Psychological perspectives on performance-based compensation : Implications for work-related and health-related outcomes

Abstract: In the past decades, the contributions of individuals have come into greater focus on all levels of employment in many types of organizations. For example, this is manifested through an increased use of individual performance-based pay setting, where individual evaluations of employees’ contributions lead to diversified pay raises among peers. The reasons for using such a pay system include that it is expected to motivate better performance and inspire those who perform well to remain with the organization. Criticism of this type of pay system, however, has come from a motivation theory perspective, for example, along with assertions that it is too resource intensive. The general aim of this dissertation was to contribute to the present research regarding how pay-related perceptions relating to these pay systems may encourage work and employees’ well-being. Study I aimed at investigating how various aspects of individual performance-based pay setting (instrumentality of the pay system, performance-based pay-raise amount, and procedural pay-setting justice) and various work design factors addressing employees’ psychological needs (feedback, job autonomy, and social support from colleagues) relate to employee task and contextual performance. Results of hierarchical multiple regression analyses supplemented by relative weight analysis showed that the work design factors – especially job autonomy – evidenced stronger positive relations with employee performance. Study II aimed at identifying groups of employees with similar pay-related characteristics and perceptions of pay setting (regarding pay-levels, perceived horizontal pay dispersion, transactional leadership and procedural pay-setting justice) in the Swedish private sector, and then examining the differences between these groups in regard to work-related (task performance and turnover intention) and health-related outcomes (self-rated health and work-related exhaustion). Latent profile analysis identified six distinct groups. A key finding was that groups characterized by perceptions of low horizontal pay dispersion who also experienced a high pay-setting quality (referring to high levels of transactional leadership and procedural pay-setting justice) – and by high procedural fairness in particular – had the most favorable levels of task performance, turnover intention, and work-related exhaustion. In combination with high pay and high procedural quality, however, high horizontal pay dispersion was associated with fairly decent outcomes, especially in regard to health. Study III aimed at compiling research, especially from a self-determination theory perspective, that concerned how work-related reward systems might encourage work and well-being in organizations by influencing employees’ psychological need satisfaction and motivation types (e.g., autonomous work motivation). It was argued that organizations should lower the saliency of monetary rewards. Instead, they need to design the work, within the limits of the context in which they operate, such that autonomous work motivation is encouraged, thus bringing about maximum well-being and high-performance outcomes. In general, the dissertation maintains that successful individual performance-based pay-setting systems require accurate administration. If not, they may run the risks of discouraging performance, decreasing retention, and lowering employees’ well-being.