Final answer:
A downside of P4P systems is that increased income may reduce the incentive to work more hours, potentially resulting in employees working less while earning the same or more. Additionally, measuring individual productivity in such systems can be difficult, thus complicating fair wage adjustments.
Step-by-step explanation:
A drawback of using pay-for-performance (P4P) systems is that while such systems are designed to incentivize performance, they can also lead to a reduction in the incentive to work more hours. This occurs because additional income from the P4P system might allow some employees to achieve their desired level of income by working fewer hours. This outcome is illustrated as a choice on a new budget line, point S, as opposed to the original working hours at point P. Furthermore, pay-for-performance systems can raise other issues, such as difficulty in measuring individual productivity, especially in jobs where this is not directly observable. For example, gauging the productivity of an accountant in a large corporation's tax department can be complex, and wage increases might then be based on estimated productivity gains rather than actual performance.