MAGISTERARBEIT

Transcription

MAGISTERARBEIT

MAGISTERARBEIT
Titel der Magisterarbeit
„The Relationship Between Compensation, Performance
Pay and Job Satisfaction“
Verfasser
Dariusz Waligóra, Bakk.rer.soc.oec.
angestrebter akademischer Grad
Magister der Sozial- und Wirtschaftswissenschaften
(Mag. rer. soc. oec.)
Wien, im December 2010
Studienkennzahl lt. Studienblatt:
A 066 915
Studienrichtung lt. Studienblatt:
Magisterstudium Betriebswirtschaft
Betreuerin / Betreuer:
Univ.-Prof. Dr. Oliver Fabel, M.A.
Deus virtutum, cuius est totum quod est optimum,
Sit nomen Domini benedictum. Ex hoc nunc et usque in saeculum.
Danksagung
Größter Dank gilt meiner Familie. Meinen Eltern Cecylia und Antoni Waligóra bedanke
ich mich für ihre Unterstützung, ihre Geduld und ihr Verständnis, dass ich meine Ziele
erreichen konnte. Meine Schwester Ewa bedanke ich mich für Ihre unaufhörliche Hilfe.
Auch meinen Freunden danke ich für wunderbare Zeit, die wir gemeinsam verbracht
haben.
Besonders bedanken möchte ich mich bei meinem Betreuer Univ.-Prof. Dr. Oliver Fabel,
M.A. für Ihre Betreuung, Ihren Rat und Ihr Feedback.
II
Table of Contents
1.
Introduction
-1-
2.
Compensation
-3-
3.
4.
2.1
Compensation Objectives
-3-
2.2
Determinants of Pay Rates
-4-
2.3
Types of Compensation
-6-
2.3.1
Base Pay
-7-
2.3.2
Wage and Salary Add-Ons
-7-
2.3.3
Variable Pay
-7-
2.3.4
Benefits and Services
-8-
Performance Pay
-9-
3.1
Performance Pay Classification
-9-
3.2
Implementation of Performance Pay
- 11 -
3.3
Problems interrelated with Implementation of Performance Pay
- 12 -
Job Satisfaction
- 14 -
4.1
Job Satisfaction vs. Pay Satisfaction vs. Organization Satisfaction
- 14 -
4.2
Job satisfaction measurement
- 15 -
4.2.1
The Job Satisfaction Survey (JSS)
- 16 -
4.2.2
The Job Descriptive Index (JDI)
- 17 -
4.2.3
The Minnesota Satisfaction Questionnaire (MSQ)
- 17 -
4.2.4
The Job Diagnostic Survey (JDS)
- 17 -
4.2.5
The Job in General Scale (JIG)
- 17 -
4.3
Job Characteristics Model
- 18 -
4.4
Does Job Satisfaction play a significant role within the organization?
- 20 -
4.5
Job Satisfaction Survey
- 21 -
5. Empirical Evidence of the Relationship between Compensation and
Job Satisfaction
- 26 -
5.1
Low-pay and High-pay workers
- 26 -
5.2
Additional Evidence from Wales
- 32 -
5.3
Wage Increase
- 34 -
5.3.1
Simple Model
- 34 III
5.3.2
Interpretation and Results
- 35 -
5.3.3
Development of Job Satisfaction over time
- 38 -
5.4
Pay cuts and Unionisation
- 40 -
5.5
Hourly Job Compensation
- 43 -
5.6
Peer Salaries
- 45 -
5.7
Job Disamenities
- 49 -
5.8
Work Motivation
- 54 -
5.9
More Money or New Management?
- 56 -
6. Empirical Evidence of the Relationship between Performance Pay and Job
Satisfaction
7.
- 59 -
6.1
Different Dimensions of Performance Pay
- 60 -
6.2
Impact of Performance Pay on High- and Low-paid Workers
- 63 -
6.3
Individual and Gain-sharing Incentives
- 66 -
6.3.1
Gain-sharing Incentives
- 67 -
6.3.2
Individual Incentives
- 69 -
6.3.3
Additional Evidence from the U.S.
- 70 -
6.4
Firm Size
- 73 -
6.5
Risk attitudes
- 74 -
6.6
What is the optimum bonus to pay?
- 77 -
6.6.1
Effect of bonus intensity on satisfaction
- 77 -
6.6.2
Effect of bonus intensity in terms of key characteristics
- 79 -
Conclusions
- 81 -
References
- 83 -
List of Abbreviations
- 93 -
Appendix
- 94 -
Abstract (English)
- 96 -
Abstract (Deutsch)
- 97 -
IV
1. Introduction
Job satisfaction is a foundation of sustainable competitive advantage to an organization. The
more satisfied is a worker from his job, the more is his contribution to the company. Satisfied
workers tend to perform their work more willingly which contributes toward the well-being of
the organization.
Satisfaction from the job can however be derived from different factors. This thesis
investigates diverse dimensions of the relationship between compensation, performance pay
and job satisfaction.
Job satisfaction is nowadays very common investigated factor. Many Scholars conducted
numerous researches in this field. Enormous number of literature comes from psychological
domain, the author however focus on economic literature. Both fields nevertheless collaborate
together very robustly. Furthermore, job satisfaction is also vital for employers, especially in
case when they plan a long cooperation with workers. Thus, company itself can profit by
increasing the level of job satisfaction within workers. On one hand we can ask the question in
which dimensions satisfied workers contribute towards the well-being of the company? The
answer however has a significant support in the recent literature. This thesis documents that
the compensation, performance pay significantly affect whether negatively or positively the
overall job satisfaction.
To prove that there exists a relationship between factors mentioned above we will investigate
numerous papers. Basically this thesis is divided into three main parts. First includes overview
and fundamental theory about compensation, performance pay and job satisfaction. Further,
we focus on particular relationship between compensation and job satisfaction. At the
beginning we differentiate between high- and low-paid workers and investigate the influence
on these particular groups. Further, it will be examined group of those whose wage increased
over the time and those who suffered from pay cuts. Further, impact of unionization of
workers on job satisfaction will be explored. Moreover, we will look into the influence of
hourly compensation and investigate the impact of peer salaries on the overall job satisfaction.
And finally, we will determine also the impact of motivation. In the third part of this thesis we
will examine the basic relation between different dimensions of performance pay and job
satisfaction. Further, we specify the impact of performance-related pay on high- and low-paid
workers. And also individual and profit-sharing will be taken into consideration. Finally we
-1-
will study the influence of firm size and risk attitudes towards the overall job satisfaction.
Ultimately, we think what would be the optimum reward for workers to pay. This issue has a
direct relation to the real world as the level of bonuses/profit-sharing very significantly
influences job satisfaction. Moreover the intensively of this incentive will be discussed.
The results of this thesis might have a great impact for management due to the fact that
findings provided in this document can contribute towards, through its practical
implementation, the increase in productivity and performance of the company. Moreover, the
very straight reasoning that high pay will make every worker happy does not apply.
Nevertheless, pay as an important aspect to leave and sustain the basics needs is significantly
important for every individual. However the author highlights the fact that other dimensions
also affect significantly employees’ attitudes towards their job.
-2-
2. Compensation
The nature of the people builds on the invariable principle that for the given input a particular
output in return is required. Thereby a contribution devoted to the specific job forces an
appropriate compensation. Disregarding the altruistic behavior, every person ultimately will
demand a wage for accomplished task or fulfillment of contract.
Literature about compensation is very extensive which confirms importance of this topic.
