Salaries of managers across many firms have sizeable performance-linked reward components. Conventional wisdom suggests that these performance-linked rewards are effective in keeping employees motivated and innovative. However, recent psychological research indicates that overly-attractive rewards may in fact reduce performance and be counterproductive for an otherwise high performing team. This issue has important implications for design of compensation schemes for marketing managers. Yet, few marketing management researchers have studied this phenomenon. How do performance-linked rewards influence the decision making styles of marketing managers who have to be innovative in dealing with competition? Does the promise of attractive performance-linked rewards help or hinder performance of a marketing unit? We sought to answer these questions via a simulation study in which we examined decision making processes and performance changes under different levels of performance-linked incentives. We find evidence to support that the practice of performance-linked rewards may benefit the low performers more than the high performers and that the high performers may not push themselves hard for the performance-linked rewards, thus lowering the performance levels. The findings are counterintuitive specifically for the high performers. Contrary to the popular notion and practice, we find that team performance including risk taking tendencies and innovative efforts actually dip in response to the high performance-linked rewards. Findings from our study provide new insights into the link between performance-linked rewards, decision making processes, and the actual performance of the managers. Our research also contributes prescriptions for calibration of compensation structures in order to promote more prudent decision making processes and to drive greater performance.

• Abhishek Pathak(Nanyang Technological University)
• Lewis Lim(Nanyang Technological University)