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Design, and Context

Jinsol Park1

Abstract
While performance-related pay (PRP) has been implemented in most OECD countries
over the past four decades, its effectiveness is still up for debate. What is under-
investigated in the previous literature is under what conditions the public sector can
effectively implement an optimal design of a PRP system. This study investigates how
the target of PRP, the design of performance pay, and organizational context affect
the effectiveness of PRP. The findings indicate that PRP has a positive association with
organizational performance but the aspects of performance it affects differ depending
on to whom it is implemented and how PRP is designed. This study also finds that the
positive effect of PRP for top executives is attenuated if organizational outcomes are
not easily observable. This article suggests that public managers should pay careful
attention to employee characteristics, pay design, and organizational contexts for the
successful implementation of PRP in the public sector.

Keywords
performance-related pay, pay-for-performance, incentives, public performance,
personnel management

Introduction
Performance-related pay (PRP), the pay scheme that attempts to link individual effort
and outputs to compensation, has long been practiced both in private and public sec-
tors. The underlying assumption behind PRP is that organizational performance will

1
University of Kentucky, Lexington, USA

Corresponding Author:
Jinsol Park, Martin School of Public Policy and Administration, University of Kentucky, 1177 Patterson
Office Tower, Lexington, KY 40506, USA.
Email: jinsol.park@uky.edu
2 Review of Public Personnel Administration 00(0)

increase as incentives are tightly aligned with individual performance that achieves
organizational goals (Heinrich & Marschke, 2010; Moon, 2000). Since the late 1970s,
the public sector has embraced this notion with the new public management wave and
broadly applied pay-for-performance systems for government employees (Bellé,
2015; Perry et al., 2009; Spano & Monfardini, 2018). While it has already been four
decades since PRP first received attention in many OECD countries, its popularity has
not declined; rather, it is receiving renewed interest in many countries (Bellé, 2015;
Jones & Hartney, 2017).
Despite broad implementation in the public sector across the globe, the literature
that synthesized the studies on PRP are inconclusive about PRP’s effects on organiza-
tional performance (Hasnain et al., 2012; Perry et al., 2009; Weibel et al., 2009). It is,
however, not a surprising conclusion considering the multifaceted dimensions of PRP.
The public sector can employ PRP in a variety of ways with respect to pay design (e.g.,
incentive size; whether to link incentives to individual, team, departmental, or entire
organizational performance), the target of PRP (e.g., senior civil servants only, or all
employees; employees with high motivation or with low motivation), and performance
measurement (e.g., who measures performance; whether performance is measured
with quantitative or qualitative criteria; how performance is linked to compensation).
Additionally, PRP outcomes may vary depending on the organizational context in
which PRP is implemented. These complex facets of PRP imply that it is important to
disentangle the relationship between various dimensions of PRP and organizational
outcomes by considering specific conditions under which an incentive system is
effective.
The complex relationship between PRP and organizational performance has already
been emphasized in previous literature (Heinrich, 2007; Perry et al., 2006, 2009;
Weibel et al., 2009). For example, Perry et al. (2009) called for scholarly attention to
find “effective contingent pay designs for public contexts,” by noting that “a variety of
antecedent employee and organizational characteristics and environmental conditions,
together with pay system design, affect critical intermediate variables . . . [which], in
turn, influence affective and performance outcomes” (p. 41). This study is a response
to this earlier call, given the research focusing on moderating factors in the public sec-
tor is still limited (Bregn, 2013; Weibel et al., 2009). Specifically, by utilizing the data
of 30 public enterprises in South Korea over the 2012 to 2018 period, this study exam-
ines how the target of PRP, pay system design, and organizational contexts moderate
the relationship between PRP and organizational performance.
The findings of this study add evidence to the view that it is important to design an
incentive system with careful attention to the target of the program (e.g., top execu-
tives versus mid- and low-level employees), pay design (e.g., organization-based
incentives versus individual- or team-based incentives), and organizational context
(based on the observability of organizational outcomes). First, this study finds that
PRP generally has a positive association with organizational performance—but its
effect depends on whom PRP targets. When implemented for chief executives, PRP
has a positive association with financial performance; when implemented for mid- and
low-level employees, it has a positive association with managerial performance.
Park 3

Second, this study shows that pay design also matters in terms of having impacts on
differing aspects of performance. When incentives are tied to individual- or team-
based performance pay, PRP is likely to have a positive association with financial
performance; when incentives are linked to organizational performance, PRP has a
positive association with advancing public values.
Importantly, this study cautions against generalizing the impact of PRP by showing
that the same incentive system can produce different outcomes depending on organi-
zational contexts. By applying Wilson’s (1989) typology, which classifies public orga-
nizations based on the observability of organizational outcomes, this study finds that
the positive effect of PRP for top executives is attenuated in organizations where it is
difficult to quantitatively measure organizational outcomes or attribute the desired end
results to organizational outcomes. Supporting earlier arguments that PRP can yield
different outcomes depending on contextual factors (Chenhall, 2003; Perry et al.,
2006, 2009; Weibel et al., 2009), this study shows that one size does not fit all when
implementing a PRP system. Public managers should consider organizational context
and various intermediate factors of PRP before introducing a contingent pay system in
the public sector.

Literature Review
Principal-agent theory, expectancy theory, and reinforcement theory are prevailing
theories that support the implementation of PRP (Hasnain et al., 2012). Principal-agent
theory deals with designing a contract to address two agency problems—adverse
selection and moral hazard—that result from the information asymmetry between
principal (the employer) and agent (the employee) (Alvarez & Hall, 2006; Holmstrom
& Milgrom, 1991). Adverse selection occurs because the agent has more private infor-
mation than the principal before signing the contract—PRP can serve as a tool to filter
out poor personnel and attract capable employees who expect to benefit from a perfor-
mance pay system (Delfgaauw & Dur, 2008; Hasnain et al., 2012; Heinrich, 2007).
Moral hazard happens because the level of effort the agent exerts is not readily observ-
able to the principal. In that case, the principal can design a contract to incentivize the
agent to exert effort for his own benefit by tying pay to the agent’s performance
(Hasnain et al., 2012; Heinrich, 2007; Miller, 2005).
Expectancy theory (Lawler, 1971, 1981; Porter & Lawler, 1968; Vroom, 1964)
focuses on the relationship between effort, performance, and outcomes. According to
expectancy theory, individuals make behavioral choices based on their expectations of
the extent to which their behaviors will lead to desired outcomes (Kellough & Lu, 1993).
Because the motivation of individuals to exert effort is greatest when there is a tight
relationship between effort, performance, and outcomes (Hasnain et al., 2012; Kellough
& Lu, 1993), expectancy theory implies that it is important to convince employees that
their performance has a tight linkage with outcomes, and positive outcomes are highly
probable if they make the effort to perform well (Kellough & Lu, 1993).
The premise of reinforcement theory is that individual behaviors are “a function of
contingent consequences” (Luthans & Stajkovic, 1999), and target outcomes are the
4 Review of Public Personnel Administration 00(0)