Compensation or pay represents an exchange between the employee and the organization
when one party gives something in return for something else. Compensation itself is a basic
incentive that prompts the human being to work and includes direct or indirect payments to
employees, such as wages, bonuses, stock, and benefits.1
Nowadays compensation issues are quite transparent. Employees are able to receive more
information because some of them are not confidential anymore. As well as organizations are
forced to publish some information. E.g. American banks ought to identify the five best-paid
staff even if they are not board directors.2 Some assert that compensation should also be fair.
However the determination of fairness itself is very questionable. In the empirical part of this
thesis the problem of pay equity will be unveiled. Moreover many scientists also claim that
compensation is the outcome of productivity. And finally some scholars also tested the
relationship between the motivation and compensation. All these aspects play an important
role influencing the wage determination or even particular type of wage.
The modern definition of compensation reveals two components: intrinsic (psychological) and
extrinsic (tangible). The second facet covers monetary and non-monetary rewards. Intrinsic
factors however refer to the employees’ mental satisfaction such as job satisfaction.3
2.1 Compensation Objectives
The objective of compensation can be classified into following categories:
Equity – this category refers to inequalities. Therefore the wage’s increase of the
lowest paid employees as well as protection real wages (so called purchasing power)
and the model of equal pay for work of equal value will narrow the disparity of
1
Barry and Milovich (1991)
2
URL: http://www.guardian.co.uk/business/2009/nov/22/banks-top-20-earners [Access: 5/10/2010]
3
Bhattacharyya (2009)
-3-
income distribution. These objectives refer to internal and external equity. Internal
equity strives for a similar payment of similar jobs. On the other hand external equity
means a payment to the worker in the labor market which relates to the comparable
worker’s payment in another firm. Different skills or contribution represent
compensation differentials are related to the concept of equity.
Efficiency – is in close relation to equity. Therefore the efficient compensation is seen
as equitable (if reward is seen as fairly) and inequitable (in case if the reward is
perceives as unfair). The main goal of efficiency is to combine a part of wages to
productivity or profit, group or individual performance etc.
Macro-economic stability – is a factor that can be driven by high employment level
and low inflation. However if the government set a very high minimum wage, this will
not have a favorable impact on employment level. Thus compensation and
compensation policies are two of the many factors that influence macro-economic
stability.
Efficient allocation of labour – refers to the degree that employees will be able to
move to receive net gain. These movements may be geographical or job related (i.e.
within the corporation). Such examples can be: movements from low-wage area to
high-wage area through the acquisition of new skills.
Other objectives. There are plenty of other objectives that also influence the
compensation. Therefore it is important to: acquire qualified personnel, retain current
employees, reward desired behavior, control costs, comply with legal regulations,
facilitate understanding of compensation systems and finally further administrative
efficiency.4
2.2 Determinants of Pay Rates
Compensation depends on different, sometimes independent one another, facets. Basically
compensation levels are affected by external relativities such as supply and demand. Further
salary related to the value attached to diverse jobs. And finally compensation level is derived
4
-4-
from the individual worth of worker which is represented by individual performance to the
firm.5
In the later empirical analysis in this thesis author will provide evidence concerning the
difference between low-paid and high-paid workers as well as importance of the
compensation related to the jobs satisfaction. To understand the following issues better let
intimately determine factors that influence the compensation rates.
The most important factor influencing the rate of pay of an employee is the kind of job the
worker performs. Two significant aspects that classify job for pay purposes are the knowledge
and skills. The basic difference between high-paid jobs such: successful entertainers (artists,
actors, models, musicians), business leaders (top executives), political leaders or professionals
and lower-paid jobs of workers who perform everyday tasks, is that the first group have
mastered skills in their particular disciplines. While for the second group the knowledge and
skills are not the only criteria used to determine job rates of pay. Furthermore the nature of
business is a major factor influencing the compensation level. The authoritative difference is
seen for instance in private-sector (especially higher-paid jobs) than in the public sector. The
difference is also visible for nonmanagement workers with low-paid jobs such as restaurants,
lodgings, and retail business compared to relatively high-paid workers in transportation,
mining, and heavy manufacturing. Moreover the size of business tends to regulate
compensations. Large businesses might often provide higher pay rates than smaller
businesses. The size of business however depends on product demand. With high demand
come economies of scale and the opportunity to increase profit. Thereby a more profitable
business is more likely to share part of its profit within workers by raising their pay.
Employees working for more profitable businesses have a greater possibility to obtain higher
wage than those working for less profitable organizations. Further some owners and top
executives refrain from paying their employees as much as possible. Different philosophy of
management might have completely opposite biases. However these biases have a significant
impact on the amount of pay offered and given to employees. In addition geographic location
leads to a disproportion of pay rates. There is a tendency that certain regions sometimes have
paid higher wages than others. These regions also revealed also the higher cost of living. On
the other hand some areas suffered higher level of unemployment which leads most frequently
to lower-wages. Nonetheless the high unemployment rate must not always relate to lower pay.
5
-5-
Individuals with certain sets of skills or abilities can be demanded. Thereby supply and
demand of labor differentiate from place to place. Sometimes in a specific locations demand
for skilled workers (e.g. computer-based) is very high as shows the evidence over the past
years. Those “extraordinary” jobs will be granted by premium wages or bonuses. There is also
evidence determining the relationship between employment stability and pay rates. Knowing
that person who is looking for a job might not feel comfortable due to the fact that there are
bills to be paid etc. For these reasons an employee who has guarantee of future employment is
often more willing to take a lower pay.6 On the other hand a significant discussion took place
concerning the gender differences. One of the earliest researches of the gender difference was
done by Joan Robinson (1969). However his basic model of wage discrimination was not
implemented very broadly into economics literature. Further appeared new models Becker
(1971), Bhaskar and To (1999), Burdett and Mortensen (1998) explored later by Manning
(2003). Recent research suggests that females earn less than males in relation to years of
experience and degree attainment. However no differences were found regarding willingness
to negotiate for increased salary. As a result, scholars reveal that pay differences between
women and man are due to other reasons than education level, years of experience or
negotiation practices.7 And finally to precise rates of pay, following two facets should be
taken into consideration: tenure and performance. Very often employee’s rate of pay increases
with job tenure. The reason is that through experience workers become more effective
problem solver. Moreover senior employees tend to be more predictable. Thus it’s a common
practice that senior employees are paid double the amount obtained by their new colleagues
within the company for comparable jobs. Lastly worker’s performance also differentiates the
level of compensation in similar jobs. Comparing rates of pay for individual workers in
similar jobs in different organizations, there is hardly ever a relation between high rates of pay
to outstanding level of performance.8
2.3 Types of Compensation
Compensation can basically be divided into two types of rewards: intrinsic and extrinsic.
Intrinsic rewards may be granted for completing a project or meeting performance objectives.
However extrinsic rewards are tangible elements of compensation and can have monetary as
6
Henderson (2000)
7
Crothers et al. (2008)
8
Henderson. (2000)
-6-
well as non-monetary form. One component of tangible compensation is represented by direct
compensation, where employer exchanges monetary rewards for accomplished work or task
as well as for performance achieved. Two most popular forms of direct compensation
represent: base pay and variable pay.
