THE RELATIONSHIP BETWEEN PAY-FOR-PERFORMANCE PERCEPTIONS AND PAY SATISFACTION

PERSONNEL PSYCHOLOGY 1988.41

THE RELATIONSHIP BETWEEN PAY-FOR- PERFORMANCE PERCEPTIONS AND PAY SATISFACTION

ROBERT L. HENEMAN, DAVID B. GREENBERGER Faculty of Management and Human Resources

The Ohio State University

STEPHEN STRASSER Division of Hospital and Health Services Administration

The Ohio State University

A study was conducted with 104 hospital employees to assess the relationship between pay-for-performance perceptions and pay satisfaction. Unlike previous research examining this relationship, a multi-item measure of pay-for-performance perceptions and a multidimensional measure of pay satisfaction were used. As hypothesized, the results indicated a positive relationship between pay-for-performance perceptions and pay- raise satisfaction, pay-level satisfaction, and overall pay satisfaction even after the effects of salary level, salary increases, performance ratings, job tenure, job satisfaction, and promotions were controlled. The importance of gathering perceptual data on characteristics of the pay system believed to have differential relationships with the subdimensions of pay satisfaction are discussed.

The construct of pay satisfaction has received considerable attention by compensation researchers and administrators. The importance of pay satisfaction to researchers is evidenced by the number of reviews of the empirical literature (H. Heneman, 1985; H. Heneman & Schwab, 1975; Lawler, 1971; Nash & Carroll, 1975; Schwab & Wallace, 1974) and by the development and continuing refinement of a theoretical model (Dreher, 1981; Dyer & Theriault, 1976; H. Heneman, 1985; Lawler, 1971; Weiner, 1980). Pay satisfaction is also a topic of importance to pay administrators as it has been shown to be related to turnover, absenteeism, and union vote (H. Heneman, 1985).

Researchers have identified a variety of potential determinants of pay satisfaction, including the perceived adequacy of pay-system administration (Dyer & Theriault, 1976). One component of the perceived adequacy of pay-system administration may be the extent to which pay is perceived

The authors would like to thank Herbert G. Heneman 111 and two anonymous reviewers for their helpful comments on earlier drafts of this paper and Rick Johnson for his assistance in collecting the data.

Correspondence and requests for reprints should be addressed to Robert L. Heneman, Faculty of Management and Human Resources, The Ohio State University, 356 Hagerty Hall, 1775 College Road, Columbus, OH 43210-1399. COPYRIGHT @ 1988 PERSONNEL PSYCHOLOGY, INC.

745

746 PERSONNEL PSYCHOLOGY

to be based upon performance. Although the relationship between pay-for- performance perceptions and pay satisfaction has been documented in a number of different studies (Carroll, 1973; Carroll & Nash, 1973; Carroll & Tosi, 1973; Kopelman, 1976; Miceli & Near, 1987; Penner, 1966), all of these studies are somewhat flawed because they either used a single-item measure of pay-for-performance perceptions, they treated pay satisfaction as a unidimensional construct, or they failed to control for characteristics of the employee and job. In contrast, the present study uses a multi- item measure of pay-for-performance perceptions, treats pay satisfaction as a multidimensional construct, and controls for the effects of employee performance, tenure, salary level, salary increase, job satisfaction, and promotions.

These methodological refinements make it possible to test the sugges- tion offered by H. Heneman and Schwab (1985) that different sets of factors predict the facets of pay satisfaction more or less well. In the present study, the effects of one factor, pay-for-performance perceptions, on satisfaction with one facet of pay satisfaction, pay raise, was examined. The present study also takes this argument by Heneman and Schwab one step further. It is suggested that while pay-for-performance perceptions will have the strongest association with satisfaction with pay raise, pay-for-performance perceptions will also be related to other facets of pay satisfaction, including pay level, benefits, and structure/administration.

The specific interest in pay satisfaction can be traced to Lawler (1971), who set forth a discrepancy model of pay satisfaction. According to this model, pay satisfaction is a function of the perceived amount of pay that should be received less the perceived amount that is received. These perceptions are thought to be determined by a variety of actual and perceived characteristics of the employee and job. Characteristics of the employee include job performance and tenure, whereas characteristics of the job include the level of difficulty and amount of responsibility.

