinary least
squares regression results in a biased estimate of the compensation regression coefficient. Sources of endogeneity
are omitted variables, simultaneity, selection bias, and measurement error (Hill et al., 2021; Wooldridge, 2002).
Simultaneity could be a concern in compensation research, for example, if in response to high employee turnover,
wages are raised and/or a retention incentive is introduced. Without addressing the endogeneity, cross-sectional data
might indicate a negative relationship between the compensation programs intended to reduce turnover, without
revealing that, in fact, turnover would have been (even) higher without these programs. Another simultaneity chal-
lenge is determining whether pay → performance or performance → pay (or whether it is both). An example is the
Trevor et al. (2012) study, which used instrumental variables to test the robustness of their finding that team com-
pensation (pay dispersion based on performance) → team performance. As another example, in implementing a PFP
program to improve performance, if other factors in the organization change at the same time (e.g., product demand,
technology, workforce quality), the effect of PFP may be over/underestimated. Or, again, PFP may be a response to
remedy subpar performance.
The gold standard for dealing with endogeneity through design is the experiment (Podsakoff & Podsakoff, 2019),
which has several defining features, including (a) “variables are manipulated and their effects upon other variables
observed” (Campbell & Stanley, 1963, p. 1); (b) random assignment, when executed successfully (e.g., sufficient sample
size, limited differential attrition), creates equivalent experimental and control groups; (c) time precedence; and (d) it
allows “measuring actual behavior” (e.g., in contrast to a survey asking about a hypothetical situation) (Colquitt, 2008,
p. 618; see also Dipboye & Flanagan, 1979, Table 5). As we saw earlier in Table 1, experiments have been used regu-
larly in research on the effect of PFP on performance over time. More common in field settings, the quasi-experiment
(Campbell & Stanley, 1963) refers to manipulation of (exogenous) variables, but without random assignment (often
not feasible in the field). Strength of causal inference depends on the design. As we also saw earlier in Table 1,
quasi-experiments have not been used in research on PFP → performance since 2010.
The second general approach to endogeneity uses statistical modeling during data analysis (Hill et al., 2011), most
commonly using instrumental variables (e.g., Maydeu-Olivares et al., 2020), propensity scores (Harder et al., 2010;
Rosenbaum & Rubin, 1983), fixed effects (to control time-invariant omitted variables) or modeling the selection
FULMER ET AL . 705

process (Heckman, 1979).Use of control variables is another avenue, but does not generally address sources of
endogeneity such as simultaneity, selection bias, or measurement error.
In Tables 1 and 2, we saw that two studies used fixed effects, one used a Heckman (1979) correction for selection
bias, and one used instrumental variables. The latter (Trevor et al., 2012) was in the study of how team (horizontal) pay
dispersion influenced team performance. Another example from outside the scope of our review (from the accounting
literature, Rouen, 2020) likewise used instrumental variables to study the effect of pay dispersion on performance
(here, vertical dispersion and at the organization level). Notably, it also used propensity score matching, which has not
been used to date in the compensation literature we reviewed. Although we have focused primarily here on statistical
approaches to endogeneity because they have been especially rare, a focus on design approaches in field research is
also encouraged, including, but not limited to designs such as regression discontinuity and difference in differences
(Hill et al., 2021; Lechner, 2011; Lee & Lemieux, 2010). In summary, we encourage researchers to do more to address
endogeneity challenges.

