Managerial Compensation Based on Organizational Performance: A Time Series Analysis of the Effects of Merit Pay

Abstract

Performance-contingent compensation is a widely accepted means for rewarding managers, but there are no rigorous empirical tests of its effectiveness. This study reports the results of a longitudinal analysis of the effects of lying managerial pay to organizational performance in the Social Security Administration. A Box-Jenkins time series procedure was applied to organizational performance data available two years before and two years after the implementation of a new compensation system. Statistical analyses indicated that the merit pay program had no effect on organizational performance, suggesting that merit pay may be an inappropriate method of improving organizational performance.