result of reinforced behaviors (Perry et al., 2006; Skinner, 1969). Thus, to produce
desirable organizational outcomes, managers in the workplace should identify the cor-
rect reinforcers that increase functional performance behaviors (Luthans & Stajkovic,
1999). In the case of PRP, reinforcement theory suggests that it is important to find the
right reinforcer (e.g., pay) that intensifies employee behaviors linked to desirable
organizational outcomes. The implication of reinforcement theory for PRP design is
that individual behaviors must be observable and measurable so that the behaviors can
be modified with a reinforcer.
On the other hand, motivation theories emphasize “the hidden costs of rewards”
(Lepper & Greene, 1978), by focusing on individuals’ intrinsic and extrinsic motiva-
tions. Motivation-crowding research stresses that external incentives such as monetary
or other financial rewards can “crowd out” intrinsic motivation (Frey, 1997; Frey &
Jegen, 2001; Frey & Osterloh, 2005). When people perceive that outside intervention
reduces their self-determination, or their intrinsic motivation is not appreciated or
acknowledged by others, they substitute intrinsic motivation with extrinsic control
(Frey, 1997). This motivation-crowding out argument is reinforced by other theories,
such as self-determination theory (Deci, 1971; Deci et al., 1999; Deci & Ryan, 2004),
which stresses intrinsic motivation generated from self-initiated activities (Weibel
et al., 2009), or public service motivation research (Perry & Hondeghem, 2008; Perry
& Porter, 1982; Perry & Wise, 1990), which emphasizes public service motives of
public employees.
Scholars have produced voluminous research on the effects of PRP on perfor-
mance since the late 1980s (Perry et al., 2009). Several scholars have synthesized
this large body of PRP research to analyze the effects of PRP and assess the current
status of PRP research. Jenkins et al. (1998) conducted the first meta-analysis on the
impact of financial incentives on performance. By moderating the research by study
setting (i.e., laboratory, experimental simulation, and field settings), task type, and
theoretical framework, they concluded that financial incentives are likely to mean-
ingfully increase performance quantity, but negligibly increase performance quality.
Condly et al. (2003) expanded the number of moderators in their meta-analysis and
reported that monetary incentives have a greater positive impact on performance
than non-monetary incentives. Also, they found that team-based incentive programs
have a more positive impact on performance than individual-based incentive pro-
grams. In their meta-analysis of studies on the impact of PRP on performance,
Weibel et al. (2009) reported that PRP has a positive association with performance
in the case of uninteresting tasks, but PRP reduces performance in the case of inter-
esting tasks—which suggests that PRP can have a crowding-out effect for highly
motivated individuals.
Hasnain et al. (2012) conducted a meta-analysis on 110 empirical studies of PRP
in the public sector by classifying studies by the observability of outputs and out-
comes in organizations where PRP is implemented. While they found that the major-
ity of high-quality studies report positive effects of PRP, these positive effects were
mostly concentrated in jobs where outcomes are observable, such as teaching, health
care, and revenue collection. Importantly, they found that the effects of PRP are
Park 5

unclear in traditional public service jobs where outcomes are not easily observable.
Their findings reinforce the argument drawn from the earlier synthesis of PRP
research (Perry et al., 2006, 2009) that it is crucial to consider the characteristics of
organizations where PRP is implemented. Other comprehensive studies that synthe-
sized the research on PRP also emphasize the importance of employee and job char-
acteristics, pay design, and organizational context, all of which could affect the
efficacy of PRP (Perry et al., 2006, 2009). Finally, a recent study that synthesized
public service motivation research (Ritz et al., 2016) reports that a PRP system is
counterproductive and should be replaced by traditional or alternative pay systems.
In sum, the earlier studies that investigated the effects of PRP emphasize the impor-
tance of accounting for various dimensions of PRP for the analysis. The next section
builds hypotheses based on this consideration regarding PRP studies.

Hypotheses
Top management is particularly important for PRP application because they impact the
choice of strategy, goal-setting, and management decisions, all of which can affect
organizational performance (Gerhart et al., 2009). Because executives’ behavior is
commonly unobservable and costly to measure, their compensation is generally tied to
organizational performance to motivate them to act in the interest of their principals
(Gerhart et al., 2009; Murphy, 1999). Despite the significance and the wide application
of executive PRP systems, most extant research in the private sector only partially
answers the question of its net effect on organizational performance (Elsayed &
Elbardan, 2018; Gerhart et al., 2009). Executives’ PRP may indirectly benefit firm
performance through its impact on managerial actions such as the choice of firm strat-
egy, development and investment decisions, and the degree of diversification (Elsayed
& Elbardan, 2018; Gerhart et al., 2009; Murphy, 1999), while the opposing view con-
cludes that there is surprisingly little evidence that executive PRP is effective for firm
performance (Murphy, 1999), and executive PRP systems fail to reduce slack and may
create perverse incentives (Bebchuk & Fried, 2006).
The main sentiment in the public sector is that PRP is effective for top management
(Perry et al., 2009; Risher & Fay, 2007), which is supported by the view that individu-
als require a sufficient level of discretion and control over tasks to respond to an incen-
tive system. If individuals perceive that they lack enough discretion or control to
influence outcomes due to external environment or procedural rules or regulations,
they have little expectations of reward and are less likely to respond to an incentive
system (Heinrich & Marschke, 2010; Pearce et al., 1985). This argument suggests dif-
ferences on the degree to which PRP affects executives compared to employees: top
management with enough discretion and influence to make important decisions for
organizations may thus be more reactive to PRP than low-level employees, as they
may feel that they can change the status quo of an organization with their influence.
On the other hand, researchers who emphasize individual motivation as a primary
determinant of the success of PRP argue that PRP can be effective for low-level
employees and detrimental to upper management. They assume that people who
6 Review of Public Personnel Administration 00(0)

undertake uninteresting tasks are primarily extrinsically motivated, while those whose
tasks are interesting are intrinsically motivated (Weibel et al., 2009). Because execu-
tives are more likely to undertake more challenging and interesting tasks than lower-
ranked employees, PRP may have a harmful impact on executives by crowding out
their intrinsic motivation (Spector, 1986; Weibel et al., 2009).
Based on these two competing arguments on the moderating effect of the target of
PRP on performance, this study examines the following hypothesis:

Hypothesis 1: Performance-related pay for top executives has a greater positive

association with organizational performance than performance-related pay for mid-
and low-level employees.