3.8 Country differences in compensation research

Earlier we saw that only three studies in Table 1 used data from multiple countries and only one of the three used
between-country variance to examine a substantive question. Thus, country differences, including the key question of
whether compensation programs work better/worse in some countries (as indicated by a statistical interaction), have
been neglected. Multilevel modelling (e.g., Raudenbush & Bryk, 2002) is useful to address these questions because
it effectively handles nesting of (dependent) observations within countries and also focuses attention on the need
to decompose/explain country effects using specific country characteristics (See example in Rabl et al., 2014, using a
system of employment practices, including compensation). This decomposition is crucial becausecountry effects have
often been misinterpreted as national culture effects (e.g., Bhagat & McQuaid, 1982; Gerhart & Fang, 2005; Rabl et al.,
2014). Rather, the country effect is an upper bound on the effect of any specific country characteristic, of which there
are many (e.g., labor market flexibility), in addition to national culture.
The primary focus of international work on pay has been on whether reward allocation criteria differ by coun-
try (Gerhart, 2008). A key theoretical logic (Early & Erez, 1997, p. 74) is that “the equity principle [reward based on
performance] is commonly used in individualistic cultures [like] the United States” in contrast to the “quite different”
principles (e.g., equality) used in cultures such as in China. Zhou and Martocchio (2001, p. 115), for example, report
“compared with their American counterparts, Chinese managers. . . put less emphasis on work performance when mak-
ing bonus decisions [and] put more emphasis on personal needs. . . ” [emphases in original]. This conclusion was based
on statistical significance. Importantly, the authors also reported that individual performance explained 64.2% of the
variance in bonus allocation decisions, whereas the interactions (i.e., the degree to which respondents from China and
U.S. used different allocation rules) explained only 1.1% of the variance. (Note also that national culture was not actu-
ally measured.) Thus, the key takeaway is arguably that performance dominates reward allocation decisions in both
countries. More broadly, a meta-analysis by Fischer and Smith (2003) examined the degree to which the use of the
equity (performance) rule versus the equality rule varied by the national culture dimension of collectivism, using data
from 14 countries. They reported a mean r = .065 (i.e., an r2 = .0042). Thus, national culture had no meaningful effect.

3.9 Diversity and inclusion in compensation research: Pay equity

Discrimination is typically divided into (a) access discrimination, where members of a group are disproportionately
denied opportunities to work in certain occupations, industries, jobs, and/or firms and (b) valuation discrimination,
where members of a group are paid less despite working in similar positions and having similar attributes. Pay inequity
most directly reflects valuation discrimination. U.S. Census Bureau data on median earnings of full-time, year-round
706 FULMER ET AL .

workers shows that women earn 82% of what men earn (up from 60% in 1980). Compared to white men, Black, His-
panic, and Asian men earn 81%, 74%, and 131%, respectively. Compared to white women, Black, Hispanic, and Asian
women earn 90%, 77%, and 124%, respectively. Blau and Kahn (2017) estimate that 62% of the female-male wage
gap is explained by differences in work experience (years, continuity), occupation, and industry. The unexplained part
(38%) is typically taken to reflect discrimination. If women have experienced access discrimination, thus being under-
represented in some occupations and industries, 38% is an underestimate. There is also an economics literature on
race-based discrimination (For reviews, see Lang & Lehman, 2012; Lang & Kahn-Lang Spitzer, 2020; Neumark, 2018).
Within organizations, the term “Glass Ceiling” identifies women’s lack of representation at higher job (pay) levels as
a key factor in their lower pay. For example, Catalyst (2020; see Gerhart, 2023, Exhibit 17.15), reports that although
women are 45% of employees in S&P 500 companies, they are 37% of first/mid-level officials/managers, 27% of execu-
tive/senior level officials/managers, 21% of Board seats, and 6% of CEOs. This reinforces the importance of examining
the role of promotion in compensation research.

4 PRACTICAL IMPLICATIONS AND FUTURE RESEARCH RECOMMENDATIONS

In this paper, we undertook two tasks. First, using over 30 years of articles in PP, JAP, and AMJ, we examined the current
state of as well as trends in how research on compensation → performance is theorized, its most studied aspects, and
designs/methodologies employed. Given that we found that the most-studied compensation construct has been PFP,
and given the long-held view of PFP’s strategic importance to organizations, we used the rest of our paper to focus
on PFP, but casting a wider net than the three journals we used to examine the state of the field and trends. Our aim
was to highlight key decision areas in the design of PFP and bring to bear theory (broadly defined) and evidence to
better understand how PFP works, including trade-offs and contingency factors. In doing so, we included work on
performance measurement/PFP design, pay transparency, and pay dispersion.
Based on this review, we identified several important takeaways from existing research that are of current and
practical relevance for organizations and compensation managers. We also offer a set of recommendations for future
scholarly research on employee compensation.