This model subsequently has been refined in at least two ways. The first refinement was suggested by Dyer and Theriault (1976). Their proposal, based on the work of Goodman (1974), was that pay satisfaction would be influenced by perceptions of the perceived adequacy of pay-system administration. Adequacy of pay-system administration was defined as employee perceptions concerning the appropriateness of pay criteria, understanding of pay criteria, accuracy of performance assessment, and adherence to pay policies or contracts. The modified discrepancy model of pay satisfaction received empirical support in studies conducted by Dyer and Theriault (1976) and Weiner (1980). In both of these studies a significant amount of pay-satisfaction variance was explained by the variables assessing the perceived adequacy of pay-system administration. In support of the revised discrepancy model, the perceived adequacy of pay-system administration

ROBERT L. HENEMAN ET AL. 747

explained a significant amount of variance in pay satisfaction in addition to the variance accounted for by the original discrepancy model of Lawler (1971).

Second, H. Heneman and Schwab (1975) suggested that pay satisfaction was a multidimensional construct. In previous (and some subsequent) research, pay satisfaction had been treated as a unidimensional construct. Empirical research conducted by H. Heneman and Schwab (1985) indicates that pay satisfaction has four subdimensions. These subdimensions are labeled as satisfaction with pay level, pay structure/ administration, pay raises, and benefits. Satisfaction with pay level is the perceived satisfaction with direct wages or salaries, whereas satisfaction with pay raises refers to perceived satisfaction with changes in pay level. Satisfaction with structure/ administration is defined as perceived satisfaction with the internal pay hierarchy and with the methods used to distribute pay. Satisfaction with benefits concerns perceived satisfaction with indirect payments to the employees.

Three issues concerning the revised discrepancy model of pay satisfaction were investigated in the present study. First, one important element of employee perceptions concerning the perceived adequacy of pay-system administration was the extent to which pay is perceived by employees to be linked to performance. For example, when pay-for-performance plans such as merit pay are properly administered, they have been shown to be related to high motivation, performance, and job satisfaction (R. Heneman, 1984). As a result of these relationships, many organizations have implemented .innovative compensation plans where pay is tied to performance (O’Dell, 1986).

At a theoretical level, there should be a positive relationship between pay-for-performance perceptions and pay satisfaction. To the extent that performance is perceived by employees as being instrumental to the at- tainment of a valued outcome such as pay raise, then pay satisfaction should be increased (Lawler, 1971). The empirical research has confirmed this positive relationship between pay-for-performance perceptions and pay satisfaction (Carroll, 1973; Carroll & Nash, 1973; Carroll & Tosi, 1973; Kopelman, 1976; Miceli & Near, 1987; Penner, 1966). Caution should be exercised, however, in interpreting this positive relationship. The empirical studies have relied upon a one-item measure of pay for performance. Consequently, the reliability of pay-for-performance measures is uncertain. Given this consideration a multiple-item measure of pay for performance was utilized in the present study, and it was hypothesized that pay-for- performance perceptions would have a positive impact on overall pay satisfaction.

The second issue investigated in the present study was the relationship between pay-for-performance perceptions and the subdimensions of pay


satisfaction identified by H. Heneman and Schwab (1985). For obvious reasons, pay-for-performance perceptions would be expected to be directly related to pay-raise satisfaction. These perceptions might also, however, be positively associated with the other dimensions of pay satisfaction. Specif- ically, there may be a relationship with pay-level satisfaction because in many organizations salary increases for performance in one year are built in to the base salary for subsequent years. In addition, pay-for-performance perceptions could be related to the structure/ administration facet of pay satisfaction because Performance is often used as a criterion to move employees within salary grades, and this criterion may or may not be preferred by employees as the basis for the allocation of pay in comparison with other potentially valued criteria such as seniority. Finally, pay-for-performance perceptions may be related to satisfaction with benefits in that it may take fewer benefits of lesser value to satisfy an employee when performance is high and pay raises are large. Hence, it was hypothesized that while pay for performance would be most highly related to pay-raise satisfaction, pay-for-performance perceptions would also be significantly related to pay level, benefits, and structure/ administration satisfaction.

