Shelley 1993 indicates that managers may expect to be

Shelley, 1993 ) indicates
that managers may expect to be compensated for the loss of immediate compensation by
the payment of a premium that is far in excess of the amount the time value of money
would imply – a finding that is probably true of non-managerial employees as well.
Finally, perceived risk is greater if individuals frame pay for performance in terms of
potential losses instead of potential gains. A system that places in doubt an amount of pay
that employees are already counting on will be seen as riskier than one that offers an
identical amount as a potential increase in pay. Considering these factors will help
incentive system designers determine what level of pay is required to offset employees’
perceived risk.
Possible Exceptions to the Principle of Paying for
Performance

It does not make sense for an employer to offer to pay employees more unless the
employer will actually get more in the bargain. When, therefore, might it be unwise (or
even counterproductive) to offer incentives?
When employees are learning
In learning situations, when employees are attempting to “get up to speed” on a new task,
offering performance-based pay may frustrate more than it motivates. Performance
failures that are a natural part of learning may be exaggerated in the learner's mind
because of failure not only to perform the task but also to obtain the monetary reward.
Thus, it is unwise to pay for performance until employees are able to perform at the
desired level.
When the employer can monitor
Agency theory ( Jensen and Meckling, 1976 ) suggests that financial incentives are
unnecessary when employers can easily monitor employees’ behavior (e.g., by direct
observation or through information systems) and give them ongoing direction and
feedback. In such situations, employees’ awareness that they are being monitored
obviates paying for performance.
When other motivators are sufficient or compensatory
Some people value other aspects of their jobs more than they value pay – factors such as
interesting work, autonomy, desirable location, benefits that meet their needs, or having a
boss they love working for. Such individuals will often accept lower pay in order to have
what is more important to them in their jobs.
When the company is unionized
Union contracts constrain an employer's pay policies, and thus under collective
bargaining agreements it may be impossible to pay for performance, especially at the
individual level. When incentives are included in a union contract, they are usually group
incentives, because group pay is viewed as encouraging cohesion rather than competition
among members.
Examples
Paying for individual performance
Woodson (1999) provides an example of the diffusion of pay for performance to a group
that has traditionally received fixed salaries with automatic, annual pay increases –
physicians employed by healthcare organizations. She presents case studies of two
organizations (a large, multispecialty group practice and a medical school affiliated with
an academic medical center) that changed their approaches to physician compensation.