4.1 Practical implications for organizations

A summary of practical implications and recommendations emerging from this review is found in Table 3. Given the
focus of this review on PFP, our first category of recommendation focuses on the pay aspect of PFP. We advise
organizations to be aware of the effects of PFP intensity, not only because of its importance for achieving desired
performance outcomes, but also to anticipate the potential need for mechanisms to address the risk of negative con-
sequences for high-intensity PFP programs. All else equal, PFP programs that offer stronger payouts for performance
(i.e., with a strong pay-for-performance link and that are large as a percentage of overall pay) need to be monitored
more closely than those with smaller payouts. Another concern that has received much attention, but which we did
not focus on in this review, is that higher PFP intensity potentially harms intrinsic motivation and performance in work
that is interesting and/or requires creativity (Deci et al., 2017; Weibel et al., 2010). This concern is more important to
the degree such work is becoming increasingly important to economic well-being. However, our reading of the litera-
ture is that the evidence (and most theory) does not support this concern. (See Gerhart & Fang, 2015; Jenkins et al.,
1998; Kim, 2022; Kim et al., 2022). Nevertheless, there is always a role for research that examines how best to design
PFP to support all aspects of motivation, including intrinsic/self-determined motivation, and all types of performance
(Gagné & Deci., 2005; Kim et al., 2022).
The performance aspect of PFP continues to be an issue requiring close attention as well. We recommend that
organizations view PFP from both a short- and long-term perspective and communicate it as such to employees. It
FULMER ET AL . 707

TA B L E 3 Summary of practical implications for organizations

Pay Attention to the Pay Component of Pay-for-Performance to Better Support Organizational Goals and Strategy
PFP intensity—Expect (and build in The choice of how strong the payoff is to performance involves trade-offs,
mechanisms to address) greater risk pitting increased motivation created by greater PFP intensity against
of unintended consequences as PFP increased risk of unintended consequences. All else equal, PFP
intensity increases programs that offer more intense payouts or with graduated payouts
that increase with performance should be monitored more closely than
those with smaller payouts.
Pay Attention to the Performance Component of Pay-for-Performance to Better Support Organizational Goals and
Strategy
Design PFP and communicate If the goal is to better motivate employees by strengthening PFP
performance expectations so that it is strength/intensity, it is necessary to think beyond the annual within-pay
clear how employees’ performance grade merit increase program based on supervisor-rated overall
leads to short- and long-term pay performance. Other, more strategically targeted aspects of
increases. compensation (e.g., bonuses tied to specific performance goals) may be
more strongly linked to desired performance. Also, over time, the major
pathway for performance to lead to higher pay is
promotion/advancement to high job (pay) levels. For these facts to
influence employees, they must be communicated effectively.
Performance measurement – Consider A key means of reducing risk of unintended consequences is to introduce
more holistic (i.e., multiple) measures the use of behavior-based performance measures (e.g., a
judgment/performance rating) to take into account unexpected factors
and to help ensure employees achieve results using appropriate
means/behaviors.
Is Your PFP System Attracting and Retaining the Desired Talent?
Factor in sorting effects more explicitly A major change in conceptualizing how PFP influences performance is the
when designing PFP programs relatively recent recognition of how PFP affects not only what current
employees do (incentive effect), but also which employees choose to
join/remain with the organization (sorting effect). High performers, on
average, prefer stronger PFP strength/intensity. Ignoring sorting
effects results in a significant underestimation of the PFP
consequences.
Check your PFP system constraints For organizations that are highly dependent on “stars” or extremely
high-performing individual contributors, it is important that the payout
distribution of the PFP system is adequate to be able to reward the
extreme performance of top performers.
Be careful about making exceptions For a particular employee it may seem helpful to make exceptions for
below-standard performance, but keep in mind that exceptions weaken
the perceived performance-pay linkage of other peers within the unit
and threaten the effectiveness of the whole PFP system as a
motivational tool.
What Do We Know So Far About Pay Transparency Effects on Performance?
Pay transparency—It’s complicated. . . More pay transparency does not necessarily lead to better performance
and more positive employee reactions. Research has identified a
number of contingency factors, including current pay level.