Performance-pay design can vary by linking pay to the performance of an individ-

ual, a team, a department, or even an entire organization. While existing studies report
that team-based incentives are generally more effective than individual-based incen-
tives, studies in the public sector that focus on the group-based incentives are scarce
(Perry et al., 2006). Group-based incentives may be more effective in improving orga-
nizational performance than individual-based incentives because group-based incen-
tive systems produce group motivation, which is greater than the sum of individual
motivations (Condly et al., 2003). Tying pay to group performance may also reduce
costs related to evaluation and conflict among employees that results from destructive
competition (Hasnain et al., 2012) and promote greater team cohesion, coordination,
trust, and support (Gomez-Mejia & Franco-Santos, 2015). The positive effect of team-
based pay is supported by a recent meta-analysis on the relationship between collec-
tive PRP and team outcomes conducted in the private sector (Nyberg et al., 2018).
However, group-based incentives may result in negative outcomes due to free-rid-
ing or “social-loafing” (Bandura, 1997), when individuals tend to exert less effort in
teams than when they are assessed individually (Condly et al., 2003; Hasnain et al.,
2012). The tendency to free-ride on collective effort intensifies as a group gets bigger,
and it becomes more difficult to identify and measure individual effort within the
group performance (Dixit, 2002; Hasnain et al., 2012). Also, group performance may
be affected by a host of other factors beyond individuals’ effort and control (Gerhart
et al., 2009). Therefore, pay tied to the entire organization’s performance may produce
less positive effects than when performance-pay is linked to individual or team effort.
From this argument, this study proposes the following hypothesis:

Hypothesis 2: Organization-based performance-related pay has a smaller positive

association with organizational performance than individual- or team-based perfor-
mance-related pay.

Organizations generally have multiple goals (Ethiraj & Levinthal, 2009), and goals
in the public sector are particularly ambiguous, imprecise, and often subject to asym-
metric measurement (Burgess & Ratto, 2003; Frey et al., 2013; Holmstrom & Milgrom,
1991; Marsden & Richardson, 1994). Also, complex services that generally involve
Park 7

multidimensional tasks (Bregn, 2013; Hasnain et al., 2012; Weibel et al., 2009) make
the public sector susceptible to distorting behaviors by incentivizing individuals to
focus only on tasks that are measurable and observable, while it might be crucial to do
unobservable tasks (Bregn, 2013; Heinrich & Marschke, 2010; Weibel et al., 2009).
Therefore, the efficacy of a performance-based incentive system largely depends
on the precise measurement of performance and the ability to link incentives to the
attributions of performance (Dixit, 2002; Ethiraj & Levinthal, 2009; Heinrich, 2007;
Holmstrom & Milgrom, 1991; Ouchi, 1977). Previous literature also reports that indi-
viduals who are not intrinsically motivated tend to have a strong incentive to respond
to performance indicators that are quantifiable and easy to measure (Frey et al., 2013).
Also, the pursuit of subunit goals rather than global goals is more likely to produce
better performance, which can be explained by less noise and uncertainty involved
with subunit goals (Cohen, 1984; Ethiraj & Levinthal, 2009). In a similar vein, incen-
tives tied to well-specified organizational goals may increase performance, as it is
more likely to make performance commensurate with effort (Perry et al., 2006). When
goals are unclear and outcomes cannot be easily distinguished from external forces,
performance decreases as individual motivation dampens (Heinrich, 2007). This is
supported by the findings of Hasnain et al. (2012), which classified public sector jobs
based on the observability of outcomes defined by Wilson (1989) and reported that
positive effects of PRP are limited to public sector jobs where outcomes are observ-
able. Therefore, this study investigates the following hypothesis:

Hypothesis 3: The level of outcome observability moderates the effect of perfor-

mance-related pay on performance.

Performance-Related Pay in Korean Public Enterprises

Public Enterprise
To investigate the hypotheses, this study focuses on PRP systems of public enterprises
in South Korea.1 A public enterprise2 is a type of public entity that includes features of
both a government organization and a private business. A public enterprise embodies
the characteristics of a private firm by generating more than half of its revenue through
business activities, but unlike a private firm, a public enterprise emphasizes public val-
ues in providing goods and services, and the government exerts a great deal of influence
on its business management and pay system. While these distinctive characteristics
make it reasonable to classify a public enterprise as a public sector organization, it
should be noted that the effects of PRP in this analysis may be overestimated compared
to that of a pure government organization, as PRP tends to be more effective in the
private sector than the public sector (Hasnain et al., 2012; Perry et al., 2006, 2009).

Performance-Related Pay in South Korea

The Korean government initiated a performance incentive system in the late 1990s,
and PRP is implemented in conjunction with a performance management system
8 Review of Public Personnel Administration 00(0)

(Kim, 2014). In 2010, the central government released a PRP guideline expanding the
performance pay system for public entities. The guideline aimed to simplify an extant
complex pay system and emphasized performance-pay, particularly for top managerial
positions. The assessment criteria by which performance pay is allocated differ
between top executives and mid- and low-level employees in public enterprises.
Performance pay for top executives is based on organizational performance, whereas
performance pay for mid- and low-level employees is based on two performance eval-
uation criteria: organizational performance, and individual or team performance.
Organizational performance is evaluated by the central government and individual or
team performance is assessed internally.

Methods and Data

This analysis uses data on Korean public enterprises for the 2012 to 2018 period.
Because Korean government changes in PRP categories for employees became effec-
tive in 2012, this study does not include data before 2012 to avoid a bias resulting from
this mechanical shift of PRP categories.

Dependent Variables
This study examines how PRP affects the performance of public enterprises in South
Korea. Because a public enterprise emphasizes both public service provision and
financial performance, it is important to look beyond finances when measuring its
performance (OECD, 2015; Papenfuß & Keppeler, 2020). Therefore, this study
focuses on the three aspects of performance: financial performance, management per-
formance, and business performance. As an indicator of financial performance, this
study uses sales revenue per employee and the ratio of sales revenue to labor costs.
These measures indicate the degree to which a public enterprise generates revenues
and its labor productivity.
Management performance is related to the achievement of various management
factors that assess how well a public enterprise fulfills its social responsibility, satisfies
customers, manages its business transparency, pursues business innovations, complies
with government policies, achieves managerial and financial efficiency, and manages
labor relations. These indicators for management performance are important measures
that assess the degree to which a public enterprise attains its public values. This study
obtained management scores from the evaluation report3 published by the Ministry of
Economy and Finance. The annual evaluation of public enterprises is conducted by a
group of outside experts, who are selected by the central government to represent a
mix of fields,4 regions, and gender. To ensure the objectivity of the evaluation, evalu-
ators are subject to strong ethics guidelines, and each score must be cross-confirmed
by multiple evaluators.5
Business performance is measured by business scores reported in the government’s
annual evaluation report. The business-related scores measure the degree to which
each public enterprise attains specified business goals.6 Admittedly, because
Park 9

management and business performance are not readily observable by nature, the scores
obtained from the government report might not accurately capture the performance of
public enterprises. Nevertheless, these scores can serve as good proxies for perfor-
mance given the comprehensive and rigorous nature of performance evaluation initi-
ated by the central government.