The final issue considered was the impact of other independent variables on pay satisfaction. The literature on pay satisfaction (see H. Heneman, 1985, and Schwab & Wallace, 1974 for reviews) consistently shows neg- ative relationships with tenure and performance and positive relationships with salary level, salary increases, and job satisfaction.

It is also expected that there will be a positive relationship between promotions and pay satisfaction. A promotion should lead to a higher salary, which in turn should produce greater pay satisfaction. The previous literature has not considered these variables as covariates in the analysis of the relationship between pay-for-performance perceptions and pay satisfaction. In the present study, tenure, supervisor’s ratings of subordinate performance, salary level, salary increase, job satisfaction, and promotions are treated as control variables in the analysis. On the basis of findings in previous research conducted by Dreher (1981), it is expected that pay-for- performance perceptions will explain a significant and unique amount of the variance in pay satisfaction above that accounted for by these control variables.

Method

Setting

The data were collected from full- and part-time employees in a midwestern hospital. All of the perceptual measures were gathered as a special one-time research project. The performance ratings were also collected only


for the purposes of this research project and were reported by the subjects’ immediate supervisor. The sample was a convenience sample based upon voluntary participation of the subjects. Salary and promotion data were retrieved from a computer tape in payroll services. Tenure, age, education, and department data were self-reported by the subjects on the questionnaire as part of the research project. Salary increases in the hospital were, by informal policy, based upon performance, seniority, occasional market sur- veys, cost of living, and promotions. This policy was neither written nor enforced. The organization had no formal pay grades.

Sample

The data were collected from 104 employees in a midwestern hospital. The sample consisted of 28 men and 76 women. The modal education category was “high school plus some college,” and mean tenure with the hospital was 6.73 years. Mean age was 36.9. The following four departments had the largest number of subjects: administration, medical records, dietary, and home health. The overall response rate for the perceptual measures was 25%. The response rate for these four departments with the largest number of subjects was as follows: administration (42%), medical records (61%), dietary (24%), and home health (71%). Occupations in the sample included nursing personnel, administrators, managers, dieticians, and technical staff.

Measures

The dependent variable, pay satisfaction, was measured using the Pay Satisfaction Questionnaire (PSQ; H. Heneman & Schwab, 1985). This measure consisted of four subscales measuring satisfaction with pay level, benefits, pay raise, and pay structure/ administration. The coefficient alpha reliability estimates for these subscales ranged from .81 to .95 for a sample of white-collar employees and a second sample of nurses (H. Heneman & Schwab, 1985). Similar estimates of reliability were reported for four man- ufacturing plants and a nursing home by Scarpello, Huber, and Vandenberg (1988). An overall pay-satisfaction measure was obtained by summing the scores of each subscale.

Pay-for-performance perceptions were measured using a four-item scale adapted from Perry and Pearce (1983). The following items were used “If I perform especially well on my job, it is likely that I would get a pay raise,’’ “The pay raises that I receive on my job make me work harder,” “The best workers in the hospital get the highest pay raises,” and “High performers and low performers seem to get the same pay raises.” A 5-point scale was


attached to each item with values ranging from 1 = “strongly disagree” to 5 = “strongly agree.” The fourth item was reverse scored.

Employee performance was measured using a nine-item scale completed by the supervisor. Supervisors rated the performance of each subordinate on the following dimensions: quality, quantity, following of procedures, ability to help others, ability to get along with others, productivity under pressure, acceptance of responsibility, adaptation to different situations, and overall performance. The 5-point scale was anchored by “poor” at the low end and “excellent” at the high end. The nine items were summed to obtain a single performance score. In a previous study the coefficient alpha for this measure was .81 for a sample of employees from 37 organizations (R. Heneman,.Greenberger, & Anonyou, in press).

Tenure was measured as the number of years with the organization since the date of hire. Salary level was measured as the total salary, excluding benefits, in 1985. Salary increase was measured as the percentage change in salary level from 1984 to 1985. Job satisfaction was measured using the Short Form of the Minnesota Satisfaction Questionnaire (Weiss, Dawis, England, & Lofquist, 1967). These authors reported Hoyt reliability coef- ficients ranging from .87 to .92 for seven different samples. Promotions were dummy coded with a value of “1” assigned to those employees who were promoted.

