Bruno Frey and Margit Osterloh assemble the case against pay-for-performance:
The idea that people are solely self-interested and materially orientated has been thrown overboard by leading scholars. Empirical research, in particular experimental research, has shown that under suitable conditions human beings care for the wellbeing of other persons. Above all, they are not solely interested in material gains. Recognition by co-workers is greatly important. Many workers are intrinsically motivated, ie they perform work for its own sake because it is found challenging and worth undertaking.
Arnold King focuses on the implications for public policy:
When a remote authority sets incentives, people respond by manipulating the system. This fact is poorly understood by education reformers who are fond of pay-for-performance and national standards, by health care reformers who are fond of paying for quality, and by financial regulators. … The Hayekian story here is that effective compensation practices require local knowledge and tacit knowledge.
The Dish 