Explanatory Variables
The main variable of interest is PRP implemented in Korean public enterprises.
Specifically, this study aims to investigate the moderating effects of the target, pay
design, and the context of PRP on organizational performance. To evaluate how PRP
works differently depending on the target (i.e., executives vs. mid- and low-level
employees), this study employs the share of performance pay for top executives in
their total wages and the share of performance pay for mid- and low-level employees
in their total wages as explanatory variables. To measure the moderating effect of pay
design, this study uses the share of performance pay in total wages for mid- and low-
level employees tied to: (1) organizational performance, and (2) individual or team
performance.
To investigate the effect of a key contextual factor in PRP—the observability of
outcomes—this study borrows the typology of public organizations from Wilson
(1989). Wilson (1989) provides an analytic framework that classifies public organiza-
tions based on the observability of outputs (activities) and outcomes. Wilson (1989)
describes that outputs are work done by operators on a day-to-day basis, such as “tick-
ets written, accidents investigated, and arrests made by police officers,” whereas out-
comes are “the results of organization work, which shows how the world changes
because of the outputs” (p. 158). Depending on the observability of outputs and out-
comes, public organizations can be classified into four types: production organiza-
tions, in which both outputs and outcomes are easily observable; procedural
organizations, in which only outputs are observable; craft organizations, in which only
outcomes are observable; and coping organizations, in which neither outputs nor out-
comes are observable.
To apply Wilson’s (1989) typology on Korean public enterprises, this study relied
on the observability of outcomes based on specified goals of each organization. The
government’s annual performance evaluation report publishes the specific goals of
each public enterprise. Based on the observability of outcomes driven by these goals,
this study coded the organizations as “craft” or “coping.” Specifically, public enter-
prises were coded as “craft” if outcomes are observable and if desired performance
endpoints can be attributed to the performance of a public enterprise. If the majority of
outcomes related to specified goals belongs to these criteria, the organization was
coded as “craft,” whereas it was coded as “coping” if the majority of specified goals
does not meet the criteria. For example, the Korea Railroad Corporation has five spec-
ified business goals: increasing the number of train passengers, ensuring the punctual-
ity of train times, increasing the efficiency of rail freight transport, ensuring the safety
of trains, and developing new business. Because the majority of specified outcomes
10 Review of Public Personnel Administration 00(0)

are observable, it was coded as a craft organization. On the other hand, the Korea
Tourism Organization, which has four specified goals—attracting foreign tourists,
facilitating MICE tourism,7 attracting foreign medical tourists, and revitalizing domes-
tic tourism—was coded as a coping organization because it is difficult to solely attri-
bute organizational outcomes to the performance of an organization. External
factors—such as the economy, or the increased international popularity of K-pop—
may have played a dominant role in producing the Korea Tourism Organization’s
organizational outcomes. Table 1 presents a description of the full coding procedure
for the two aforementioned examples. The full list of public enterprises classification
is presented in Appendix 1. No public enterprises were classified as “production” or
“procedural” because none strictly met the criteria of these two organization types.8

Control Variables
Control variables include the size of organization (i.e., number of employees), the
average length of employment period, the previous job of the top executive, and total
debt. A public enterprise may become more bureaucratic and less innovative as it ages
and gets bigger, thereby diminishing performance (Ha & Jung, 2014). This study also
controls for the previous job of the top executive. Because the top executive in public
enterprises is appointed by the Korean government, the media has often criticized that
unqualified top executives assume leadership positions due to political reasons. Top
executives who were previously politicians, bureaucrats, or soldiers are coded as 0,
whereas top executive who were either promoted internally or from the private sector
are coded as 1. This study assumes that top executives with no previous business expe-
rience are less competent than top executives with extensive experience in the field.
Finally, as large debt can reduce organizational performance (Hasnain et al., 2012),
this study controlled for total debt level of public enterprises.9 Table 2 presents the
variables used in the study and Table 3 shows the summary statistics.

Empirical Model
The empirical model below tests hypotheses 1 and 2:

Perfit = α + βCPRPit + γEPRPit + δX it + θi + πt + εit (1)

where Perfit indicates organizational performance, which is specifically measured

as financial, management, and business performance in a public enterprise i in year t.
The two main explanatory variables— CPRPit and EPRPit —denote the share of per-
formance pay in total wages for top executives and employees, respectively, in a pub-
lic enterprise i in year t. X it is a set of control variables and ε it is an error term. This
study also includes fixed effects for year and public enterprise.
The following model tests the effects of performance pay design on organizational
performance (hypothesis 3):
 Table 1.  Examples of a Coding Procedure.

No. Specified goals
Example 1: Korea Railroad Corporation
 1 Increasing the number of
train passengers
 2 Ensuring the punctuality
of train times
 3 Increasing the efficiency
of rail freight transport
Observability of
outcomes Description Coding result
Observable It can be measured by the number of Because most specified
passengers divided by the total train mileage organizational goals (four
Observable It can be measured by the number of on time out of five) are observable,
train operations divided by the total train the Korea Railroad
operations Corporation is coded as a
Observable It can be measured by the mileage of freight craft organization
transport divided by the total train mileage

 4 Ensuring the safety of Observable It can be measured by the number of train

trains accidents divided by the train mileage
 5 Developing new business Unobservable It is difficult to observe outcomes
Example 2: Korea Tourism Organization
 1 Attracting foreign Unobservable It is difficult to solely attribute organizational Because most specified
tourists outcomes to the performance of an organizational goals
 2 Facilitating MICE tourism Unobservable organization. There is a possibility that (four out of four) are
 3 Attracting foreign medical Unobservable external factors, such as the economy unobservable, the Korea
tourists or increased international popularity of Tourism Organization
 4 Revitalizing domestic Unobservable K-pop, played a dominant role in producing is coded as a coping
tourism organizational outcomes. organization

11
12 Review of Public Personnel Administration 00(0)

Table 2.  Description of Variables.

Variables
Dependent variables
  Financial performance
   Sales revenue per employee (log)
   The ratio of sales revenue to
labor cost (log)
  Management performance
   Annual performance evaluation
result related to management
  Business performance
   Annual performance evaluation
result related to businesses
Explanatory variables
  The share of performance pay for
top executives (%)
  The share of performance pay for
employees (%)
  The share of organizational
performance pay for employees
(%)
  The share of individual or team
performance pay for employees
(%)
  Observability of organizational
outcome
Control variables
  Organization size (log)
  The average length of employment
period
  Type of top executive
  Total debt (log)
Description
Total sales revenue/number of employees
Total sales revenue/total labor cost
The summation of annual performance scores
that is related to management performance
measured by the Ministry of Economy and
Finance, with the total score converted to 100
The summation of annual performance scores
that is related to business performance
measured by the Ministry of Economy and
Finance, with the total score converted to 100
The share of performance pay for top
executives in total wage
The share of performance pay for employees in
total wages
The share of performance pay for employees
in total wages, which is tied to the annual
organization’s performance scores measured
by the Ministry of Economy and Finance
The share of performance pay for employees
in total wages, which is tied to individual or
team performance that is assessed internally
0 if craft organization; 1 if coping organization
based on Wilson’s (1989) typology
Number of employees
The average length of employment period of
employees
0 if recruited from internal promotion or from
other business sectors; 1 if the prior job was
politician, bureaucrat, or soldier
Total debt

Perfit = α + βCPRPit + τEPRP _ orgit + ϕEPRP _ indit + δX it + θi + πt + εit (2)

where EPRP _ orgit denotes the share of organization-based performance pay in total
wages for employees in public enterprise i in year t and EPRP _ indit indicates team- or
individual-based performance pay for employees in public enterprise i in year t.
Park 13

Table 3.  Summary Statistics of Variables (N = 210; 2012–2018).