is important to think beyond annual merit pay, to incorporate individual incentives as appropriate (e.g., bonuses tied
to specific strategic performance goals), and to emphasize pathways to promotion-based pay increases. We also rec-
ommend more holistic approaches to performance measurement that incorporate behavior-based performance (in
addition to results-based performance) as a way to take into account unexpected factors and ensure that appro-
priate means are used to achieve objective performance metrics. Consider Novartis as an example. It reached a
708 FULMER ET AL .

$678 million settlement with the U.S. Justice Department over improper incentives to persuade doctors to prescribe
Novartis drugs (Vigdor, 2020). In response to this, as well as other unethical sales/bribery practices overseas, Novar-
tis changed their incentive system such that payouts would no longer depend solely on results, but also on a rating of
whether employees exhibited appropriate values and behaviors in achieving these results. Novartis also decided to
reduce PFP intensity by capping the bonus to a maximum of 35% of compensation (Liu, 2018).
Our third set of recommendations center around the issue of how PFP systems can best attract and retain the
desired talent. PFP systems are often designed with the motivation of current employees in mind, but we recommend
that organizations step back and take a broader view that considers sorting. Otherwise, they are likely to underes-
timate the consequences of PFP adoption, given that high performers, on average, prefer organizations that offer
stronger PFP programs. Another recommendation is to check that the constraints (e.g., budget controls, payout caps)
built into the PFP program are not artificially or unnecessarily undermining the goals of the program. This is especially
important in organizations that are highly dependent on “star” employees or extremely high-performing individual
contributors, where it is important that the payout distribution of the PFP system is adequate to reflect the perfor-
mance distribution, such that high performers are appropriately compensated. And finally, we note that research (e.g.,
Abdulsalam et al., 2021) has found that making exceptions (“i-deals”) for below-standard performance in a PFP system
can create significant negative reactions among peers. Although it may be helpful to individual employees who are
struggling, if they are outnumbered by peers, then any such negative peer effects will dominate, translating into lower
unit performance.
And finally, we note that the research on pay transparency is relatively new but beginning to accumulate quickly.
As of now, the message is mixed, which suggests that organizations contemplating voluntarily increasing transparency
should proceed carefully. Our review highlighted that more pay transparency does not necessarily lead to better per-
formance or to more positive employee reactions across the board. Research has identified a number of contingency
factors, including current pay level, and researchers are still in the midst of understanding how those factors affect the
consequences of increasing transparency.

