How Does Basing a Pay Increase on a Firm-Level Performance Measure Affect Employee Pay Satisfaction? A Value Chain Perspective

• In Event: Pay Increases and Promotions

Abstract

Employers often provide broad pay increases that are not tied to individual performance. Instead, such pay increases are typically either provided unconditionally (e.g., fixed bonus or raise) or tied to risky, firm-level measures of performance such as firm profits (e.g., profit sharing). We investigate whether the structure of a broad pay increase interacts with the type of work employees perform (i.e., their role in the value chain) to influence their pay satisfaction. Drawing on the theory of psychological ownership, we predict that providing an unconditional pay increase improves employee pay satisfaction to a greater extent when employees add value to their firm’s products and services indirectly rather than directly. In addition, we also predict that offering a pay increase conditioned on firm-level performance rather than one that is unconditional leads to smaller improvements in pay satisfaction among workers who add value indirectly but larger improvements among those who add value directly. Via an experiment, we find support for these predictions. We discuss the implications of adopting a “value chain” perspective for incentive contracting.

Authors

• Robert Andreas Grasser, University of South Carolina

• Patrick Ryan Martin, University of Pittsburgh

• Bryan Richard Stikeleather, University of South Carolina