Variables Mean SD Min Max

Dependent variables
  Sales revenue per employee (unit: $1,000) 1,971 2,232 105 12,641
  The ratio of sales revenue to labor cost 24 26 2 171
  Annual performance evaluation result related to 67 13 40  
management (total 100)
  Annual performance evaluation result related to 75 9 48 93
businesses (total 100)
Explanatory variables
  Performance pay for top executive (%) 35 19 0 66
  Performance pay for employees (%) 21 6 7 39
  Organizational performance pay for employees (%) 7 4 0 21
  Individual or team performance pay for employees (%) 15 5 1 27
Control variables
  Number of employees 3,368 6,017 83 29,219
  The average length of employment period (years) 14 4 1 23
  Total debt (unit: one million dollar) 13,900 30,200 19 142,000

Note. U.S. dollar is converted at the exchange rate of 1,000 South Korean won.

Finally, the following empirical model investigates the impact of the observability
of outcomes on organizational performance:

Perfit = α + βCPRPit + γEPRPit + µObsi + ωCPRPit * Obsi + ρEPRPit * Obsi +

(3)
δX it + θi + πt + εit

To measure the moderating effect of the observability of organizational outcomes,

performance pay for top executives and employees is respectively interacted with
Obsi —the value is 1 if the public enterprise is a coping organization, and 0 if the
organization is a craft organization based on the typology of Wilson (1989).
One possible concern about this research method is an endogeneity issue. Because
PRP is affected by organizational performance, PRP may not affect organizational
performance but organizational performance may influence the allocation of PRP.
Another possible concern is that there may be other unobserved factors that affect
organizational performance such as ownership, the share of funding (Bozeman &
Bretschneider, 1994; Heinrich & Fournier, 2004; Papenfuß & Keppeler, 2020), goal
ambiguity, the alignment of goals with prosocial values,10 and individual composition
(Papenfuß & Keppeler, 2020). While it may not perfectly address this possible endo-
geneity, the fact that all PRP variables included in the model are based on the previous
year’s performance assessment provides the implicit lagged effect in the PRP mecha-
nism, thereby addressing the possibility that PRP and performance are jointly deter-
mined. For example, this year’s performance pay is determined by last year’s
performance, and thus performance cannot concurrently be determined with the pay.
14 Review of Public Personnel Administration 00(0)

Besides the inclusion of control variables, year and firm fixed effects control for time-
invariant as well as firm-invariant characteristics, thereby reducing an endogeneity
concern to some extent. Nevertheless, this analysis attempts to identify associations—
not casual relationships—between PRP and organizational performance.

Data Sources
This article investigates how PRP implemented in public enterprises in South Korea is
associated with organizational performance. The majority of PRP variables and con-
trol variables were obtained from the publicly available government data source called
“All Public Information In-One (ALIO).” Management and business data were col-
lected from the annual performance evaluation report published by the Ministry of
Economy and Finance. In addition, the previous jobs of top executives in public enter-
prises were collected from publicly available information. The unit of this analysis is
a public enterprise.

Empirical Results
Table 4 presents whether PRP influences the performance of public enterprises mea-
sured by financial, management, and business performance, when implemented to
chief executives and employees, respectively. The results that exclude control vari-
ables (model 1) show that PRP has a positive association with sales revenue per
employee when implemented to top executives, while it has positive associations with
labor productivity and management score when implemented to employees. When
control variables are included (model 2), the statistical significance of employee PRP
disappears for the ratio of sales revenue to labor cost and remains significant only for
management score. Holding other variables constant, increasing a top executive’s
share of performance pay by ten percent (e.g., from 30 percent to 33 percent of total
wages) is associated with a two percent increase in sales revenue per employee. On the
other hand, a ten percent increase in employees’ share of performance pay is associ-
ated with a three-point increases in management score, which is about one-ninth of the
difference between mean and minimum management scores. This finding contradicts
the argument that PRP is not effective for high-level employees who are assumed to
have high intrinsic motivation due to their interesting and challenging tasks (Spector,
1986; Weibel et al., 2009). Rather, the results indicate that PRP may be associated with
differing aspects of performance, depending on to whom it is implemented. Chief
executives—who have greater autonomy and control in terms of their decision-mak-
ing—are more likely than lower-level employees to be motivated to focus on financial
performance, which is more readily observable than other aspects of performance such
as the emphasis on publicness or social responsibility.
Table 5 illustrates how different PRP pay designs are associated with organizational
performance. This study exploits the fact that employees in Korean public enterprises
receive two types of performance pay—organization-based PRP and individual- or
team-based PRP—to test the relationship between pay designs and performance. The
 Table 4.  The Effectiveness of Performance-Related Pay Contingent on the Targets of the Program.
Model 1 Model 2

Sales rev. per The ratio of sales Sales rev. per The ratio of sales
  employee rev. to labor cost Mgmt. score Business score employee rev. to labor cost Mgmt. score Business score

PRP for top executive (%) 0.003** (0.001) 0.001 (0.002) 0.043 (0.032) 0.012 (0.037) 0.002* (0.001) 0.001 (0.002) 0.048 (0.033) 0.028 (0.039)
PRP for employees (%) 0.011 (0.007) 0.017* (0.010) 0.304* (0.168) 0.292 (0.196) 0.010 (0.007) 0.015 (0.010) 0.307* (0.171) 0.262 (0.198)
Number of employees (log) −0.501** (0.240) −0.530 (0.342) 2.315 (5.748) 0.587 (6.669)
Average length of −0.006 (0.015) −0.018 (0.052) −0.362 (0.356) −0.203 (0.414)
employment period
Type of top executive −0.020 (0.037) 0.018 (0.052) 0.528 (0.877) 0.685 (1.017)
Total debt (log) −0.021 (0.057) 0.021 (0.081) −0.622 (1.366) 2.345 (1.585)
Constant 6.732*** (0.124) 2.372*** (0.175) 72.959*** (2.943) 78.310*** (3.437) 10.701*** (1.774) 6.075** (2.528) 70.220 (42.551) 42.540 (49.370)
Public enterprise—fixed Yes Yes Yes Yes Yes Yes Yes Yes
Year—fixed Yes Yes Yes Yes Yes Yes Yes Yes
Observations 210 210 210 210 210 210 210 210
Number of orgs. 30 30 30 30 30 30 30 30
R-squared 0.017 0.021 0.850 0.549 0.009 0.001 0.861 0.386

Note. Robust standard errors are reported in parentheses and two-tailed tests are employed for all explanatory variables.
*p < .1. **p < .05. ***p < .01.