4.2 Recommendations for future research

We summarize four categories of recommendations for future research in Table 4. We begin with attention to the
theoretical foundations of the field as they have evolved in the studies in this review. As noted earlier, a few well-
established theories (i.e., equity, expectancy and tournament/sorting theories) dominated throughout the time frame
of our study, including during the 2010–2022 period, while others commonly cited in earlier decades have fallen by the
wayside recently. Notably, we observed the decline in the use of agency theory and goal-setting theory, with none of
the studies of employee compensation in the 2010–2022 period using them (Table 1). Both were frequently used pre-
2010 and supported empirically, and have continued to develop theoretically in the literature (e.g., Locke & Latham,
2002; 2020). Although new phenomena sometimes require new theories, we have seen examples of how classic com-
pensation/motivation theories can be extended quite fruitfully to understand contemporary research questions, and
we encourage future researchers to give some thought to such application. For example, the emerging line of research
on the effects of pay transparency on performance and sorting could be informed by attention to how social pressure
and comparisons facilitated by pay transparency influence individuals’ acceptance of assigned goals or the setting of
self-set goals and subsequent goal attainment; such research would be particularly valuable in settings where social
comparisons are likely and/or encouraged, such as in co-located sales groups or workgroups that are highly connected
via digital work platforms or social media. Intriguing research in the area of goal setting has also found (in academic
settings) that writing about goals enhances both performance and persistence (Morisano et al., 2010; Schippers et al.,
2020; for a brief review see Locke & Latham, 2020). The mechanisms for this are still to be determined, but given
that people now routinely document personal and professional goals digitally via writing on social media, as well as in
videos, podcasts, etc., it would be interesting to examine whether digital documentation of employees’ goals in these
FULMER ET AL . 709

TA B L E 4 Recommendations for future research

Theoretical Foundations
Consider Goal-setting, agency, expectancy and equity theories have a strong foundation of
well-established empirical support. While some may assume that new phenomena must call for new
theories for studying theories, a hallmark of good theory is that it is useful for understanding what seem to
new phenomena be novel phenomena. And indeed, established theories can often be extended and
refreshed through applying them to new phenomena.
Understudied Aspects of PFP
PFP strength/PFP PFP is not simply dichotomous. Its strength/intensity is important to include to fully
intensity understand its effects.
PFP payout holdbacks Some employee PFP systems (e.g., group gainsharing plans), pay for recruitment referral
or clawbacks programs, key employee retention programs (e.g., during a restructuring) and executive
PFP programs include provisions to delay or recover some or all of a PFP payout until a
later time to account for contingencies and try to align employee/executive decisions
with long-term best interests of the organization. Agency theory-based research on the
incentive and sorting effects of holdbacks and clawbacks would be valuable.
Performance Results- and behavior-based PFP plans can have different effects and most organizations
measurement use a combination. However, research using both is rare. Research including both is
needed.
Performance effects of Meta-analytic work on PFP effectiveness, as well as ongoing laboratory work, focuses on
the most common individual incentive plans (e.g., bonuses). These types of plans, at least in pure form, are
form of PFP, merit rare. Merit pay continues to be very widely used (and merit bonuses have grown in use).
pay? There is proportionally much less empirical research on these plans. More such work
would be valuable to understand their incentive and sorting effects.
Extreme performance Research needed on how PFP can be designed to cost-effectively incentivize/retain
distributions: Effects extraordinarily high performers/stars while also appropriately motivating and retaining
on pay systems the well-performing non-stars who make up most of the workforce.
Pay dispersion To the degree pay dispersion continues to be a starting point for some compensation
research, it would be useful to clarify what it adds beyond studying PFP dispersion. A
fundamental requirement of PFP is creation of pay dispersion that intentionally
corresponds to performance/contribution dispersion; research to date has found that
overall dispersion’s effects are largely tied to how performance-based it is.
Pay Communication and Transparency
Effects on performance Greater attention needed to contextual factors (individual, situation) that determine
and on diversity and whether different pay communication/transparency strategies improve
inclusion goals motivation/performance, reported satisfaction/fairness, and sorting. It is also
important to understand whether employee reactions to increasing transparency
versus to decreasing transparency are symmetric (i.e., how challenging is it to reduce or
roll-back pay transparency once it has been increased?)
Effects on diversity, More work is needed to understand the degree to which increased pay transparency
inclusion and equity reduces pay inequities within organizations, a commonly stated goal for transparency.
If it does, through what means is this is accomplished (e.g., increasing pay of underpaid
groups or capping/constraining pay of higher paid groups) and at what overall cost to an
organization?
Pay information Both increased transparency on the part of organizations and the quantum leap in the
availability effects easy availability of pay information on the Internet have increased how informed
employees are about alternative opportunities. How does this influence employee
mobility, their performance, and their other reactions?
It is often assumed that greater pay information availability facilitates more pay
comparisons among employees, but research so far suggests that this does not always
happen. What individual and situational factors strengthen/weaken the link between
information availability and social comparisons?
(Continues)
710 FULMER ET AL .