Analysis

Given the inconsistency of the PSQ factor structure across organizations (Scarpello et al., 1988), a factor analysis was conducted for the PSQ items. The SPSSX Factor program was used with an oblique rotation. The skree test suggested a four-factor solution (all four factors had eigenvalues greater than .97). Individual items retained for each factor had factor loadings greater than .45. Coefficient alphas were calculated for each factor as a measure of internal consistency.

Next, the data were analyzed using multiple regression (Cohen & Co- hen, 1975). The dependent variables in the analysis were overall pay satisfaction, pay-level satisfaction, benefits satisfaction, pay-raise satisfaction, and pay-structure/ administration satisfaction. Each dependent variable was regressed upon the following independent variables: pay-for-performance perceptions, performance, salary level, salary increase, tenure, job satisfaction, and promotion. In order to assess the contribution of the pay-for- performance measure, a series of step-wise regressions were performed. The control variables (performance, salary level, salary increase, tenure, job satisfaction, and promotion) were entered first, followed by the pay- foi-performance measure along with the control variables. The change in R2 was then assessed.

ROBERT L. HENEMAN ET AL. 75 1

TABLE 1 Factor Analysis Results for the PSQ

Factor Structure/

Items Level Benefits Administration Raises

1. My take-home pay 2. My benefit package 3. My most recent raise 4. Influence my supervisor

has on my pay 5. My current pay 6. Amount the corn any pays

toward my beneis 7. The raises I have typically

received in the past 8. The company’s pay structure 9. Information the company gives

about pay issues of concern to me

10. My overall level of pay 11. The value of my benefits 12. Pay of other jobs in the

13. Consistency of the company’s

14. Size of my current salary 15. The,number of benefits I

16. How my raises are determined 17. Differences in pay among jobs

18. How the company administers

company

pay policies

receive

in the company

* Pay Eigenvalues % Total variance

.92

.I0

.55 -

.%

-

.22

-.I2

.46 -

.27

.24

- .02

-.14

.09

.86 -

.oo

.I6

-.I5

.42

8.05 44.70

.93 -

- .06 .9 - 1 .28

- .04 .03

.86 -

.23

.05

.22

.oo

.=

.07

.09 - .09

.97 - - .02

.oo -.11

3.24 18.00

.06

.04

.I4

- .04 .02

.o 1

.03

.62 -

.54 -.01 - .oo

.86 -

.80 - - .02

- .03 .37

.79 -

.64 - 1.94

10.80

-

.oo - .08

.I7

.83 - - .02

.08

.46 -

.I9

.I5

.07 -.01

.oo -.I7

.20

- .06 .66 - .30

- .25

.97 5.40

Note: N = 104. Highest loading for each row is underlined.

Results

The results of the factor analysis for the PSQ are shown in Table 1. On the basis of the skree test, a four-factor solution was retained. The four factors all had eigenvalues greater than .97. On the basis the .45 decision rule for factor loadings, all 18 items were retained. The first factor, Pay Level, was defined by items 1, 3, 5, 10, and 14. The second factor, Benefits, was defined by items 2, 6, 11, and 15. The third factor, Structure/Administration, was defined by items 8, 9, 12, 13, 17, and 18. The fourth factor, Pay Raise, was defined by items 4, 7, and 16. These factors were similar to those found by H. Heneman and Schwab (1985) for their sample of nurses.


The means, standard deviations and coefficient alphas for all the variables are shown in Table 2. The low intercorrelations among the predictor variables suggests that multicollinearity is not a problem. As shown in Table 2, the coefficient alphas for all the PSQ dimensions and the overall pay-satisfaction measure were all greater than 30. The internal consistency estimate of the pay-for-performance measure was adequate (a = .71). In addition, the internal consistency of the nine item performance measure was high (a = .93). The internal consistency of the job satisfaction measure was also high (a = .91).