15
16
Table 5.  The Effectiveness of Performance-Related Pay Contingent on the Performance Pay Design.
Model 1 Model 2

Sales rev. per The ratio of sales Sales rev. per The ratio of sales
  employee rev. to labor cost Mgmt. score Business score employee rev. to labor cost Mgmt. score Business score

PRP for top executive (%) 0.004** (0.002) 0.003 (0.002) 0.022 (0.038) −0.013 (0.045) 0.004** (0.002) 0.003 (0.002) 0.022 (0.042) 0.019 (0.049)
Organizational PRP for 0.003 (0.009) 0.008 (0.012) 0.421** (0.204) 0.432* (0.239) 0.003 (0.009) 0.004 (0.013) 0.442** (0.218) 0.309 (0.253)
employees (%)
Individual or team PRP for 0.018** (0.008) 0.025** (0.012) 0.194 (0.200) 0.160 (0.234) 0.016* (0.009) 0.025** (0.012) 0.194 (0.204) 0.223 (0.238)
employees (%)
Number of employees (log) −0.508** (0.239) −0.540 (0.341) 2.430 (5.749) 0.627 (6.688)
Average length of employment −0.007 (0.015) −0.020 (0.021) −0.342 (0.357) −0.196 (0.415)
period
Type of top executive −0.019 (0.037) 0.021 (0.052) 0.495 (0.878) 0.674 (1.021)
Total debt (log) 0.006 (0.061) 0.064 (0.086) −1.134 (1.458) 2.167 (1.696)
Constant 6.628*** (0.140) 2.254*** (0.198) 74.530*** (3.332) 80.190*** (3.891) 10.270*** (1.802) 5.392** (2.564) 78.270* (43.300) 45.340 (50.370)
Public enterprise—fixed Yes Yes Yes Yes Yes Yes Yes Yes
Year—fixed Yes Yes Yes Yes Yes Yes Yes Yes
Observations 210 210 210 210 210 210 210 210
Number of orgs. 30 30 30 30 30 30 30 30
R-squared 0.011 0.016 0.858 0.579 0.004 0.001 0.859 0.405

Note. Robust standard errors are reported in parentheses and two-tailed tests are employed for all explanatory variables.
*p < .1. **p < .05. ***p < .01.
Park 17

results that omit control variables (model 1) show some interesting points that positive
effects of PRP for employees are broken down by differing aspects of performance
depending on pay designs. PRP for employees that is tied to individual or team perfor-
mance has positive associations with measures for financial performance while PRP
that is tied to organizational performance has positive associations with management
and business scores. When control variables are included (model 2), however, organi-
zation-based PRP is statistically significant only for management score and it is no
longer significant for business performance. All else being equal, a ten percent increase
in the current share of individual- or team-based PRP is associated with a 16 percent
increase in sales revenue per employee and a 25 percent increase in the ratio of sales
revenue to labor cost. On the other hand, a ten percent increase in the current share of
organization-based PRP is associated with a four-point increase in management per-
formance score, which is about one-seventh of the difference between mean and mini-
mum management scores. The positive association of PRP for top executives with
performance remains consistent with the results in Table 4, with increased statistical
significance. The results indicate that individuals may tend to focus more on recogniz-
able outcomes when their efforts are linked to more narrowly defined targets over
which they can exercise greater control. As shown by the earlier results associated
with the target of PRP, the results in Table 5 also imply that governments should pay
attention to the design of PRP, by which differing aspects of organizational perfor-
mance are affected.
Table 6 shows how the observability of organizational outcomes is associated with
the effectiveness of PRP. This study proposed that the effectiveness of PRP is lower for
coping organizations where it is difficult to measure outcomes or attribute the desired
end results to the activities of organizations than for craft organizations where it is
relatively easy to measure outcomes. The result in Table 6 confirms the hypothesis
when confining results to PRP implemented to top executives. When a public enter-
prise is a coping organization, the results show that the positive effect of executive
PRP is significantly reduced, by offsetting the positive impact of executive PRP close
to zero. This finding supports an earlier argument that organizational context moder-
ates the effectiveness of PRP (Perry et al., 2006, 2009). While performance pay for top
managerial positions generally produces positive outcomes, the effectiveness may be
attenuated in certain contexts. Top executives in coping organizations may perceive
that their vision, strategy, and performance have little effect on organizational perfor-
mance, thereby decreasing the effectiveness of PRP. PRP for employees, however, has
a positive association with financial performance and management performance in
coping organizations but a negative association in craft organizations.
While this finding is puzzling at first, the fact that the application of Wilson’s
(1989) typology is based on the observability of organizational outcomes, not indi-
vidual outcomes, may have produced this confounding result. The fact that organiza-
tional outcomes are unobservable does not necessarily mean that individual
performance is not observable or measurable. In the context of PRP in Korean public
enterprises, Wilson’s (1989) typology might be more relevant to PRP for top execu-
tives than PRP for employees, because top executives’ performance pay is directly
18
Table 6.  The Effectiveness of Performance-Related Pay Contingent on the Observability of Organizational Outcomes.

Sales rev. per The ratio of sales Mgmt. Business

employee rev. to labor cost score score
PRP for top executive (%) 0.006*** (0.002) 0.004 (0.003) 0.151*** (0.050) 0.072 (0.059)
PRP for employee (%) −0.006 (0.011) −0.007 (0.016) −0.203 (0.269) 0.057 (0.318)
Observabilitya — — — —
PRP for top executive × observability −0.005** (0.002) −0.003 (0.003) −0.141*** (0.053) −0.060 (0.063)
PRP for employee × observability 0.020 (0.012) 0.032* (0.018) 0.639** (0.290) 0.254 (0.344)
Number of employees (log) −0.520** (0.238) −0.542 (0.340) 1.742 (5.655) 0.345 (6.694)
Average length of employment period −0.007 (0.015) −0.022 (0.021) −0.403 (0.352) −0.218 (0.417)
Type of top executive −0.013 (0.037) 0.015 (0.053) 0.750 (0.875) 0.785 (1.036)
Total debt (log) −0.017 (0.057) 0.027 (0.081) −0.477 (1.345) 2.404 (1.592)
Constant 10.850*** (1.763) 6.217** (2.519) 74.830* (41.870) 44.450 (49.560)
Public enterprise—fixed Yes Yes Yes Yes
Year—fixed Yes Yes Yes Yes
Observations 210 210 210 210
Number of orgs. 30 30 30 30
R-squared 0.008 0.001 0.715 0.355

Note. Robust standard errors are reported in parentheses and two-tailed tests are employed for all explanatory variables.
a
While the model includes all constitutive terms in the interaction model specification, note that the variable on observability of outcomes measured based on
Wilson’s typology is omitted because this variable is time-invariant.
*p < .1. **p < .05. ***p < .01.
Park 19

linked to organizational performance whereas employees’ performance pay is deter-

mined by both organizational performance and team or individual performance.
Nevertheless, the analysis in other research settings that use contextual factors as mod-
erators merits further investigation for the generalization of results.
Among control variables, this study finds that the size of organization measured as
the number of employees (log) has a negative association with sales revenue per
employee across all models. Large organizations, on average, may be more bureau-
cratic and less innovative, thereby negatively affecting organizational performance
(Ha & Jung, 2014).