2.3.1
Base Pay
Base pay is a compensation that an employee receives for its job. That is usually a wage and
salary. Depending on type of organization there are two categories related to the distribution
of pay and the nature of job: hourly and salaried. First respectively refers to hourly pay that
employees receive (wages). Wage is calculated on the amount of time worked. And second
provides fixed payments to employees no matter how much they worked. Due to the law,
extra payment such overtime may be paid to certain salaried employees.9
2.3.2
Wage and Salary Add-Ons
Wage and salary add-ons include overtime pay, shift differentials, premium pay for work
during weekends and holidays, and other performance that is not normally required of
workers. Moreover these work premiums must in some cases comply with federal wage and
hour law requirements. They are also characterized by the fact that premiums are higher than
the basis hour pay.10
2.3.3
Variable Pay
Variable pay is another type of direct pay which represents a pay related to individual, team,
or organizational performance. The most popular forms of variable pay for employees are
bonuses and incentive program payments. Also top executives receive often long-term
rewards such as stock options. Within the incentive program payments we can distinguish
group/team incentives. The concept of people working together seems quite beneficial for the
company. However employees cooperating in group/teams have shown a fairly low level of
satisfaction with rewards spread equally between all members of group/team. On the other
hand rewarding groups based on individual performance may be seen as more equitable.
Another aspect of group/team incentives is gainsharing. Gainsharing is the system of sharing
with employees greater-than-expected gains in profits or in productivity. Further we can
9
Mathis and Jackson (2008)
10
Henderson (2000)
-7-
differentiate in the variable pay category a system names profit sharing. It means that the
organization distributes a portion of the profit to employees. Basic objectives of this plan
include: increase in productivity and performance, attract and retain employees, improve
service and product quality, enhance employees’ moral.11
2.3.4
Benefits and Services
These extrinsic rewards provide numerous compensation packages include: pay when
employment has been suspended, payment when worker is unable to work due to accident or
sickness, payment for medial protection, retirement pay, travel/meal/housing/public transport
allowance, and extra payment in case of death of employee. Also non-monetary privileges
may include: company car, cafeteria services, tuition reimbursement, or child care and
recreation activities.12
11
Mathis and Jackson (2008)
12
Ebd.
-8-
3. Performance Pay
As we already discussed in the previous chapter, there are different methods to reward
workers for their job. The most common one is the input-based pay which depends on the
amount of time or effort spent on a particular activity. Input is however not easy to measure
therefore some organizations began to compensate their employees for received output.
Output-based pay therefore depends on what comes out and not on time or effort spent at a
work place. Moreover output-based pay might not be easy to measure if we consider the
quality of product, productivity itself and other factors. Nevertheless this method has
particular advantages. First, it encourages those employees at the organization who perform
well to stay there and induces to leave those whose effort is low (see also Lazear, 2000).
Further, output-based pay motivates workers very strongly to increase the effort instead of
showing up at work. Therefore the basic conclusion is that rewarding employees by outputbased pay provides direct incentives to produce more.13
3.1 Performance Pay Classification
Within diverse performance payment methods the Institute for Employment Studies stipulated
following types which are illustrated in Table 1.
Some of the following methods such like gainsharing, profit sharing, and team bonuses were
already discussed in the previous chapter because they are inherent part of compensation.
Remaining rewards methods will be clarified now.
13
Lazear (1998)
-9-
Table 1 Different types of performance-related pay
Individual
Base pay
Organization level
Team
• merit pay
• team adjustment to
• pay at risk
base pay funding
Organization
• varying pay
budget
according to
adjustment
organization
performance
Reward vehicle
Variable pay and
bonuses
Other forms of
reward
• executive bonus
• team bonuses
• profit sharing
• individual bonus
• project bonuses
• gainsharing
• piecework
• gainsharing
• sales commission
• location bonus
• individual non-cash
• team non-cash
• corporate
recognition
events
recognition e.g. holidays
• learning opportunities
• executive share options
• all employee
share options
Source: Brown and Armstrong (1999)
Basic performance pay links directly team, individual or organizational performance with the
height of compensation paid in the form of base pay or cash bonus payments. Further, merit
pay is a performance scheme which links individual pay increase to the results provided by an
individual through an appraisal of performance and award of a performance rating. We also
distinguish pay for contribution which is basically a reward for achievement of significant
business, team, personal goals, and also high involvement in the organization. The difference
between performance pay and pay for contribution is that the first approach refers to cost
efficiency and people here are perceived as costs. However the second approach perceives
people as assets and therefore pays more attention to value added to the organization.
Furthermore it is also valuable to reveal about pay at risk. This scheme assumes that
employees will give up a proportion of their fixed base pay or base pay increase for the
opportunity to obtain higher pay level accordingly the performance of the business. In case the
performance is very poor, employees’ base pay will be reduced.14
14
Brown and Armstrong (1999)
- 10 -
3.2 Implementation of Performance Pay
Performance pay, as Judith Oliver (1996) said, is very nice in theory but difficult in practice.
Pay for performance motivates employees to some degree but if the implementation and
operating process fail then the whole efforts might be counterproductive.
Bullock and Tubbs (1990) claim that formal plan involvement structure and staff involvement
in plan design correlate with success of performance pay. Moreover they pointed out the
importance of positive and favorable employees’ behavior within the company. And finally
Bullock and Tubbs say that management style should be participative within the organization.
However authors don’t see any relation in size of company, union presence and industry or
technology.
To similar results came also Perrin (1990). The author unveils that senior management
involvement is important for successful implementation of performance pay. This leads to the
consistent employee support. Perrin also notices the significance of communication within the
organization. And finally human resource activities such as diverse training contribute toward
success. Perrin similarly to Bullock and Tubbs doesn’t see any correlation in organization
size, union presence and industry.
Furthermore American Compensation Association (1992) provided also evidence that
confirmed results from the past. Factors that correlate with success of performance were
frequent communications, clear plan objectives and link to business goals, frequent payments,
and employee involvement in design/operation.
Results assert that the pure implementation of performance pay might not be successful.
Factors such staff communication and involvement correlate very strongly with performance
pay than any others facets. This let us formulate a hypothesis that the transparency is probably
one of the more important aspects during the implementation of performance pay. Lack of
employee involvement and communication in the design of performance pay system might
lead to counterproductive behavior. By involvement and communication is to understand that
employee should know how different schemes work and how employee’s impact influences
the organizational performance and its pay.15 In the next paragraph we will concentrate on this
issue more precisely analyzing several implementation problems.
15
Brown and Armstrong (1999)
- 11 -
3.3 Problems interrelated with Implementation of Performance Pay
Many studies, e.g. Egger-Peitler et al. (2007), Kessler and Purcell (1992) or Marsden and
Richardson (1994) provided evidence which reveals that the implementation of pay of
performance may evoke many problems in the organization. First reason why it happens is
very straightforward. Performance-related pay can be implemented very lousy. That is the
simplest explanation why the introduction of performance pay in some organizations fails.
However development of performance pay has also another faces. Gabris and Mitchell (1988)
and also Kellough and Selden (1997) claim that implementation of performance pay is
perceived as unfair. The reason of this problem can be explained by a game: I win you lose. It
means that certain workers obtain higher pay and other might receive lower pay due to their
performance. This produces different biases within the team or group which could lead to
destroying the working environment and decrease the employees’ moral. Nevertheless it is
very complicated to indentify exact reasons of unfairness. Condrey and Brudney (1992)
noticed that low levels of organization trust reveal the disparity within employees. EggerPeitler et al. (2007) identified the problem in lack of transparency in the system for
employees. Also Gabris and Ihrke (2000) claimed that lack of leadership credibility influences
strongly fairness of performance pay perception.16
As mentioned in previous paragraph, transparency is a very distinctive facet that affects
performance-related pay. It’s meaningful to notice that transparency is not the suggestion that
everyone in the company knows what other earn. Transparency however means that
employees understand the idea of compensation scheme within the organization, how they fit
to that scheme and how they will be rewarded for their job. Through the transparency
employees identify themselves with organization and moreover they understand that their
value make an impact in e.g. overall organization performance. However transparency has
also something to do with pay secrecy. Colella et al. (2007) made in this field valuable
research concerning the restrictions of access to information regarding the level of employees’
pay and also ability to exchange these information. Colella suggested that private
organizations with performance-related pay apply secrecy to sustain their systems.17
Bamberger (2008) proved Colella’s results and moreover came up with a new linkage
between pay performance and pay secrecy. A lab-based simulation showed that policy of pay
16
Perry et al. (2009)
17
Ebd.