TA B L E 4 (Continued)

Methodological Concerns
Endogeneity In field work, statistical approaches continue to be rare and design approaches have
become rare.
International samples Few studies use samples from more than one country, and none examine whether PFP
effectiveness varies across countries; more research is needed to understand whether
PFP works differently in different parts of the world.

ways have similar positive effects on performance and persistence in PFP settings. In other words, could sharing PFP-
related performance goals in these digital and public ways enhance the effects of PFP through enhancing cognitive
focus (i.e., via visualization of an “ideal future,” as Morisano et al., 2010 suggested), through a sense of accountability
to one’s audience, or both? Might some employees proactively use social media in this way to self-regulate and support
their own goal attainment? Although it may seem that new phenomena call for new theories, a hallmark of well-
developed and established theory is that it often remains quite useful for understanding apparently novel phenomena.
And indeed, established theories are reinvigorated and extended through such application.
The second category of recommendations highlights several under-studied aspects of PFP that we noted in our
review. First, more research is clearly needed on the construct of PFP intensity and its effects. Relative to other aspects
of PFP (e.g., objective vs. subjective performance rating, individual vs. group performance basis), we know less about
PFP intensity effects on performance and other outcomes, and about individual and situational contingencies that
moderate these relationships. We recommend that research go beyond conceptualizing and operationalizing PFP as
either present or absent, and develop research that theoretically and empirically take into account the magnitude of
the pay-performance relationship in terms of how sensitive payouts are to performance and how large actual or poten-
tial PFP payouts are relative to employees’ overall pay. Second, one recommendation for reducing the risk potential
for negative consequences of a strong incentive is to delay its full payment until there is greater certainty that the
performance has actually been delivered as expected (a “holdback”) or to include a provision where previously paid
incentive must be returned (a “clawback”). Clawbacks are commonly used in executive pay situations, although they
could be used in other cases as well, while holdbacks or similar delayed payments are used in group-based pay sys-
tems (e.g., gainsharing) or for special payments such as employee referral incentives that do not pay out fully until the
referred employee reaches a particular tenure benchmark (Pieper, 2015). In our review, we noted no research that
examined whether such mechanisms are used or are effective in employee PFP situations, but we believe such work
would be fruitful. Third, as noted previously, results- and behavior-based PFP plans are often used together in organi-
zations. Research on complex PFP plans that use both is rare, and more would be valuable. Fourth, the most common
form of individual pay-for-performance plan in use in organizations is the merit pay plan, and pure individual incen-
tive plans are rare. However, there is far more research on individual incentive plans. In line with previous reviews
(e.g., Rynes et al., 2005), we think more work on merit pay plans would be valuable to better understand their incen-
tive and sorting effects. Fifth, we recommend that more research be undertaken to understand how organizations
structure their pay systems when they are faced with extreme performance distributions (i.e., a few star employees
or individual contributors with exceptionally high performance together with a majority of well-performing non-stars
whose contributions are also needed). And finally, we note the overlap in research on pay dispersion with research on
performance-based pay, with growing evidence that dispersion’s effects are largely driven by whether dispersion is
attributable to performance-based pay differentiation. We recommend that future pay dispersion research consider
what it can add that goes beyond what we know about the effects of performance-based pay.
A third category of recommendations relates to growing interest in pay communication and transparency.
Research to date suggests that more transparency does not necessarily lead to better performance and employee
reactions. Greater attention is needed to situational and individual factors that determine how different communica-
tion/transparency strategies influence outcomes. One important question for organizations is whether they can adjust
FULMER ET AL . 711

