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Pay Satisfaction and Impact on Employees

PAY SATISFACTION AND ITS IMPACT ON MOTIVATION AND GOAL COMMITMENT OF EMPLOYEES

A Dissertation

Submitted to Dr. Bruce Rayton of the

School of Management, University of Bath, UK

As a compulsory requirement for the Masters Degree

in

Management with Human Resource (CIPD)

by

Masroor Ahmed Siddique

September, 12 2008

Chapter 1

Introduction

1.1. Overview

The theme of this research topic revolves around the main stream issue of understanding human attitudes and behaviours in Human Resource Management (HRM hereafter) literature. Certainly there are many works which discusses it (Arnold, J., Silvester, J., Patterson, F., Robertson, I., Copper, C. & Burnes, B., 2004; Lawler, 1981; Schwab & Wallace, Jr., 1974; Weiner, 1980). Many researchers share a common view point that monetary incentives work as a mediator for motivation and helps increasing the overall performance of employees, but there is a very little understanding as to how these two variables interact in determining the performance (Wright, 1992). This argument is further strengthened by Igalens & Roussel (1999), who believed that regardless of the difference of opinion concerning the nature and measurement of the relationship among components of compensation, job satisfaction and work motivation, the existence of this relation is reasonably eminent and inevitable.

Compensation systems serve as a decisive factor among the compensation policies of an organization and the behavioural upshots of employees (Lawler, 1981). In the past few years pay satisfaction has received considerable amount of attention (Heneman & Schwab, 1985; Heneman, Greenberger & Strasser, 1988; Judge & Welbourne, 1994) but it still lacks enough empirical findings to support its relationship with the motivation and goal commitment of employees. Most of the research up till now focuses on the determinants of pay satisfaction or the measurement of the construct, but with numerous impending imperative consequences for organizations and their employees, the lack of research on the impacts of pay satisfaction on employee motivation and goal commitment is quite noticeable (Faulk II, 2002; Tremblay, Sire & Balkin, 1999; Jones & Wright, 1992). For further research and practice in this regard there is a need to examine the affects of pay satisfaction on other behavioural variables.

Miceli & Lane (1991) defined pay satisfaction as the overall feel of comfort towards the pay package, but regardless of this simple definition researchers like Heneman (1985), Heneman & Judge (2000) and Miceli & Lane (1991) reveal disagreement regarding construct formulation. The dimensionality of pay satisfaction construct is long been argued, according to some researchers it is unidimensional (Miceli, Near & Schwenk, 1991; Orpen & Bonnici, 1987) but most of the researchers support its multi-dimensional nature; e.g., Heneman & Schwab (1985) and Judge (1993) argued about the four facets of PSQ; while others support both four and five factors based on the job classification (Scarpello, Huber & Vandenberg, 1988), further Carraher (1991) in his findings mentioned that both individual cognitive factors and contextual factors influence the perceived dimensionality of pay satisfaction. Despite the efforts been made in order to investigate and determine the true dimensionality of the pay satisfaction, the problem has not yet been rectified; though it might be an evocative pursuit to illuminate the mystifications surrounding dimensionality of PSQ, but the importance of pursuing this line of research is pretty disputed (Faulk II, 2002). He further mentioned that Heneman & Judge in their most recent inclusive literature asks for putting a halt on pay satisfaction dimensionality research and suggest moving the focus away from probing factor structure and scale inter-correlations to investigating the relationship of this construct with other attitudinal variables. A high precedence in literature was given to the identification of pay satisfaction outcome linkages so that the future research would be of real importance to organizations. In line with the above mentioned argument there are number of researches which aim to explore the relationship of monetary incentives with employee motivation, improved performance (Bonner & Sprinkle, 2002; Herpen, Praag & Cools, 2005; Kuvaas, 2006) and goal commitment (Wright, 1992; Riedel, Nebeker & Cooper, 1988).

The equity and discrepancy based models are relatively silent on the fact that how motivation and commitment of employees can be affected by pay dissatisfaction (Heneman & Judge, 2000); hence, there is a need to further explore these areas. This dissertation will critically analyse the affects of variation in the pay and incentive system on the motivation and commitment of employees toward accomplishing the perceived company goals. It focuses on the psychological problems that arise from the monetary affects of incentives on the overall performance and attitudes of employees.

1.2. Objectives of Study

The objectives of the study are:

To determine if there is a relationship between the satisfaction generated by pay and the employee motivation.

To determine if there is a relationship between the monetary incentives and the commitment of employees to company perceived goals.