- 12 -
secrecy, which finally leads to transparency, may influence fairness perception and moderate
interpersonal competitiveness. Furthermore the model of Bamberger supported the opinion
that secrecy relates to lower individual task performance.
Transparency in result can lead to greater wage dispersion. Pfeffer and Langton (1993) found
that accurately these differences in wages level resulted in decreased productivity, decreased
collaboration, and also reduced satisfaction. Therefore we could in general state that pay
transparency significantly influences performance-related pay and it makes an impact on pay
efficacy.
- 13 -
4. Job Satisfaction
The crucial aspect for the quality and quantity of organizational output is undoubtedly
employees’ skills, effort and interest toward the job. But is for instance workers’ satisfaction
important for employer? There are many studies that investigate following issue. Thus, to
understand the idea of satisfaction at work correctly, let us first distinguish three following
concepts: job satisfaction, pay satisfaction and organizational satisfaction. Although these
concepts have fairly different definitions, they however extensively influence each other.
4.1 Job Satisfaction vs. Pay Satisfaction vs. Organization Satisfaction
Job satisfaction is the extent to which employees are self-satisfied or dissatisfied of a job well
done and job itself. Locke (1979) however proposes that job satisfaction is a pleasurable or
positive emotional state resulting from the effect of one’s job or job experience. Nevertheless
there are two inducements that affect job satisfaction: intrinsic and extrinsic. Intrinsic job
satisfaction would be the type of job that employee do and different task associated with this
job. On the other hand extrinsic job satisfaction consists of overall contentment of work
condition, pay, coworkers and supervision. It is also meaningful to reveal that facets such as:
performance in a proficient manner, opportunity of career and future individual development
highly enhance job satisfaction. Job satisfaction is therefore important because a positive view
of one issue can influence the view of the other. That’s why a negative view of one process
can have a significant impact on one of the positive processes.
However, pay satisfaction is the extent to which an employee is content with its wage. Basic
element that develops pay satisfaction is comparison with others. These comparisons relate to
very unique preferences of each individual. Therefore coworkers with similar or identical
assignments might compare themselves. Further, workers in other organizations, doing similar
or different work for similar or different pay, can be the basis for comparisons. Managers
thereby should influence these comparisons to avoid the perception of inequity within
employees. Ducharme et al. (2005) provided evidence on pay satisfaction. Because pay
satisfaction is an important factor of an organization’s reward system therefore it influences
both employees behavior and organization outcome. Job satisfaction, turnover, absenteeism
and employee performance are affected by the level of pay satisfaction. Ducharme et al. thus
came up with results that pay satisfaction remains high level when performance pay is close
- 14 -
related to the employees’ performance and at the same time remains low level when there are
no performance appraisals in the company, even though there is performance pay.
And ultimately we still have to determine the third process: organizational satisfaction.
Organizational satisfaction consists of two other processes mentioned above however is not
restricted to them. Main issues that support the high level of organizational satisfactions are:
recognizing, understanding, and accepting organizational philosophy and policies.18
4.2 Job satisfaction measurement
Job satisfaction can be basically measured with interviews and questionnaires. Though this
first method is fairly complex, the second one is more popular from diverse reasons. First and
foremost interviews are more expensive and time-consuming than questionnaires. To conduct
one survey with a questionnaire there is less effort and money required. On the other hand, it
is easier to quantify and standardize questionnaire than interview. However interview can
provide more extensive information and it can also extend the research area by generating
own thoughts concerning satisfaction or dissatisfaction.
Probably the easiest method to conduct a job satisfaction survey is to use one of the existing
scales. Quite a few have been already developed and their reliability and validity was also
established by many researchers. Basically using an existing job satisfaction scale has few
advantages. First, most of scales already refer to the major aspects of satisfaction and they
meet expectation of satisfaction survey. Moreover existing scales have shown satisfied level
of reliability and also there is evidence for construct validity. Most existing scales provided
already norms which can help with the interpretation of results. And finally the use of existing
scales saves time and costs. It must be noticed that existing scales also have few
disadvantages. First, they might limit the results of study because the facets of most scales are
general. They don’t include more specific factors of satisfaction or dissatisfaction which
might be relevant for particular organizations. Furthermore job satisfaction scales are not free
of charge. These expenses probably will not surpass costs of own scale, however they
influence the expenditure of survey itself wherein a large number of employees will be
surveyed.19
18
Henderson (2000)
19
Spector (1997)
- 15 -
In the literature can be found six major job satisfaction scales: four facets scales, and two
global satisfaction scales.
4.2.1
The Job Satisfaction Survey (JSS)
The Job Satisfaction Survey was introduced by Spector (1985) including nine factors of job
satisfaction and overall satisfaction. Table 2 illustrates these facets.
Table 2 Facets From the Job Satisfaction Survey
Facet
Description
Pay
Satisfaction with pay and pay rises
Promotion
Satisfaction with promotion opportunities
Supervision
Satisfaction with the person’s immediate supervisor
Fringe benefits
Satisfaction with fringe benefits
Contingent rewards
Satisfaction with rewards (not necessarily monetary)
given for good performance
Operating conditions
Satisfaction with rules and procedures
Coworkers
Satisfaction with coworkers
Nature of Work
Satisfaction with type of work done
Communication
Satisfaction with communication within the
organization
Source: Spector (1997)
This is the most popular form of job satisfaction scales for organizations. JSS can be very
easily modified therefore it makes this scale more favorable. Moreover two kinds of reliability
estimates are significant for providing a scale. On one hand it is internal consistency reliability
estimates which is related to how items of a scale correlated with another. And on the other
hand it is test-reset reliability which informs about the stability of the scale over time.
Furthermore, validity of the JSS was proved by many studies which evaluated different scales
on the same employees. Smith et al. (1969) for instance confirmed that JSS scale (with
following facets observed: pay, promotion, supervision, coworkers, and nature of work)
correlates with Job Descriptive Index. This scale will be namely discussed in the next
paragraph.20
20
Spector (1997)
- 16 -
4.2.2
The Job Descriptive Index (JDI)
The Job Descriptive Index was developed by Smith, Kendall and Hulin (1969) and is probably
most popular scale within organizational researchers. The scale consists of five facets: Work,
Pay, Promotion, Supervision, Coworkers. Evaluation of JDI bases on responses: “Yes”,
“Uncertain”, or “No”. This scale is very reliable. Though the significant research conducted
on this scale, JDI provides satisfactory validation evidence. However the main limitation of
JDI can be only five facets that this scale focuses on. Many may criticize it, however some
perceives it as advantage. 21
4.2.3
The Minnesota Satisfaction Questionnaire (MSQ)
The Minnesota Satisfaction Questionnaire is next satisfaction scale quite popular among
researchers developed by Weiss (1967). The MSQ consists of 20 more specific facets and it is
divided into two forms of 100-item long version and 20-item short version. Basically the short
form of this scale is very sufficient and the long one will be mainly recommended to those
who have greater interest.22
4.2.4
The Job Diagnostic Survey (JDS)
The Job Diagnostic Survey was introduced by Hackman and Oldham (1975) and it measures
effects on job characteristics. Following facets are evaluated: nature of the job & job tasks,
motivation, personality, psychological states and reactions to the job. It doesn’t however
measure directly the job satisfaction but job satisfaction is here one of the reactions to the job.