The multiple regression results are shown in Table 3. As predicted and shown in the first row, pay-for-performance perceptions had a significant (p < .Ol),relationship with two subdimensions (i.e., level and raises) of the PSQ as well as the overall PSQ. Also, the relative size of the pay- for-performance effects was as expected. The size of the beta coefficient for pay for performance was largest for pay raises (.74) followed by level (.59), structure/administration (.34), and benefits (- .02). The results of the stepwise regressions, where the characteristics of the individual were entered first as control variables, are shown in Table 4. For three of the dependent variables (level, raises, and overall pay satisfaction), the results were as predicted. As indicated by the significant changes in R 2 , pay- for-performance perceptions explained an additional amount of variance in pay-level satisfaction, pay-raise satisfaction, and overall pay satisfaction in addition to the variance accounted for by salary level, salary increase, supervisor ratings of subordinate performance, job tenure, job satisfaction, and promotions.

Discussion

The results of the present study bear on several conceptual issues concerning pay satisfaction. H. Heneman and Schwab (1985) argued that variables believed to be related to pay satisfaction may not correlate equally well with each facet of pay satisfaction. Some support was found for this argument. In the present study, it was shown that one variable previously shown to be related to pay satisfaction, pay-for-performance perceptions, had a larger beta weight for pay-raise satisfaction than for other facets of pay satisfaction or overall pay satisfaction. Future researchers might look at other variables that may be differentially related to the various facets of pay satisfaction. For example, in the present study, there was a nonsignificant relationship between pay-for-performance perceptions and benefits satisfaction. In order to gain a better understanding of benefits satisfaction, future researchers might construct a specific measure of the extent to which employees perceive that benefits granted by an organization meet their individual needs.

TABL

E 2

Mea

ns, S

tand

ard

Dev

iatio

ns, R

elia

bilit

ies,

and

Int

erco

rrel

atio

ns fo

r In

depe

nden

t and

Dep

ende

nt V

aria

bles

1 2

3 4

5 6

7 8

9 10

11

12

n

Pred

icto

rs

m r

Var

iabl

e X

SD

8

1. P

ay-fo

r-pe

rfor

man

ce

2.35

.8

4 (.7

1)

rl 2.

Sal

ary

leve

l 15

903.

30 8

202.

04 -.04

(-)

3. S

alar

y in

crea

se

8.17

7.

72

.09

.08

(-)

t 4.

Per

form

ance

3.

84

.62

.05

.43*

* .0

2 (.9

3)

6. J

ob s

atisf

actio

n 3.

74

.65

.45*

* .2

3*

.I3

.26*

* -.

01

(.91)

5.

Ten

ure

6.73

6.

21

-.02

.33*

* -.2

1*

.01

(-)

I 7.

Pro

mot

ion

.I4

.35

.I 1

.37*

* .1

9*

.29*

* .2

8**

.18*

( - )

z

3.29

.9

1 .3

0**

.08

-.13

.26*

.0

9 .2

8*

.01

.27*

(.9

4)

> r 2 PS

Q

8. L

evel

2.

92

1.08

SO

**

.I5

.I3

,I 1

.08

.58*

* .0

1 (.9

4)

9. B

enef

its

10. R

aise

s 2.

75

.90

.59*

* .I

5 .2

3*

.I2

.I6

.47*

* .I

0 .7

5**

.32*

* (.8

5)

11.

Stru

ctur

e/A

dmin

istra

tion

2.77

.7

3 .4

6**

-.I2

-.0

5 .1

3 .I

2 .3

9**

-.07

.60**

.40*

* .5

9**

(.88)

12

. Ove

rall

2.88

.7

0 .6

5 **

- .02

.1

8 .09

.04

.54*

* .0

5 .8

6**

.54*

* .8

1 **

.86*

* (.9

2)

Nor

e: R

elia

bilit

ies

in d

iago

nal;

N =

104

. *

p<

.05

; **

p<

.Ol.


TABLE 3 Multiple Regression Results

Pay satisfaction Structure/

Independent variables Level Benefits Raises Administration Overall

Pay -for-Performance .59** -.02 .74** .34 .57** (.22) (.19) (.18) (.28) (. 13)

Salary level .30 -.65 .I0 - .28 -.13 (.W (.W (W (.W (.W

Salary increase .oo - . I 1 .09 - .01 -.01 (.02) (.02) (.02) (.02) (.01)

Performance .I2 .31 .16 -.01 .I9 (.20) (.26) (.26) (.26) (. 17)

Job tenure .08 .03 .12 .14 -.13

Job satisfaction .23 .44* .18 .I7 .33* (.36) (.30) (.30) ~ 3 0 ) (.20)

Promotion - .26 .01 -.21 -.14 - .22 (.38) (.32) (.32) (.32) (.21)

(.30) (.03) (.03) ~ 0 3 )

R a SO** .38** .66** .41** .63**

Nore. Standardized beta values shown; standard errors in parentheses; N = 104. * p<.05; ** p<.O1.

