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There is some evidence that performance-related pay (PRP) leads to higher levels of stress as it incentivizes employees to work harder for longer. However, PRP in the workplace also typically involves performance monitoring, which may introduce an additional source of stress via social-evaluative threat (SET). The current study examined the effect of PRP on stress while varying the level of performance monitoring/SET. Using an incentivized mixed design experiment, 206 participants completed a simulated work task after being randomly allocated to either a PRP contract (£0.20 per correct response, n = 110) or minimum-performance fixed payment contract (£5 for ≥10 correct responses; £0 for <10, n = 96) condition. All participants completed the task during a high SET (explicit performance monitoring) and low SET (no monitoring) condition. Subjective and objective stress were measured through self-report and salivary cortisol. High SET led to higher levels of self-reported stress but not cortisol, whereas there was no effect of the payment condition on either self-reported stress or cortisol. A statistically significant interaction revealed that high SET-fixed payment participants were significantly more stressed than those in the high SET-PRP group. Estimating the regressions separately for high- and low-performing individuals found that the effect was driven by low-performing individuals. These results suggest that fixed payment contracts that have a minimum performance threshold and which include performance monitoring and SET can be more stressful than traditional piece-rate PRP contracts. The current study suggests that incorporating performance monitoring and SET into payment contracts may affect the well-being of employees. [ABSTRACT FROM AUTHOR]

BACKGROUND: Although recent economics literature suggests a link between performance-related pay (PRP) and ill health, this finding is contested on the grounds that this link is plagued by endogeneity between the two variables of interest. OBJECTIVE: This study investigates the adverse effects of performance-related pay on stress which is an important determinant of physical health. METHODS: Forty subjects were randomly assigned to two equal groups: either being paid by performance or being paid a flat fee. Both objective (saliva samples to measure cortisol elevation) and subjective (self-reported stress level) measures of stress were obtained before and after participation in the experiment. This experimental methodology purges the effects of self-selection into performance pay and identifies the direction of causation from performance-related pay to stress which is measured by cortisol levels. RESULTS: Those who were paid for their performance experienced higher levels of stress, both in terms of perceived stress and in terms of objectively measured cortisol levels, compared to those who were paid a flat fee for minimum performance. CONCLUSIONS: Performance-related pay induces objectively measurable stress. Self-reported stress levels and the objective stress measure obtained by measuring cortisol move in a similar direction for the PRP and non-PRP groups, but only the cortisol group shows statistically significant differences between the PRP and non-PRP. This also suggests that individuals underestimate the stress caused by performance pay. [ABSTRACT FROM AUTHOR]