4.2.5
The Job in General Scale (JIG)
The Job in General Scale was introduced by Ironson et al. (1989) and it intended to evaluate
overall job satisfaction rather than particular facets. The form of JIG is similar to JDI. It
consists of 18 items regarding the job in general. For each item employee can answer: agree,
aren’t sure, disagree. Ironson et al. (1989) stated that JIG has a good internal reliability with
coefficient .91 to .95 within different samples. JIG also correlates with other global scales.
21
Spector (1997)
22
Ebd.
- 17 -
4.3 Job Characteristics Model
Job Characteristics Model (JCM) “involves increasing the amounts of skill variety, task
identity, task significance, autonomy, and feedback in a job.”23 Job satisfaction has a
meaningful role in JCM because it is a part of job outcomes.
comes. Therefore this factor contributed
toward the growth in motivation. The following
ing model states that the job characteristics to
same degree affect psychological states: experienced meaningfulness, experienced
responsibility for task outcomes, and knowledge of the actual results. This leads to the
reinforcement of work motivation.
motivation Lackk of meaningfulness, responsibility, and feedback in a
job will not strongly motivate employee.24
Figure 1 exemplifies the elements of JCM and the relationship between them.
Figure 1 Job Characteristics Model
Source: Hackman and Oldham (1975)
23
Hellrieger and Slocum (2007) p. 130
24
Ebd.
- 18 -
Basically the model consists of three dimensions: core dimension, psychological states, and
outcome. Five job characteristics25 are key factor in this model:
•
Skill variety – the extent to which a job requires a variety of employee competencies
to carry out the work.
•
Task identity – the extent to which a job requires an employee to complete a whole
and identifiable piece of work, that is, doing a task from beginning to end with a
visible outcome.
•
Task significance – the extent to which an employee perceives the job as having a
substantial impact on the lives of other people, whether those people are within or
outside organization.
•
Autonomy – the extent to which the job provides empowerment and discretion to an
employee in scheduling tasks and in determining procedures to be used in carrying out
those tasks.
•
Job feedback – the extent to which carrying out job-related tasks provides direct and
clear information about the effectiveness of an employee’s performance.
The model also identifies individual differences which influence the level of employees’ job
enrichment. These factors are: knowledge and skills, strength of growth needs, and
satisfaction with contextual factors. Basically knowledge and skills relate to an enriched and
not enriched job. Those employees who perform tasks satisfactory and have feeling of job
“well done” achieve an enriched job effectively. And on the other hand those who are not able
to achieve the job enrichment might experience frustration, job dissatisfaction and stress. This
is because employees would like to perform good however they lack of knowledge or skills.
One solution for this issue can be diverse training and development programs to support those
employees. Next individual difference is growth-need. This concept relates to different
opportunities for learning, and personal accomplishment at work. Employees with high
growth-need respond often to job enrichment programs. Usually they also experience greater
job satisfaction and are more motivated than employees with lower growth-need. Finally they
also reveal greater productivity and lower turnover. Ultimately the last facet is satisfaction
with contextual factors. Contextual factors are organizational policies, supervision, salary and
benefits programs, relation within the personnel, and work conditions. Therefore the higher
25
Hellrieger and Slocum (2007) p. 131
- 19 -
satisfaction within the contextual factors the greater are employees satisfied at work and the
higher is the level of job enrichment. 26
Summarizing, JCM reveals the importance of different factors with respect to the high level of
job enrichment. Within these facets satisfaction at work or satisfaction with contextual factors
pretends to be very important because it is the key factor which impact on every stage of
JCM.
4.4 Does Job Satisfaction play a significant role within the organization?
This question might ask numerous managers or top executives. The company should itself be
profitable and the role of managers is to obtain this result. But does employees’ job
satisfaction ought to be an important issue for them? Basically managers try to achieve a high
productivity and great outcome. Job satisfaction however can be a secondary factor which will
be taken into account. And the logic appraisal might lead to a conclusion: why to lose time
and money to make the employees happier? Different evidence however unveils a great
advantage of high job satisfaction within the company.
Based on the main goal of this thesis, the explanation of the relationship between the
compensation, pay performance and job satisfaction, let us explain a practical implementation
of job satisfaction within the company. It also confirms that job satisfaction is not a random
facet to investigate. The relationship mentioned above however will be discussed in the
empirical part. Nevertheless now it will be explained why job satisfaction is important and it
will be also demonstrated that the job satisfaction, as one of many factors of job
characteristics, plays a meaningful role toward the company.
Many researchers analyzed the impact of job satisfaction on diverse facets. The most
important issues which were investigated are: productivity, performance, turnover, and
compensation. Recent studies confirm that job satisfaction is a good predictor of future
turnover (Sousa-Poza, A. and Sousa-Poza, A. A. , 2007). Therefore dissatisfied workers might
in consequence be distinguished by higher level of quits and absenteeism. To the same results
came also Randsley de Moura, et al. (2009) identifying the relationship between job
satisfaction and turnover intentions in seven organizations. Moreover job satisfaction can have
a positive effect on performance. We must however admit that job satisfaction is one of the
26
Hellrieger and Slocum (2007)
- 20 -
many diverse facets that influence company productivity. Very recent study of Böckerman, P.
and Ilmakunnas, P. (2010) confirms the role of job satisfaction in the determination of
establishment-level productivity. Results provide evidence that the effect of one point increase
in the average level of employees’ job satisfaction within-establishment standard deviation
would increase productivity by 6 percent. Recapitulating, job satisfaction is a meaningful
attribute which affects not only the employee but also the firm. Keeping the workforce
satisfied is a very important challenge for managers because, as empirical proved, it affects to
a large degree the overall performance of the company.
4.5 Job Satisfaction Survey
The Society for Human Resource Management (SHRM)27 conducted in 2009 the annual Job
Satisfaction Survey in the U.S. The aim of the survey is to indentify facets which affect in
general employees’ job satisfaction. The survey consists of 24 aspects of employee
satisfaction divided into four groups: career development, relationship with management,
compensation and benefits, and work environment.
It is well-known that dissatisfied workers are less likely to stay with the current employer. The
turnover of course leads to bilateral consequences. Employee is forced to search a new job
and suffers the lack of continuous financial resources. With high degree of dissatisfaction
employee might also be frustrated and depressed. On the other hand company is obliged to
find a new employee. If it is a qualified worker in an engine production line at Audi, company
probably will be forced to spend some amount of money and time on recruiting process to hire
the proper person. Therefore it is fairly vital to sustain the job satisfaction within the company
at the higher level.
The results of job satisfaction survey might be on one hand surprising but on the other hand
rational. It must however be taken into consideration that 2009 was the time of a deep
downsize in the world-wide economy which contributed toward many lay-offs. Findings of
SHRM relate also to the financial crisis. All results are shown in Figure 2.
27
The Society for Human Resource Management (SHRM) is the world’s largest association devoted
to human resource management. Representing more than 250,000 members in over 140 countries,
the Society serves the needs of HR professionals and advances the interests of the HR profession.
Founded in 1948, SHRM has more than 575 affiliated chapters within the United States and
subsidiary offices in China and India.
- 21 -
Job security is placed at the top of the ranking. Due to the unsecure jobs and constant
fluctuation in the economic in 2009 this result is, as said before, very rational. SHRM claims
that seven out of 10 human resource professionals are anticipating deeper job cuts in the U.S.
labor force in the first quarter of 2009. Moreover at the beginning of 2009, 30% of employees
believed that in six months their jobs would be moderately or significantly at risk. Therefore it
is not astonishing that job security became the number one in terms of job satisfaction.