To determine if there is a relationship between motivation and goal commitment of employees.

To determine the impact of pay satisfaction on employee motivation.

To determine the impact of pay satisfaction on employee goal commitment.

To determine the impact of motivation on employee commitment.

To determine the impact of socio-demographic variables on pay satisfaction, motivation and goal commitment of employees.

1.3. Overview of chapters

This dissertation comprises six chapters.

Chapter 1: Chapter one provides an overview of the determinants and dimensionality of pay satisfaction construct and the need to look at its relationship with motivation and goal commitment of employees secondly, it talks about the aims and objectives of the study.

Chapter 2: Chapter two is the Literature Review section in which the explanatory research on the three key areas: Determinants of pay satisfaction, Theories about work motivation of employees and Goal Commitment was undertook. The literature review includes an assessment and investigation of conjectural foundations surrounding each research component. Propositions were then constructed based on these sections to further illuminate my stance. These propositions are then combined into a meaningful sequence to form the base and to substantiate the hypothesis formulation. The testing of hypothesis will be exploratory, where its validity and limitations will be explicated.

Chapter 3: Chapter three presents the Methodology and Research Design, it will explain the various philosophies, approaches, techniques and strategies employed and their rationale. This section further discusses the definitions and constructs used for the measurement of variables.

Chapter 4: Chapter four will present the results of statistical analysis required to validate/refute the propositions and hypothesis. This chapter proceeds with an analysis of descriptive and inferential statistics on the variables under consideration.

Chapter 5: Chapter five presents the Discussion section; it will explain the results in further detail and where needed the concerning literature is also integrated. Moreover, the limitations of the study and findings on the base of the data gathered are discussed in this chapter.

Chapter 6: Chapter six is the Conclusion where implications for the future research on related areas will be addressed and the chapter concludes with recommendations.

Chapter 2

Literature Review

The aim of this chapter is to essentially evaluate the relevant theories and research to provide an informed and detailed basis of the research question. The chapter proceeds with a profound presentation of pay satisfaction constructs, different pay satisfaction models and related theories. Further it will try to explore the relationship and affects monetary incentives could have on the motivation and commitment of employees through describing various motivational theories presented by different researchers in the literature. Given the focus of this study it is important to have a sound understanding of the meaning of motivation and commitment, as often they are used interchangeably, but the literature indicates that they are unique and different in nature.

2.1. Overview

In today's business world there are number of ways in which the people can influence different aspects of organizational performance. Organizational strategies are conceived and implemented by people, while the mix of systems and employees determine the strategy, which is needed for an organization to be competitive in the business environment. Competencies are needed for the successful execution of business strategy and the formulation of the organization human capital is based on those competencies. A motivated and committed work force is exceptionally beneficial for any organization so it is very important for an organization to be aware of its employee's needs and what it is that motivates them to work hard and to reveal their maximum potential (Lawler, 2003).

It was not long when employees in the retail sector were considered as disposable resources that were hired and laid off according to the business needs, but with the growing focus on the human behaviour there is a need to understand the impact of pay administration on individual and organizational effectiveness. Following the above mentioned argument Harris (1996) stated that with the passage of time the rules in the workplace have been modified and the realities of yesterday does not exist anymore, which affects both employee and company perceptions regarding the commitment and motivational needs.

Beer, Spector, Lawrence, Mills & Walton (1984) mentioned about the phenomenon of change in the business environment, they supported the fact that in the past few decades there has been a radical change in the organizational policies and strategies. They further added that in order to satisfy all the stakeholders the top management must be able to establish a strategy which can be beneficial to both the organization and its employees. Organizations expect their employees to work hard, achieve the assigned goal in a reliable manner and to be responsive to the business needs, but this can only be possible if the workforce is satisfied, motivated and committed enough to complete the task as required. Similarly, employees expect the organization to treat them fairly and reward their efforts appropriately and in order for organizations to deal with employee expectations there is a need for them to have an understanding of employee motivation and commitment (Beer et al., 1984).

Faulk II (2002) argued that since the very beginning pay is considered as an important reward in order to incentivise and motivate personnel to work hard, so the satisfaction of individual with pay is of vital importance, as the dissension created by pay dissatisfaction will lead to the lowering of efforts of furthermore quitting the job. Other organizational researchers e.g. Locke, (1976) conjectured that feelings of been treated fairly lead to the satisfactory behaviours towards job and pay and these attitudes impact employee performance within organizations (Judge & Buno, 2001). In the following section the focus will be on the pay distribution models with the impact which each of them can possibly have on other variables (i.e. Motivation and Goal commitment).