In addition to providing some support for the argument offered by H. Heneman and Schwab (1983, the results of the present study take this argument one step further. It was shown that not only were pay-for-performance perceptions related to pay-raise satisfaction, they were significantly related to pay-level satisfaction. This finding makes sense in the context of the studied organization because pay raises, which were, in part, to be based upon performance, were built into the base salary. Hence, one would ex- pect that perceptions about pay for performance for pay raises would carry over to pay levels as well . This finding suggests that in developing specific measures believed to be related to a particular facet of pay satisfaction, as suggested by H. Heneman and Schwab (1985), attention also needs to be given to the interdependent nature of the facets of pay satisfaction relative to these specific measures.

The importance of individual perceptions, in comparison with actual characteristics of the employee and job, in influencing pay satisfaction was emphasized by Dreher (1981). The results of the present study reinforce this conclusion. It was shown that little variance was explained in overall pay satisfaction or facets of pay satisfaction by more objective measures like salary level, salary increase, performance ratings, tenure, and promotions. However, a significant amount of variance was explained in overall pay satisfaction and two facets of pay satisfaction by pay-for-performance


TABLE 4 R’ Values for Step-wise Regressions

Pay satisfaction Structure/

Independent variables Level Benefits Raises Administration Overall

Control variables .35* .3n* .4 1 * .35* .4n** Pay-for-performance and

control variables so** .3n* .66** .41** .63**

AR’ .IS** .oo .25** .06 .IS**

Nore: Control variables include salary level, salary raise, performance, tenure, job satisfac-

*p< .05; **p< .01. tion, and promotion: N = 104.

perceptions. While actual characteristics of the employee and job should be included as control variables in the study of pay satisfaction, the data in the present study suggest that perceptions concerning various aspects of pay-system administration deserve to be given greater attention than they have in previous research.

The results of the present study also relate to the measurement of pay- for-performanee perceptions and pay satisfaction. In previous research, a positive relationship was reported between pay-for-performance perceptions and overall pay satisfaction (Carroll, 1973; Carroll & Nash, 1973; Carroll & Tosi, 1973; Kopelman, 1976; Miceli & Near, 1987; Penner, 1966). Concern was expressed in the present study that these significant relationships might be attributable to the use of single-item measures of pay for performance and a unidimensional measure of pay satisfaction. The results show that the relationship between pay-for-performance perceptions and overall pay satisfaction holds up when a multi-item measure of pay for performance with adequate internal consistency (.71) is used and when a multidimensional measure of pay satisfaction (the PSQ) is used.

Some further evidence of the construct validity of the PSQ was also presented. Four factors similar to those identified by H. Heneman and Schwab (1985) emerged from data in the present study. The reliabilities of these scales were fairly high, with coefficient alpha estimates of reliability ranging from .85 to .94 for the four facets of the PSQ. Coefficient alpha for the overall measure of pay satisfaction was .92. Item No. 7 (“raises I have typically received in the past”) loaded equally well on both Pay-Level and Pay-Raise factors. According to Scarpello et al. (1988), who found that Item No. 7 loaded on the Pay-Level factor, this might be expected because this item emphasizes an outcome frame of reference like the other items on the Pay-Level factor (e.g., my overall pay). In the present study, Item No. 7 was retained on the Pay-Raise factor because the theory behind pay satisfaction indicates that this is a pay-raise item (H. Heneman & Schwab, 1975; 1985).