Moreover survey demonstrated that facet such as professional abilities/skills and the
importance of the job to the organization’s overall success increases the sense of job
security.28
Second factor, that affects significantly employees’ job satisfaction, are benefits. The basic
application of benefits within an organization is to recruit and retain top employees. Further,
benefits became a tool for employers to increase loyalty, productivity and job satisfaction. In a
2009 SHRM study of employees, 71% of employees indicated that complete elimination of
health care benefits by their employer would have a significant negative impact on them, and
45% reported that suspension of retirement plan contributions by their employer would
significantly affect them. The most highly rated benefits that influence job satisfaction are:
health care, paid off time, retirement and family-friendly benefits.29
28
Society for Human Resource Management (2009)
29
Ebd.
- 22 -
Figure 2 Important Aspects of Employee Satisfaction
Note: Percentages reflect respondents who answered “very important” from scale where 1 = ”very unimportant” and 4 = “very important”.
imp
Source: 2009 Employee Job Satisfaction: A survey report by SHRM
- 23 -
Further, the compensation and pay was situated as a third aspect of SHRM job satisfaction
survey. This explicit confirms that the reward is consistently of great importance for
employees. SHRM observed however following disparity between compensation and
supervision. Namely employees who are paid well but have miserable relationship with their
supervisor may be more likely to be frustrated, less productive and dissatisfied which also
influences the whole team. Employees were also inquired what they would do if they were
offered more money, with the same benefits, at another company. Nearly six out of ten
employees stated that they would be able to leave their current employers if they received an
offer of a 30% salary increase and the same benefits. And finally employees were also asked
by SHRM about the importance of following facets30:
Being paid competitively with the local market, where 55% of employees stated this
aspect as very important.
Base rate of pay, where 52% of employees claimed this factor as significant attribute
of job satisfaction
Opportunities for variable pay (bonuses, commissions, other variable pay, monetary
rewards for idea and suggestions), where 37% of employees reported that this facet is
very important to job satisfaction.
Stock options, which was very important aspect for 12% of employees.
The topic of relationship between compensation and job satisfaction will be however
discussed in detail in the next chapter.
Fourth most important issue that contributes toward high level of job satisfaction is
opportunity to use skills and abilities. Similarly employees rated this factor in 2008. Basically
employees are somehow fulfilled in their job when they are able to use their skills, abilities
and to collaborate effectively within the organization. It is also interesting to notice that
almost 47% of employees stated that their professional abilities, skills and contribution to the
firm affected overall increase of job security, which is the most important factor of job
satisfaction accordingly the SHRM survey.31
And final facet of the top five aspects of job satisfaction is feeling safe in the work
environment. SHRM noticed that female employees consider feeling safe in the work place as
30
31
Ebd.
- 24 -
more significant factor than male employees. Safety in the work environment accordingly
SHRM survey concerns issues from terrorism, violence in the workplace to health problems
and workplace accidents. On the other hand employees thereby might have greater
expectations to protect them from threats.32
Summarizing, the evidence demonstrates a clear influence of particular factors on employees’
job satisfaction. Dissatisfied worker may cause many problems within the company and the
two most important issues are turnover and absenteeism. Due to this fact, company can
perform less efficient which will also manifest in decrease of productivity. Therefore it is vital
that employees will be satisfied in their work place. This however depends ultimately on the
employers’ effort and their awareness of not only structure of the workforce but also
environmental factors.
32
- 25 -
5. Empirical
Evidence
of
the
Relationship
between
Compensation and Job Satisfaction
Job satisfaction is a variable that has been investigated by many researchers over the years.
We find extremely large number of the literature which relate to diverse aspect of job
satisfaction. This thesis doesn’t base on psychological characteristics of job satisfaction such
different forms of behavior as mental health, absence, or psychical ailments.33 It will however
concentrate on the economical aspects of job satisfaction such as: pay, turnover, productivity,
performance, quality of job, and motivation.
The empirical evidence is organized as following. Findings of diverse publications are
collected and analyzed, then ordered in terms of results. Researchers have used sometimes
different methods. The author however aims to demonstrate the output in an understandable
and clear manner thereby following division is applied.
5.1 Low-pay and High-pay workers
This basic division of payment in low- and high-pay is formed by many factors. First, it is
simple caused by an unequal distribution of earnings. That was the case in the economy since
the late 1970s during several changes and reforms in the Western market. And moreover these
issues are driven by “new” employment practices, such as part-time work, temporary
contracts, low-skilled or manual or elementary work, especially in agriculture, and finally
low-paid jobs on non-standard working hours. Furthermore there is a noticeable tendency that
low-paid individuals might be afraid of being unable to maintain the standard living.
European Commission (2001) was concerned about such mentioned above “new” forms of
employment. They not only led to the lower level of pay but also decrease the quality of jobs.
Moreover it also has an impact on job security, work-life balance, access to training and
lifelong learning, health and safety at the workplace. European Commission (2001) therefore
investigated all determinants of job quality: the type of work contract (temporary vs.
permanent), working time (full-time vs. part-time) and its nature (voluntary vs. involuntary),
job security, the job status (supervisory, intermediate, non-supervisory) and the provision of
employer-provided training. The results from the study are demonstrated in Figure 3.
33
Freeman (1978)
- 26 -
Evidence
vidence illustrates very clearly the negative effect of job quality within EU. Around 13% of
employees are in, so called, dead-end.
dead nd. They receive extremely low pay which corresponds to a
very low productivity. 25% represents low pay which relates to not satisfactory productivity.
33% share of employed are acceptable and only 29% represents suitable job quality. European
Commission (2001) argued therefore that low-pay
low pay workers suffer from a double penalty
because they earn less and work in jobs of bad quality. Thus this issue unveils that there are
Figure 3
in Europe a two-tier
two
labour
market. The first one consists
of jobs with a decent pay,
relative job security and career
prospects, involving generally
good working conditions. The
second tier however tier is
made up of the unemployed
and discouraged workers,
workers and
also of low quality jobs which
have
low
pay,
uncertain
employment relationships or
lack of further education and
Source: European Commission (2001): ECHP
career
development
perspective.
European Commission (2002) therefore put much attention to work quality because greater
quality of employment
yment may result in faster labour market growth and higher productivity.
The study of Pouliakas and Theodossiou (2010) indicates the relationship between lowlow and
high-paid
paid workers and job satisfaction. Their findings nevertheless stand in opposition that
t
low-paid workers always have inherently low quality jobs. Authors conduct a research based
on European Community Household Panel (ECHP) over the period 1996-2001.
1996 2001. This statistical
data covers following countries: Austria, Belgium, Denmark, Finland, France, Greece,
Ireland, Italy, Portugal, Spain and the United Kingdom. Furthermore, ECHP database covered
the period 1996 – 2001. ECHP is a questionnaire-based
questionnaire based survey including 60,000 national
nation
- 27 -
representative households and 120,000 observations per year for entire EU34. The survey
examines the satisfaction with a particular activity status: employment, unemployment, or
inactivity. Employee must also specify the degree of job satisfaction: not satisfied at all (1)
and full satisfied (6). Rates between 2 and 5 relate respectively to a given level of job
satisfaction.35Moreover job satisfaction was used as proxies for “quality of work”. Similar
study, based also on ECHP conducted Diaz-Serrano and Cabral Vieira (2005) and received
the same results as Pouliakas and Theodossiou (2005)36.