2.2. Pay Distribution Models

According to the factsheet of CIPD (March, 2008), pay is one of the most important forms of reward which aims on attracting, retaining and motivating staff. Lawler (1971) stated that an organization can increase the level of motivation through increasing the importance of pay. The ways in which the pay is distributed are important motivational factors and of real importance to organizations, as they impact the overall performance of employees in the business environment (Pfeffer, 1994; O'Reilly, Main & Crystal, 1988). There are various pay distribution models and systems proposed by researchers, which influences the individual and organizational performance in different ways. Two most commonly used models of pay distribution are: Hierarchical Pay Distribution Model and Compressed pay Distribution Model (Bloom, 1999). Both types of models have their own advantages and disadvantages in different business environments.

2.2.1 Hierarchical Pay Distribution Model

In Hierarchical model, the pay distributions are considered as network of incentives that helps attracting the new workforce and motivating the individuals to perform well (Milkovich & Newman, 1996; Milgrom & Roberts, 1992). Hierarchical distributions are expected to raise the employee performance through creating a meritocratic structure, in which rewards for efforts increase monotonically (Zenger, 1992). Furthermore, Bloom (1999) stated that in hierarchical distribution the concentration of pay is relatively among fewer levels, jobs and entities, which are near the top of the cycle. He further added that pay is widely scattered and equality of pay packages is less common across different levels; this inequality of rewards is practiced in order to encourage greater efforts and performance by employees. This view point is further strengthened by Milgrom & Roberts (1992) who believed that this wide distribution span creates a positive link among pay and performance, thus increasing the returns for superior output. Whereas, few researchers (e.g. Pfeffer, 1994; Cappelli & Sherer, 1990) disagree with their point of view, they argued that greater dispersion of pay among levels can create dissatisfaction, weaken individual's performance and increases the susceptibility of leaving the job. Pfeffer (1994) further argued that it may over compensate the individuals near the top of pay distribution which may give an unfair advantage to incumbents at the top positions. These conditions may lead to what is termed as winner takes all, which is considered to both expensive and fallow (Frank & Cook, 1997).

2.2.2. Compressed Pay Distribution Model

In compressed pay distribution, pay is less disseminated and more equally distributed across the different levels, jobs or individuals (Bloom, 1999). He further mentioned that compressed distribution is used in order to promote cooperation, effort and commitment among employees and the major focus is on endorsing high group level performances. Cowherd & Levine (1992) asserts that compressed pay systems cab be extremely useful for enhancing the group performance, as they inspire the feeling of fairness and pursuing the common goal, team oriented behaviours and foster cooperative attitudes. Moreover, researchers believe that compressed distribution helps in reducing interpersonal competition among teams and cultivate perceptions of common destiny (Milgrom & Roberts, 1992). According to Bloom (1999) compressed pay model not only prevents the negative effects of hierarchical pay distribution but also lead to the better organizational performance by creating loyalty and harmonious social relationships among team members. As with the hierarchical distribution, compressed model also have some weaknesses, as mentioned by Ehrenberg & Smith (1994) they believed that compressed pay systems creates a problem of topping out which is when the strong performers reaches at the top (i.e. maximum allowable level) they are expected to seek out and remain at organizations offering more hierarchical pay distributions. They further argue that this model might create a feel of dissonance among the strong performers as they might thought that their efforts are not awarded in a proper manner.

Both Pay distribution models discussed above have their advantages and disadvantages, but the applicability and success of any of them is strictly dependent on the business environment. Depending on the conditions, any of them can cause dissatisfaction among personnel regarding their pay. Pfeffer & Langton (1993) studied the effects of wage dispersion on satisfaction; in the light of empirical finding they argue that greater the degree of wage dispersion the lower is the satisfaction and productivity of individuals. Looking at the above argument it can be deduced that satisfaction with the pay motivates people to work hard and to be more committed.

The following section will focus on the theories proposed by different researchers regarding the satisfaction of individuals with pay and how this satisfaction can be measure with the use of different constructs (i.e. Unidimensional and Multidimensional).

2.3. Pay Satisfaction

Since its introduction into the literature the pay satisfaction construct has received significant amount of attention, although the intellectualization of the construct has modified over the past few decades (Faulk II, 2002). In the following section two general models of pay satisfaction will be discussed along with the modifications made to them, which served as theoretical base for most of the research done on pay satisfaction since Heneman's 1985. This research focuses on two major areas i.e. measurements of pay satisfaction and influences of pay satisfaction on other behavioural outcomes.

