Merit pay plans are becoming increasingly popular in nonprofit organizations, despite their downside risk. One risk is the potential negative effect of the plan on employees’ intrinsic motivation. The authors investigated employee motivation in a study of a nonprofit organization before and after the implementation of a merit pay system. Results suggest that merit pay produced a decline in intrinsic motivation for employees initially highly intrinsically motivated. Justice-related factors also had an effect. Employees who indicated a preference for merit pay and believed that their performance was appraised unfairly experienced a significant decline in intrinsic motivation after the merit pay plan was implemented.
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