Literature shows that job satisfaction is a meaningful predictor of human behavior in terms of
quits, absenteeism, productivity. Moreover the evidence confirms that in some cases
unemployed people reveal lower level of job satisfaction than employed individuals. In
addition some demographic studies report also that women represent higher job satisfaction
than man and the age of individuals relates to the U-shaped. Further evidence reveals that
there is no relationship between job satisfaction and level of education, or union
membership.37
The study determined diverse factors that have been examined. Relevant for this thesis is only
compensation level, i.e. low- or high-pay and the relationship between them and job
satisfaction. In most of countries low-paid employees are less satisfied with their jobs than
high-paid employees. One exception is United Kingdom where evidence reveals that less-paid
workers are more satisfied than high-paid workers. Moreover Denmark distinguishes itself
between other countries because of the fact that low-paid employees and high-paid employees
derive equivalent contentment from their jobs regarding their pay. These results are confirmed
in Figure 4.
34
Between 1996 and 2001 survey encompassed 11 countries: Austria, Belgium, Denmark, Finland, France,
Greece, Ireland, Italy, Portugal, Spain and the United Kingdom
35
Pouliakas and Theodossiou (2010)
36
First publication of Pouliakas and Theodossiou appeared in 2005. The Forthcoming took place in 2010 in
International Labour Review No. 1.
37
- 28 -
Figure 4 Mean of Job Satisfaction of high- and low-paid workers in 11 EU countries (1996-2001)
- 29 -
Source: Pouliakas and Theodossiou (2010)
- 30 -
The southern countries such Greece, Italy, Portugal and Spain report diversity in job
satisfaction. Namely they demonstrate stable difference between low- and high-paid workers
without any distinctive upward or downward movements. Next group is France and Finland
where high- and low-wage workers’ means have a tendency to narrow over the period of
observation. There is also a visible change in low-paid workers’ mean with a tendency of
upward and downward movements. Moreover Austria, Belgium and Ireland have remained
almost constant. One exception in this study is the United Kingdom where opposite results are
provided. Workers tend to be more satisfied with lower pay than with higher pay. This led to
the conclusion that there is not always a relationship that low-paid jobs are intrinsically jobs
of low quality. This therefore unveils an ambiguous justification of European Commission’s
statement.38
Pouliakas and Theodossiou (2010) provided results for the main job-satisfaction for each
country. Overall outcome discloses that low-paid workers in Greece, Ireland, Italy, Portugal
and Spain are significantly less satisfied with their jobs than the high-paid workers. On the
other hand, evidence from in Austria, Belgium, Finland, France and the United Kingdom
unveils the difference in job satisfaction between high- and low-paid employees tends to be
insignificant. Only Denmark is distinguished by the fact that low-paid workers are
significantly happier in their jobs.
These results lead to suggestion that Europe is divided into two groups of countries, i.e.
southern and northern group. In so called southern countries39 such Greece, Ireland, Italy,
Portugal and Spain, low-wage employees suffer from low-payment as well as bed-quality of
jobs, wherein the second group, different mechanism such as market, diverse institutions
established the sustainable high degree of well-being for the lower-paid employees. Thereby
one suggestion encourages providing policies that intend to improve low-paid and bad-jobs
within the countries. The most important point is however that not all inducements ultimately
will enhance the welfare of low-paid workers.40
38
39
To facilitate the problem of two groups within the Europe, there has been implemented a notification of
southern and northern countries. This division however in case of Ireland doesn’t relate exactly to its
geographical location. Once again, this was only introduced from simplicity reasons.
40
- 31 -
There is a significant relationship in some cases between job satisfaction and low- or highpaid workforce. These results relate to the extent that low-paid jobs might inherently reveal a
bad quality of jobs. Quality of job became an indicator related to the level of pay and
therefore it unveiled that Europe is divided into two labour markets. First labor market, where
considerable relationship between level of pay and job satisfaction is significantly observed
and second market where the relationship between job satisfaction and level of pay is visible,
however not significant. Moreover European Commissions (2001) set objective of consistent
improvement of work quality therefore this issue become more important. Basic solution for
this problem would be an introduction of policy that eliminates the low-wage employment.
This action however not necessarily contributes toward the welfare of all low- paid
employees. There are noticeable differences between countries because northern group
followed a strategy of flexible employment policies with explicit level of reintegration and
training efforts director toward low-skilled workforce. This enhanced a long-term
employability. The southern countries however concentrated on policies which ought to
reduce the overall costs of low-paid employees. Therefore some consequences, concerning the
relationship between levels of pay and job satisfaction, are clearly observed.41
Finally the United Kingdom represents the observable exception to the patterns mentioned
before. Low-pay workers report a higher level of satisfaction. This result is consistent with
previous studies for this country. The reason of this phenomenon could be the fact that British
low-paid employees may receive non-pecuniary benefits to compensate these differences.
Moreover there is evidence - as mentioned above (southern and northern groups) - that
determinants of job satisfaction across countries importantly differentiate. Therefore job
quality probably can’t be generalized across European labor markets. Moreover a policy of
removing low employment within the United Kingdom, through e.g. regulation, could worsen
the employee’ well-being. On the other hand this policy may lead in other countries to totally
different results.42
5.2 Additional Evidence from Wales
Jones and Sloane (2007) published a paper that deals with low-paid and high-paid workforce
and their relationship with job satisfaction. The British Household Panel Survey (BHPS)43 has
41
42
Diaz-Serrano and Cabral Vieira (2005)
43
More information on BHPS in Appendix
- 32 -
been used to answer the question. Moreover four facets of job satisfaction have been
determined: two mentioned above and also difference between female and male workers. This
paper as well as Pouliakas and Theodossiou (2010) were motivated by the same factor, i.e. the
claim widely spread by European Commission that low-paid employments are inherently low
quality jobs. This reasoning should therefore suppose that job satisfaction would be lower in
low-paid jobs.
Results of Jones and Sloane (2007) publication reveal that level of job satisfaction is generally
higher in Wales than in England or Scotland. Moreover, job satisfaction within these countries
is also greater for low-paid employees than high-paid employees. Low-paid male workers in
Wales demonstrate significantly higher overall job satisfaction, satisfaction with the work and
with the working hours than high-paid male workers. On the other hand, low-paid female
workers in Wales unveil lower satisfaction with their pay than high-paid female workers. The
relation of higher job satisfaction with lower paid jobs refers to speculation of additional
compensation. As mentioned in the last paragraph, employees might accept low pay because
of non-pecuniary aspects which compensate their low pay. Jones and Sloane (2007) thus
proved this particular dependence in their paper as well.
The British Household Panel Survey let also Jones and Sloane (2007) provide also evidence
of other factors that affect the low- and high-paid workforce. Thus, married high-paid
employees have higher levels of job satisfaction than other groups. Moreover there is a
tendency that job satisfaction declines with education for high-pay workers. E.g. the result is
significant for employees with high degree and there is no significance at the lowest level of
education. Moreover education doesn’t lower job satisfaction of low-pay workers. This is
because lower-pay employees tend to obtain lower level of education. Furthermore, tenure,
promotion opportunities affect only the job satisfaction of the higher paid employees.
Presumably low paid employees whether don’t think about promotion or simple promotion is
not possible at this level (i.e. line production etc.).
Summarizing, besides the fact that Wales is a low-wage economy, workers there disclose a
relative high level of job satisfaction. Therefore the claim of European Commission (2001)
that low- paid jobs are inherent of low quality has been challenged by the findings in Wels.
This however proves that unhappiness in work is not always derived from low-wages. Policy
makers should thereby construct strategy that resolves this issue in terms of introducing
incentives into employment. Low-quality work itself is not consistent with employees’
- 33 -
perceptions about their jobs. Authors also notice that reducing low-pay employment by
different regulations may affect negatively welfare of low-paid employees.44
5.3 Wage Increase
Some scholars investigated over the years the impact of wage increase on job satisfaction.