2.3.1. Pay Satisfaction Models and Theories

There are number of pay models discussed by researchers in the past; initial research relied on two basic approaches, i.e., equity model (Adams, 1965) and a closely derived, discrepancy model (Lawler, 1971, 1981) to determine the satisfaction level of individuals with pay; these models do distinguish the fact that pay has certain inferences for employee behaviour in organization, but they are unclear about the why aspect. Faulk II (2002) believed that pay satisfaction motivates employees to engage in certain behaviours, but these approaches do not identify which behaviours will be chosen.

2.3.1.1 Equity Model

According to Heneman & Judge (2000) in the equity model, pay satisfaction of individual is dependent on the comparison of ratio between the desired outcome and the effort made by one person with that of another. They further mentioned that pay satisfaction increase with the increase in similarity between the two ratios. Adams (1965) believed that the formulation of equity and inequity is massively dependent on this ratio:

Inequity exists for a person (p) whenever he perceives that the ratio of his outcomes (O) to inputs (I) and the ratio of Other's (o) outcomes to Other's inputs are unequal (Adams, 1965:280)

The equity and inequity formulations are relevant under two broad conditions, one when both personal are in direct exchange with one another and secondly, when both are involved in an exchange relationship with the third party and both compare themselves with each other (Cosier & Dalton, 1983).

Fig.1: Equity theory proposed by Adams (1965)

Source

2.4. Pay Satisfaction and Motivation

Taylor was one of the first few researchers to identify the motivating effects of pay; he anticipated that employees put forward extra efforts on job in order to maximize their financial rewards (Faulk II, 2002). He further mentioned that although, with the emergence of human resource school this argument lost its support, but monetary incentives still remain one of the most elemental ways in which organizations reward their employees. As discussed earlier that despite lot of research that has been done on the pay satisfaction determinants, the way it impacts the human behaviours and attitudes is yet to be explained.

Skinner's (1953) Reinforcement Theory and Vroom's (1964) Expectancy Theory are two of the earliest theories to illuminate the influences of pay satisfaction on human behaviour.

2.3.1. Reinforcement Theory

Reinforcement theory suggests that behaviour is a function of consequences, and there is an enormous chance that individual will repeat the desired behaviour if that behaviour is followed by a positive reinforcement (i.e. reward). Carrying this point forward, Lawler (1971) stated that through the frequent pairing with the primary reinforcers, rewards or pay can act as a general reinforcer, which can stimulate and motivate people to work hard. Faulk II (2002) believed that individual's learning capabilities enhance on the basis of their past experiences, which elucidate them on the basic necessities of life and how can they be satisfied. He further mentioned that monetary incentives are considered as the sine qua non for satisfying the basic human needs (e.g. food & shelter). Moreover, he argued that undoubtedly reinforcement theory does cater with the change in human behaviours due to their past experiences, but do not have a clear stance that how future behaviours can be identified based on the basis of past experiences.

2.3.2. Expectancy theory

According to the industrial researchers, expectancy theory has clearly become the most popular approach to motivation (Locke, 1975). Expectancy theory was proposed by Vroom, it was mainly focused on illustrating the influences of monetary incentives on the future human behaviour. According to expectancy theory there are three factors (i.e. Valance, Instrumentality and Expectancy) which determine the motivation (Vroom, 1964).

A momentary belief concerning the likelihood that a particular act will be followed by a particular outcome (Expectancy).

Judgement regarding the probability of attaining a certain outcome with defined level of performance (Instrumentality).

Affective orientations to a particular outcome (Valence).

Life experiences are the essence of reinforcement theory they are expected as the key determinants which influences the identification of both expectancy and instrumentality, as if an individual has a past experience which lead to such a belief that certain level of effort is required to reach up to given level of performance and that this level of performance helps in producing the required output, then if the outcome is enviable, the person is much likely to repeat that activity to make full use of it (Faulk II, 2002).

2.3.3. Herzberg's Two Factor Theory

Desirability of the outcome is one of the key components which is not coved by either reinforcement theory or expectancy theory

In mid 1980's Heneman & Schwab (1985) on the base of Heneman & Schwab (1979) proposed few modifications to the initial models discussed by Adams (1965) and Lawler (1971), the first modification they suggested was that instead of the unidimensional measure of pay it should be replaced with a multidimensional approach measure the pay level, pay structure, pay raise and pay from benefits; the second modification was to add the pay policies and administration as the determinant of pay

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