Although individual pay for performance (or merit pay) is a widespread practice among U.S. businesses, the research on its effectiveness shows it to be of limited utility (see here, here, here, and here), mostly because it is easy for its benefits to be swamped by unintended consequences.
Indeed, psychological research indicates that a focus on financial rewards may serve to (a) reduce intrinsic motivation, (b) heighten stress to the point that it impairs performance, and (c) promote a narrow focus reducing how well people do in all dimensions except the one being measured.
[posted by Brent]
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