Abstract
Performance-based pay is a feature of many modern compensation systems, especially given its enhancing effects for performance and motivation. Despite these benefits, there is also mounting evidence that performance-based pay has costs to employee well-being. To help explain these contrasting effects, we isolate the unique impact of pay uncertainty as a factor common in performance-based pay. Integrating restricted employee sustainability theory (Barnes et al., 2023) with scarcity theory (Mullainathan & Shafir, 2013), we argue that pay uncertainty pushes individuals to overwork, neglecting necessary rest and recovery. In this way, pay uncertainty can explain both the performance benefits of performance-based pay in addition to the well-being costs. We test this possibility using a unique experimental paradigm across five real-effort experiments (NCombined = 1,476), finding support for our predictions. Participants facing greater pay uncertainty work longer and delay recovery, even when financial rewards for continuing to work become negligible in Studies 1, 2, and 3. In line with scarcity theory predictions, pay uncertainty increases perceptions of financial scarcity (Study 4a) and those facing financial scarcity are less likely to engage in recovery (Study 4b). Together, these results highlight the costs of pay uncertainty while identifying the psychological mechanism underlying that cost.