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1. Introduction
No other incentive or motivational technique comes close to money[1] .
Such a quotation reflects the dominant view in the management accounting literature that pay-for-performance incentive systems have a motivational effect. In fact, some authors assert that the primary aim of incentives is to enhance extrinsic motivation by satisfying an individual employee's needs indirectly through means of pay and bonuses ([4] Anthony and Govindarajan, 2007; [50] Kunz and Pfaff, 2002). The link between pay-for-performance and extrinsic motivation is explicit in the agency theory literature. Extrinsic motivation is the importance placed on external rewards, such as bonuses and promotion ([78] Van Herpen et al. , 2005), or the threat of wage cuts or dismissal ([26] Frey, 1997). In an agency theory context, incentive contracts designed to encourage extrinsic motivation are held to be indispensable ([68] Osterloh et al. , 2002). Similarly, expectancy theory argues that linking incentives to performance motivates employees to increase their effort and performance ([42] Jenkins et al. , 1998; [52] Lawler, 1973; [79] Vroom, 1964).
The literature has shown that remuneration issues play a critical role in organizations; however, there has been little advice that companies could use in terms of when certain incentive system designs have been more (or less) appropriate ([36] Heneman et al. , 2002a; [60] Merchant, 1989; [62] Merchant et al. , 2003). The need for more theoretical development is important because the use of pay-for-performance plans is growing ([9] Broadbent and Cullen, 2005; [53] Lawler, 2000), and there is a trend to increasing variable pay as a percentage of total remuneration ([38] Heneman et al. , 2002b). Another gap in the literature has been that most of the economics-based incentives research has been at the chief executive officer level, and few studies have examined incentives at the business unit or for front-line employees ([47] Kominis and Emmanuel, 2005; [62] Merchant et al. , 2003; [72] Prendergast, 1999).
A challenge to the view that pay increases motivation comes from cognitive evaluation theory, which argues that incentive pay has a negative effect on intrinsic motivation - a "crowding-out" effect ([29] Gagne and Deci, 2005). However, research findings into the crowding-out effect have been mixed ([50] Kunz and Pfaff, 2002). To explain the mixed results from the...