Look into the public management literature. Pay-for-performance generally tanks when attempted.
1) In the private sector, higher performance creates higher revenues, which defrays the costs of bonuses. In the public sector higher performance can not increase revenues under all but the most arcane circumstances, and very often generates costs. Whaddya gonna pay those performance bonuses with? I know, let’s ask Gov. Scott Walker.
2) Reliable quantification of “performance” continues to elude pretty much everyone in the public sector. And, as we see time and again…and again, people perform to the indicators. Those indicators better damn well be highly predictive of total organizational performance and the public interest, or else you’ll just be rewarding and getting more of something that doesn’t really matter or serve the public interest. You have to know what “performance” is first, in order to reward it, and unless it’s something like delivering mail or answering customer calls, in most instances we honestly don’t know.
3) Comparable measures of performance across job families, and parity in the application of such measures across all managers, is one of those things that continues to elude. When the criteria for performance pay are discrepant across managers, work units, or agencies, you can expect it to be divisive and undermine, rather than encourage, performance.
Most thinkers in the field will tell you that it can work under some very specific conditions, but those conditions tend to align about as often as solar eclipses. If you’re willing to put all your chips on solar eclipses, be my guest.
I also draw your attention to a fabulous article, nay…parable, by Robert Sanders in Public Personnel Management, Vol 33:2, 2004 entitled “Georgia Gain or Georgia Loss?”. Sanders studied the consequences of introducing performance pay into the Georgia Merit System. One of the unforeseen consequences was that managers started downgrading performance appraisals because they didn’t have the budget to cover the promised performance bonuses. Employees showed a steady drop in perception of fairness in appraisal, clarity of performance appraisal, and a number of other indices that most public managers would be chastised for. Moreover, they started experiencing an increase in turnover amongst all those staff who were likely muttering to themselves “WTF is up with that? I bust my hump for them for the 3rd year in a row, and my performance appraisal continues to say I’m ‘adequate’ and don’t meet criteria for a performance bonus. Adequate? Who do you have to sleep with to get a raise around here?”.