Looking for organizational wellbeing: the impact of multilevel performance-related pay on employee mental health

Despite a growing interest in the empirical relevance of performance-related pay (PRP) schemes for employee outcomes (i.e. productivity and performance), the relationship between PRP and employee mental wellbeing is still under-researched, and the few existing evidences show mixed results. To fill this gap, we investigate the interplay between three domains of PRP (individual, group and organizational PRP) and employee mental health. This study builds upon the incentive and counteracting effects of PRP to analyze the interplay of PRP schemes on employee mental health. Overall, the paper attempts to assess and disentangle the complementary (or substitution) relationship between three domains of PRP in influencing employee mental health. To validate our hypotheses, we used a sample of 23,854 public and private establishments in Europe. Our findings suggest that while individual PRP negatively affects employee mental health, group PRP is positively associated with mental health. We found no significant effect for organizational PRP. By testing the interaction effects of multiple forms of PRP, our results revealed that surprisingly the employee mental health is stronger in companies that jointly adopt individual and organizational PRP policies, showing the complementarity between piece rates and profit-sharing policies.