In terms of practice, two issues arise concerning the administration of pay in the organization studied. First, actual pay level and pay raises were not significantly related to pay-level satisfaction, pay-raise satisfaction, or overall pay satisfaction. These nonsignificant findings may be due to the absence of pay grades in the studied organizations. Without pay grades, individuals may not be capable of gauging their satisfaction with actual pay because they have little information with which to compare their actual pay to the actual pay of others. Pay grades are typically established on the basis of an internal evaluation of the worth of jobs to the organization and an external survey of the worth of these jobs in the relevant labor markets. If pay grades had been established and communicated to employees, then there may have been a stronger relationship between actual pay and pay satisfaction because employees could more easily compare their pay with the pay of others.

Second, the studied organization had a loosely stated and administered pay policy. As a result, the correlations between factors to be used to determine salary increases (performance, tenure, and promotion) and actual salary increases were somewhat low (.02, .21, and .19, respectively). In response to the low correlation between performance and salary increases, the organization is now considering the development of a formal merit pay plan.

The results of this study should be viewed in the context of five potential limitations. First, the organization used in this study did not have a formal pay-for-performance plan. Hence, the results of this study may not generalize to other settings that do have pay-for-performance plans or other formal plans (e.g., seniority-based plans or mixed plans). These findings need to be replicated in an organization with a formal pay-for-performance plan. However, this study does suggest that even in organizations that do not have formal pay-for-performance plans, employees are able to gauge their feelings about pay for performance and that these feelings are related to their satisfaction with pay.

Second, the potential for common method variance is present in this study. Pay satisfaction and pay-for-performance perceptions were measured on the same questionnaire. In order to minimize this threat, more objective predictors (e.g., actual salary level) were included. Also, the loosely stated and administered policy concerning pay increases made it possible for a wide variance in pay-for-performance perceptions. As a result of this policy, it is possible that the pay-for-performance variance is due to characteristics of the pay system rather than to characteristics of the questionnaire. Although the common method variance explanation cannot be totally ruled out, it appears that common method variance may have been minimized as indicated by the nonsignificant beta for pay-for-performance perceptions in predicting benefit satisfaction.


Third, the causality between pay satisfaction and pay-for-performance perceptions may be questionable. It is possible that a third variable causes both pay satisfaction and pay-for-performance perceptions. In order to minimize this possibility, one such third variable, job satisfaction, was included in the present study. Pay-for-performance perceptions were significantly related to pay satisfaction even when job satisfaction was controlled.

Fourth, the characteristics of the present sample may limit the general- izability of the results. However, as pointed out by Schwab et al. (1988), sample and pay-system characteristics from pay-for-performance studies are almost always idiosyncratic to the studied organization. As a result, Schwab et al. (1988) suggest that studies such as the present one should be conducted so that our knowledge of pay-for-performance systems can be increased by accumulating results across organizational settings.

Fifth, given the low response rate (25%) in this study, the results may be a function of selection bias. As a check on this possibility, the sample was split into high and low performers at the median performance rating. Correlations were then calculated between pay-for-performance perceptions and the five measures of pay satisfaction (i.e., level, benefits, raises, structure/ administration, overall). The median correlation for high performers was .46. The median correlation for low performers was 3. These results suggest that if a large number of the nonrespondents had been low performers and had been included in the sample, then the magnitude of the relationship between pay-for-performance perceptions and measures of pay satisfaction might have been greater than reported in the results. One

I explanation for the magnitude of the differences between high and low performers may be the actual pay practices. The correlation between rated performance and salary increase was very low (.02) and nonsignificant. To the extent high and low performers received the same pay raise, high performers may have been less satisfied with the loose administration of the policy that pay was to be based in part on performance. Some support for this explanation may exist in the beta value of .01 between performance and satisfaction with structure/ administration.

In conclusion, the results of the present study provide further evidence of a positive relationship between pay-for-performance perceptions and pay satisfaction. In addition, the results provide a more complete look at this relationship. Pay-for-performance perceptions were found to be significantly related to pay-raise satisfaction, pay-level satisfaction, and overall pay satisfaction but not significantly related to benefits satisfaction or structure/ administration satisfaction. It is suggested that compensation researchers and administrators develop specific measures for perceived characteristics of the pay system believed to have differential relationships with the subdimensions of pay satisfaction.


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Documents

THE RELATIONSHIP BETWEEN PAY-FOR-PERFORMANCE PERCEPTIONS AND PAY SATISFACTION