Pay for performance (PFP) is widely adopted to incentivize and reinforce employee behavior towards organizational goals, but employees vary concerning how they perceive and react to PFP. Based on self-determination theory, we develop a model where the effects of perceived individual PFP on intrinsic motivation, job-related anxiety, and turnover intention are mediated by two distinct proximal motivational states: controlling and informational effects of pay. We also draw on social exchange theory to argue that the effects of perceived individual PFP on controlling and informational effects of pay are moderated by employees’ social and economic exchange relationships with their organization. A three-wave study of 903 employees largely supports our mediation hypotheses that perceived individual PFP can have both favorable and unfavorable effects on important employee outcomes. In addition, a social exchange relationship weakened the positive association between perceived individual PFP and a controlling effect of pay. Since we controlled for perceptions of both procedural and distributive justice of pay, several pay characteristics, the feeling of being trusted and close monitoring by the immediate supervisor, and individual differences in desire for money, our findings provide novel and robust insight into the complex nature of the effects of employee perceptions of PFP. This insight carries practical implications for organizations seeking to intrinsically motivate employees without increasing their ill-being and intention to leave the organization.