transparency if they find it is not working as planned. Are employee reactions to reductions in transparency of similar
magnitude as reactions to increases in transparency, or might we see more asymmetrically negative reactions to reduc-
tions in transparency? Given the commonly stated assumption that greater transparency will contribute to reducing
pay inequities, more research is also needed to understand whether this is actually happening. If it is, through what
means is this occurring (e.g., through raising pay of lower-paid groups or capping/constraining pay of higher paid groups
or both) and what are the effects on different employee groups’ performance and turnover and on overall (unit) perfor-
mance and costs? One final area relates to the effects of increased pay information availability. More work is needed
to understand how the vast array of pay information that is now publicly available on the internet is influencing social
comparisons among employees as well as workers’ information about alternative opportunities. What are the effects
on employee mobility, performance, and other reactions?
In terms of methodological recommendations, we found substantial diversity in design/methodological approaches
regarding how performance is measured, level of analysis, and whether substantive variance in compensation is gen-
erated using within- or between-organization designs. However, we saw at least two methodological concerns that
give pause. One is that attention to internal validity and endogeneity challenges in the field seem to be limited, espe-
cially the use of statistical approaches; we also noted that the use of design approaches (e.g., quasi-experiments) to
addressing endogeneity have waned. Second, we found no work using multi-country samples on whether compensa-
tion and/or PFP specifically is differentially effective in different country contexts. (See Gerhart, 2008, for a review of
the work that comes closest.) We recommend greater research attention to both of these issues. Utilization of multi-
country samples, in particular, would also enable expanded attention to a richer set of cross-cultural and international
issues in pay research, including comparisons of PFP incentive and sorting effects by country, country differences in
utilization and effectiveness of job- versus person-based pay, and pay transparency effects across countries. Given
the number of organizations managing global workforces and multinational organizations, such research would be of
particular relevance to organizations, managers, and HR/compensation practitioners.

5 CONCLUDING THOUGHTS

On the occasion of this special anniversary issue of Personnel Psychology, we have welcomed the opportunity to reflect
on the most recent 30 years of compensation research in PP and other top journals. We conclude by observing, as
have others over the years (e.g., Gupta & Shaw, 2014), that employee compensation continues to be an under-studied
topic despite its clear importance to employees’ lives and its economic significance for organizations and society. The
proportion of academic research on compensation in comparison with other HR topics has been lower than the relative
proportion of interest in compensation expressed in HR practitioner journals (Markoulli et al., 2017), signaling the
need for more academic research to match practitioner interest in the topic. Looking forward, we hope that by the time
the 100th anniversary of Personnel Psychology rolls around, this review and the recommendations that have emerged
from it will have served to invigorate and inspire more of the important research needed to fill these gaps and better
inform how organizations design and manage employee compensation systems.

CONFLICT OF INTEREST STATEMENT

The authors declare no conflicts of interest.

DATA AVAILABILITY STATEMENT

Data sharing not applicable to this article as no datasets were generated or analysed during the current study.

ORCID
Ingrid Smithey Fulmer https://orcid.org/0000-0003-1543-6483
Ji Hyun Kim https://orcid.org/0000-0002-9833-3991
712 FULMER ET AL .

ENDNOTES
i
An example of a results-based individual plan is an individual incentive or sales commission. Results-based, aggregate level
plans include gainsharing, profit sharing and stock plans. Merit pay is an example of behavior-based, individual plan.
ii
Although we are not able to cover benefits, an important study documents the degree to which employees undervalue their
benefits (Wilson et al., 1985).

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How to cite this article: Fulmer, I. S., Gerhart, B., & Kim, J. H. (2023). Compensation and performance: A
review and recommendations for the future. Personnel Psychology, 76, 687–718.
https://doi.org/10.1111/peps.12583