Discussion and Conclusion

Despite the inconclusive effects of PRP reported in the previous literature, PRP has been
consistently implemented in public sectors across most OECD countries over the past
four decades (Bellé, 2015; Spano & Monfardini, 2018). Based on the synthesis of ample
research on PRP, scholars concluded that these inconclusive effects are attributable to the
complexity of PRP and called for research that considers the various moderating factors
of PRP (Perry et al., 2006, 2009). Responding to this earlier call for research that takes
various characteristics of PRP and the contexts of organizations into account, this study
investigates how PRP is associated with performance depending on the target of the
program (top executives versus mid- and low-level employees), pay design (organiza-
tion-based incentives versus individual- or team-based incentives), and organizational
context (based on the observability of organizational outcomes). For empirical analysis,
this study utilizes data on 30 Korean public enterprises between 2012 and 2018.
The findings suggest that performance pay generally has a positive association with
organizational performance but the aspects of performance it affects may differ
depending on to whom PRP is implemented. The results show that individuals who
have a great deal of discretion and control over organizations may be incentivized to
focus on readily recognizable indicators, such as financial performance, when their
incentives are linked to performance. Chief executives may perceive that performance
related to the emphasis on public values—which is often perceived as vague and unob-
servable—is more difficult to attain by exerting their own discretion than other dis-
tinctive indicators such as sales revenue. This finding not only counters the argument
that performance pay is counterproductive for high-level employees who are assumed
to have high intrinsic motivation, it also implies that it is worth investigating the
nuanced role of PRP in relation to employee characteristics and performance type.
Public organizations can choose to design performance pay in various ways.
Incentives can be linked to the performance of an individual, a team, a department, or
even an entire organization. Despite evidence that pay design matters for the effective-
ness of PRP, we lack research exploring the effects of pay design on performance
(Perry et al., 2006). The dual PRP systems for employees in Korean public enter-
prises—in which some portions of incentives are linked to the organizational perfor-
mance and other portions are linked to individual or team performance—enables us to
test the effects of pay design. This study’s findings provide some evidence that the way
20 Review of Public Personnel Administration 00(0)

governments design PRP can impact organizational performance. The results show
that individual- or team-based performance pay tends to have a positive association
with financial performance, whereas organization-based performance pay has a posi-
tive association with management performance that emphasizes the achievement of
public values. The findings indicate that individuals are more likely to be motivated to
focus on measurable performance, such as financial performance, when incentives are
tied to tasks they can easily influence.
Finally, the results show that the effectiveness of performance pay can differ
depending on organizational context. Specifically, by borrowing the organization
typology of Wilson (1989), this study finds that the positive impact of PRP for top
executives is reduced in organizations where outcomes are not easily observable or
difficult to attribute to organizational activities. In the context where incentives are
tightly linked to organizational performance organizations but performance is not eas-
ily observable, the effectiveness of PRP rarely persists. This finding provides an
important implication with respect to the conditions under which PRP works.
One notable point that runs through all findings in the tests of the hypotheses is that
PRP is more likely to motivate individuals to focus on observable and measurable per-
formance when they have greater responsibility, discretion, and control over their tasks
and outcomes. This argument is supported by the findings that the higher an individual’s
rank in an organization and the more tightly tasks and measured outcomes are linked, the
more likely the individual is to focus on observable and measured performance. Also,
the finding that PRP is particularly effective for top executives when organizational per-
formance is observable adds to the evidence that contextual factors play an important
role in the effectiveness of PRP. In conclusion, this research indicates the importance of
PRP studies that account for subtle and nuanced moderating factors, deviating from a
dichotomous approach that examines the effectiveness of PRP by itself.
This study, however, has some limitations to be noted. First, as discussed earlier,
readers should note that public enterprises have characteristics of both public and pri-
vate sectors. While Korean public enterprises are subject to strict regulations and rules
of the Korean government and must emphasize public values, these organizations
obtain more than half of their revenue from business activities. Based on the previous
evidence that PRP is likely to be most effective in the private sector (Hasnain et al.,
2012; Perry et al., 2006, 2009), it is worth noting the possibility that the positive effects
of PRP in this study’s data may be overestimated. The public sector has more con-
straints regarding budgets and stewardship (Perry et al., 2009), and tasks in the public
sector are more complex and difficult to measure (Bregn, 2013; Hasnain et al., 2012).
Second, the data was collected from South Korea, which emphasizes collective values
more than in western cultures (Kim et al., 1990), which suggests that the positive effects
of PRP in this study might be attenuated to some extent due to a culture in which
employees tend to push back against performance pay. Third, it should be noted that
there might be a problem of limited statistical power for identifying statistically signifi-
cant relationships in the analyses, due to the relatively small sample of organizations
employed in this study. Finally, while the application of the typology of Wilson (1989)
provides some insights into understanding the impact of organizational contexts on
Park 21

performance, disagreement may exist in the classification of organizations, especially

for those that are near the subtle border between coping and craft organizations.
Nevertheless, this article elucidates why PRP is effective in certain contexts while
it fails in other contexts. The findings of this study emphasize that it is important to
consider the target, pay design, and the context of an organization for the successful
implementation of PRP. By building on Wilson’s (1989) classification that this article
utilized, future research with more sophisticated criteria that classify organizations
based on the observability of outcomes would lead to more generalizable findings.

Appendix 1.  Korean Public Enterprises Classified by Wilson’s (1989) Typology.

