Management Accounting Section Midyear Meeting

The Effect of Pay Dispersion Reduction Explanation on Fairness and Effort of Lower- and Higher-Paid Employees

• In Event: Control Systems (Experimental) II

Abstract

We examine the effect of management’s explanation of pay dispersion reduction on perceived fairness and effort exerted by lower- and higher-paid employees. We find that lower-paid (higher-paid) employees perceive pay to be more (less) fair and increase (decrease) their effort following pay dispersion reduction. In addition, we find that management’s explanation (communication) of the reason behind the pay change – namely, reduction in pay dispersion – increases effort for both lower- and higher-paid employees, relative to the efforts under the no explanation condition. This result is supported by increased perceptions of managerial credibility affecting pay fairness, which leads to greater effort. However, we find that the beneficial effect of managerial explanation does not hold for participants from Chinese-influenced locations (Taiwan and mainland China), but rather flips such that the dispersion-reduction explanation of pay change does not result in greater perceived fairness but results in reduced effort across both lower- and higher-paid employees. This latter finding highlights the potential for responses to pay dispersion and its reduction to depend on cultural norms. Overall, this study contributes to our understanding of the effect of relative pay changes and managerial communication of the reason behind pay change on employee perceptions and actions.

Authors

• Hsihui Chang, Drexel University

• Lei (Tony) Chen, Peking University

• Dhinu Srinivasan, University of Pittsburgh

• Todd A Thornock, University of Nebraska-Lincoln