Performance Pay Design Series
In our last post, we covered the three keys of effective performance pay: it must be positive, known, and immediate. This post zooms in on just one of those: known vs. unknown performance pay — and why otherwise well-intentioned competitions so often underperform.
A simple thought experiment
Let’s say you want someone on your team to complete a specific task or sell a specific item — a widget.
Scenario 1: Known rate
You decide to pay $50 for every widget sold. Clear. Positive. Known. Anyone who sells a widget gets $50.
Scenario 2: Competition
You still plan to pay $50 — but only to the first person who sells a widget.
If you have five people on the team, each individual now has a 20% chance of earning the reward. From the perspective of any one person, the expected value of the performance pay is no longer $50:
$50 × 20% = $10
Subconsciously, people reprice the pay. For many, $10 is no longer worth the effort required. So they disengage — not because they’re lazy, but because the math no longer works.
Why this happens (and why it’s predictable)
This dynamic is well explained by Expectancy Theory (Victor Vroom), which holds that motivation depends on:
- Expectancy — “If I try, can I succeed?”
- Instrumentality — “If I succeed, will I be rewarded?”
- Valence — “Is the reward worth it?”
Competitions quietly destroy instrumentality. Even high effort no longer guarantees reward.
Who still plays? Mostly your A players
In any team, there are a few experienced or highly confident performers — your A players. They believe the odds are in their favor.
Middle performers and junior talent see the same structure and conclude the opposite: “Someone else will win.” So they opt out. This is why competitions tend to concentrate effort rather than activate teams.
The “increase the pot” trap
Managers often sense this problem intuitively and respond by increasing the prize: $50 becomes $200; $200 becomes $1,000. Eventually, the pot gets large enough that the expected value feels motivating again.
But notice what’s happening: you’re paying more money to overcome a design flaw. The pay rate wasn’t too small — it was too uncertain.
Loss aversion makes it worse
Behavioral economics adds another layer. Work by Daniel Kahneman and Amos Tversky shows people are loss-averse: the pain of losing outweighs the pleasure of winning.
In a competition, most participants lose — and even strong effort often ends in no reward. Over time, people learn: “Trying and losing feels worse than not trying at all.” Effort drops further.
Conclusion
If your goal is to activate the whole team, encourage consistent effort, and develop junior and mid-level performers, then known rates beat competitions almost every time.
Competitions can be useful for short bursts, elite groups, or marketing moments. But for day-to-day performance, predictable performance pay does more with less money.
Next, we’ll tackle component #3: immediacy versus later — why fast recognition and fast payout are exponentially more powerful than delayed rewards.
MyFieldPay helps businesses design performance pay that is known, immediate, and behavior-changing — especially for technicians and field teams. If you’re rethinking how you motivate performance, we should talk.