Pay-for-Performance, Employee Participation, and SME Performance

This study examines how pay-for-performance (PFP) systems affect the performance of small- and medium-sized enterprises (SMEs). We decompose PFP into two dimensions: scope and depth. PFP scope captures the variety of performance measures and reward types included in a firm's PFP system, and PFP depth reflects the relative amount of performance-based pay compared with total pay. We posit that PFP scope has a positive whereas PFP depth has an inverted U-shaped effect on employee participation, which in turn enhances SME performance. Analysis of data collected at both employee and firm levels of 444 SMEs during 1999-2006 supported these hypotheses.