No Public enterprises Wilson’s typology

 1 Korea Railroad Corporation Craft
 2 Incheon International Airport Corporation, IIAC Craft
 3 Korea Airports Corporation, KAC Craft
 4 Korea Electric Power Corporation, KEPCO Craft
 5 Korea Coal Corporation Craft
 6 Korea District Heating Corporation Craft
 7 Korea Water Resources Corporation, K-water Craft
 8 Korea Expressway Corporation Craft
 9 Korea Gas Corporation, KOGAS Craft
10 Korea Hydro & Nuclear Power Co., Ltd., KHNP Craft
11 Korea Minting, Security Printing & ID Card Operating Corp, Craft
KOMSCO
12 Korea Midland Power Co., Ltd. Craft
13 Korea South-East Power Co., Ltd. Craft
14 Korea Southern Power Co., Ltd. Craft
15 Korea Western Power Co., Ltd. Craft
16 Korea East-West Power Corporation Craft
17 Korea Tourism Organization, KTO Coping
18 Jeju Free International City Development Center, JDC Coping
19 Korea Marine Environment Management Corporation, KOEM Coping
20 Busan Port Authority, BPA Coping
21 Incheon Port Authority Coping
22 Ulsan Port Authority, UPA Coping
23 Yeosu Gwangyang Port Authority, YGPA Coping
24 Korea Broadcast Advertising Corporation, KOBACO Coping
25 Korea Appraisal Board Coping
26 Korea Housing & Urban Guarantee Corporation Coping
27 Korea Land and Housing Corporation, LH Coping
28 Korea National Oil Corporation, KNOC Coping
29 Korea Racing Authority Coping
30 Korea Resources Corporation Coping

Note. This list of public enterprises is based on the Ministry of Economy and Finance’s 2016 classification
of public entities.
22
Appendix 2.  High-Level Evaluation Categories of the Annual Performance Evaluation Report (Example: Korea Railroad Corporation).
Year 2012 2013 2014 2015

Performance Evaluation category Score Evaluation category Score Evaluation category Score Evaluation category Score

Management Leadership 5 Leadership 5 Business strategy and 11 Business strategy and 14

performance social contribution social contribution
Accountable business 3 Accountable business 3 Business efficiency 8 Business efficiency 8
management management
Public evaluation 5 Public evaluation 5 Human resource 2 Human resource 2
management management
Social contribution 7 Social contribution 7 Financial management 17 Financial management 14
Business efficiency 6 Business efficiency 6 Pay and employees’ 12 Pay and employees’ 12
welfare welfare management
management
Human resource 4 Human resource 2  
management management
Financial management 12 Financial management 12  
Pay and performance 8 Pay and performance 7  
management management
Labor management 5 Labor management 3  
Sub total 55 50 50 50
Business performance Transportation business 17 Transportation 17 Business performance 13 Business performance 13
business management management
Safety management 14 Rail freight business 8 Transportation 16 Transportation 16
business business
Facilities inspection and 10 Unprofitable business 3 Rail freight business 5 Rail freight business 5
repair management
Non-transportation business 4 Safety management 16 Safety management 11 Safety management 11
  New business 6 New business 5 New business 5
development development development
Sub total 45 50 50 50
Total 100 100 100 100

(continued)
 Appendix 2. (continued)

Year 2016 2017 2018

Performance Evaluation category Score Evaluation category Score Evaluation category Score

Management Business strategy and social 14 Business strategy and social 18 Business strategy and leadership 6
performance contribution contribution
Business efficiency 8 Business efficiency 5 Social contribution 22
Human resource management 2 Human resource management 4 Business efficiency 5
Financial management 14 Financial management 10 Human resource and Financial 9
management
Pay and employees’ welfare 12 Pay and employees’ welfare 13 Pay and employees’ welfare 8
management management management
Public participation 5
Sub total 50 50 55
Business Transportation business 21 Transportation business 21 Transportation business 11
performance Rail freight business 6 Rail freight business 6 Rail freight business 3
Safety management 17 Safety management 17 Safety management 10
New business development 6 New business development 6 New business development 3
Business performance 12
Performance management 6
Sub total 50 50 45
Total 100 100 100

Note. The performance categories indicate the high-level evaluation categories, each of which includes sub-categories.

23
24 Review of Public Personnel Administration 00(0)

Acknowledgments
I am grateful to the editors and three anonymous reviewers who all provided constructive and
excellent comments on a previous draft. I also thank Nicolai Petrovksy, J.S. Butler, and Daniel
Torres for their valuable comments to improve my article.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.

Funding
The author received no financial support for the research, authorship, and/or publication of this
article.

ORCID iD
Jinsol Park https://orcid.org/0000-0002-4670-5511

Notes
 1. There are 30 Korean public enterprises based on the categorization for public entities
assessed in 2016. Every year, the Ministry of Economy and Finance announces the types
of public entities (e.g., public enterprises, quasi-public entities, other public entities) based
on the criteria stipulated by law, including the number of employees and the sources of
revenue. Because the government classifies public entities annually, note that the types of
public entities can marginally change each year.
  2. The law specifies that a public enterprise shall have more than 50 employees and more than
half of its revenue shall be generated from business activities.
  3. Note that while each sub-evaluation criterion is subject to marginal year-to-year changes,
the key evaluation criteria structure is unchanged. The main evaluation criteria presented
in this article follow those of the 2016 annual performance evaluation report. Appendix 2
presents the high-level evaluation categories for 2012 to 2018, with an example of the Korea
Railroad Corporation.
  4. For example, in 2016, there were forty evaluators for the performance evaluation of public
enterprises. Those evaluators came from various fields, such as academia, accounting, and
research. The relevant act (i.e., the Act on the Management of Public Institutions) stipulates
to maintain objectivity throughout the selection process of committee members for the
annual performance evaluation of public institutions.
  5. There are several governmental mechanisms to ensure the objectivity of the evaluation and
alleviate concerns about possible endogeneity in which the impact of PRP for top execu-
tives is biased since the relationship between evaluators and the top executives of public
enterprises is not distant.
  6. Given the complex natures of management and business performance, the evaluation is
based both on quantitative and qualitative measures.
  7. MICE stands for meetings, incentives, conferences, and exhibitions.
 8. In public enterprises, departments often produce multi-dimensional outputs (activities)
which cannot be observed, particularly in back offices. Because all jobs in public enter-
prises are multi-dimensional to some degree, no public enterprises are classified either as
Park 25

a production organization or a procedural organization in a strict sense, in which activities

are observed.
  9. While not included in the model, other possible factors that can affect organizational per-
formance merit further discussion. The fact that a public enterprise lies on a continuum
between private and public sectors suggests another strand of research on the distinction
between private and public organizations (e.g., see Bozeman & Bretschneider, 1994; Perry
& Rainey, 1988). While the hybrid types of public-private organizations add complexity
in the clear-cut distinction between private and public organizations, scholars generally
form a consensus that ownership structure (i.e., legal type) and the extent to which political
authority affects them (such as the share of revenues that come from public sources, mana-
gerial and financial autonomy) are important attributes that distinguish between private
and public organizations (Bozeman & Bretschneider, 1994; Papenfuß & Keppeler, 2020;
Perry & Rainey, 1988). In addition, previous literature reports that organizational behaviors
and performance can be influenced by these attributes (Bozeman & Bretschneider, 1994;
Heinrich & Fournier, 2004; Papenfuß & Keppeler, 2020). From an empirical standpoint,
firm fixed effects would capture some important time-invariant variation across organiza-
tions, but the share of funding can be considered as an additional variable in the future
research that employs the hybrid organization as an unit of analysis.
10. If organizational goals are highly profit-oriented and less prosocial, PRP may not motivate
individuals with high public service motivation.

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Author Biography
Jinsol Park is a Ph.D. candidate in the Martin School of Public Policy and Administration at the
University of Kentucky. Her research broadly focuses on public performance and management,
local government administration, and public budgeting and finance.

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