The unintended consequences of a pay-for-performance rule change

Purpose: The purpose of this paper is to estimate the impact of a pay-for-performance (PFP) rule change on US Department of Defense (DoD) employees’ job satisfaction by looking at changes in the DoD’s National Security Personnel System. Design/methodology/approach: The data for the analysis are derived from the 2002, 2004, 2006 and 2008 Federal Human Capital Survey. A difference-in-differences (DID) quasi-experimental methodology was used to examine the effect of a PFP rule change on DoD employee job satisfaction. The Department of Air Force and Navy are analyzed as a proxy for the DoD. This study also undertakes a subgroup analysis strategy to understand the effect of PFP systems on specific subgroups (classified by gender, race and supervisory status). Findings: This study’s results indicate that the overall effect of the introduction of a new PFP rule at DoD is a decrease of approximately 7.9 percentage points in employee job satisfaction, which is a substantial negative effect. In addition, this paper further finds that DoD’s PFP system has widened the gender gap in job satisfaction at DoD. Originality/value: This study contributes to both the theoretical and the empirical understanding of PFP systems and public employee work morale and attitudes.