Wage increase itself is associated with particular costs. Grund and Sliwka (2005) provided a
simple model which demonstrates that “wages are upward sloping and concave in an
employee’s tenure.”45 All these factors thus affect the level of job satisfaction. Moreover job
satisfaction was used as a proxy that refers to the utility of an individual in the work. Further
satisfaction from the job is affected also by the absolute wage and last wage increase.46
For the study authors used data from the first 19 waves of the German Socio-Economic Panel
which is fairly representative survey. Sample is limited to full time employees (blue collar and
white collar workers), at age of 20 to 60 years and obtaining a gross monthly wage of at least
€500 in the present and the prior year. For the analysis of the effect of wage increases, wage
information must be submitted of two consecutive years.47
5.3.1
Simple Model
Grund and Sliwka (2005) built a basic utility or job satisfaction function, wherein absolute
wage is represented by wt. ∆wt is the difference between the current wage and the wage from
the last period, i.e. wage increase. And by e is denoted exert of an effort level. Thus, we
receive fundamental utility function of an employee represented by:
‫ݏ‬ሺ‫ݓ‬, ∆‫ݓ‬, ݁ሻ,
wherein the wage increase at time t is given by:
∆‫ݓ‬௧ = ‫ݓ‬௧ − ‫ݓ‬௧ିଵ .
44
Jones and Sloane (2007)
45
Grund and Sliwka (2005) p.2
46
Ebd.
47
Ebd.
- 34 -
The effort level e can be affected by a wage increase or a higher bonus payment. Grund and
Sliwka (2005) therefore assume that wage is an increasing and concave function of the
worker’s effort e:
‫ݓ = ݓ‬ሺ݁ሻ ‫ݓ‬ℎ݁‫݁ݎ‬
߲‫ݓ‬ሺ݁ሻ
߲²‫ݓ‬ሺ݁ሻ
> 0 ܽ݊݀
≤ 0.
߲ሺ݁ሻ
߲݁²
Further, Grund and Sliwka (2005) assume additive separability of the utility function, on one
hand in satisfaction increasing from wages and on the other hand wage increases and the costs
of effort:
‫ݏ‬ሺ‫ݓ‬, ∆‫ݓ‬, ݁ሻ = ‫ݒ‬ሺ‫ݓ‬, ∆‫ݓ‬ሻ − ܿሺ݁ሻ.
Accordingly to the increase in the utility ‫ ݓ‬and ∆‫ ݓ‬and to the cost function increasing in the
effort level, following assumption is given:
߲²ܿሺ݁ሻ
߲²‫ݒ‬ሺ‫ݓ‬, ∆‫ݓ‬ሻ
߲²‫ݒ‬ሺ‫ݓ‬, ∆‫ݓ‬ሻ
߲ܿሺ0ሻ
= 0,
≥ 0,
< 0 ܽ݊݀
<0
߲݁
߲݁²
߲‫ݓ‬²
߲∆‫ݓ‬²
From this assumption marginal costs of effort amounted zero and therefore the costs of wage
raising activities are convex and the marginal impacts of wages and wage increases on utility
are decreasing.48
And finally authors assume that the marginal utility of an increase in wage is decreasing in the
wage level:
߲ ଶ ‫ݒ‬ሺ‫ݓ‬, ∆‫ݓ‬ሻ
< 0.
߲‫ݓ∆߲ݓ‬
Moreover ∆‫ ݓ‬does not measure the relative wage increase but the absolute wage increase.
This means that wage increase by €100 by person who earns €1,000 affect the satisfaction in a
stronger way than the same rise in the wage level of person who earns €10,000.49
5.3.2
Interpretation and Results
Date based used in this paper comes from GSOEP, where respondents answered the question:
“How satisfied are you with your job?” Scale range from 0 (totally unhappy) to 10 (totally
happy). The average result of job satisfaction is 7.10. Evidence reveals that there is observed a
48
Grund and Sliwka (2005)
49
Ebd.
- 35 -
decrease in job satisfaction over the time as in 1985 60% of West-German workers were very
satisfied with the jobs they held and this number decrease to 49% of very satisfied workers in
2002.50 This can be however the effect of unification of West- with East-German because in
the second region a lower job satisfaction is observable.
To analyze the effect of wage increase on job satisfaction, Further, Grund and Sliwka (2005)
provided the following approach:
‫݊݋݅ݐ݂ܿܽݏ݅ݐܽܵ ܾ݋ܬ‬௧
= ߙ + ሺߚ + ߛሻ ∙ ܹ‫ܧܩܣ‬௧ − ߛ ∙ ሺܹ‫ܧܩܣ‬௧ − ܹ‫ܧܩܣ‬௧ିଵሻ + ߜ ′ ܺ + ߝ,
where X describes the vector of the other independent variables. And the dependent variable
in an ordinal scale is job satisfaction.
The results confirm that there is a significantly positive effect for the wage and also the wage
increase. Results are presented in Table 3. This outcome can be explained in the following
manner. Let compare two workers with similar characteristics who receive the same salary
€2,500. The difference between them is the fact that one of them has earned in the past €2,000
and the second one €2,300. Therefore it can be claimed that the first worker with ∆‫ ݓ‬equal to
€500 has a significantly higher job satisfaction than the second one. The first worker on the
other hand has also higher utility. Besides the second worker earned more money than before,
he is still unhappier. It can be also assumed that the first employee has worked much harder
than the second one. Thus this difference is so substantial.51
50
51
Ebd.
- 36 -
Table 3 Regressions on job satisfaction
Source: Grund and Sliwka (2005)
- 37 -
Further, Grund and Sliwka (2005) analyzed also effects of wage increase on blue collar
workers and white collar workers. Table 3 illustrates the regression between those factors and
job satisfaction.
There is a noticeable positive effect of wage increase on job satisfaction within the white
collar workers. This result is highly significant. Moreover it can be observed even closer
relationship between those two if we take the subgroup of highly skilled white collars workers
into consideration. On the other hand, the effect of wage increase on job satisfaction is weaker
observable for blue collar workers. We can however hypothesize the reason why it is so. Not
every blue collar worker might experience high utility. Those however who are motivated and
ambitious can indicate this utility. In this connection these workers might switch their jobs to
white collar jobs due to the better career opportunities. Another factor that seems importantly
is the fact that blue collar employees can hardly have an impact on their wage increases.
Thereby their satisfaction will be on the lower level in comparison with white collar
workers.52
Summarizing, there is a significant relationship between wage increases and job satisfaction in
general. White collar workers group however is the distinct example where this high
significance is clear observed.
5.3.3
Development of Job Satisfaction over time
Grund and Sliwka (2005) investigated also if it is true that job satisfaction might decline over
time even though wages increase. Authors divided sample into two groups: first group were
these employees who stay at the particular company (Stayer) and the other group of
employees who move to another company within one year (New Employer). Moreover it is
important to notify that those who decide to leave the firm might have same substantial
reasons. Results are presented in Table 4.
52
- 38 -
Table 4 Mean job satisfaction in consecutive years (Standard devations in parantheses)
Source: Grund and Sliwka (2005)
Results reveal that employees who decided to change the job are characterized by higher level
of job satisfaction than those how stayed at the present company. The reason of this fact can
be that these workers selected a new job with particular characteristics that contributed toward
their satisfaction. Moreover new job might also highly affect workers’ wage increase. On the
other hand, the mean level of job satisfaction declines significantly for stayers. Thereby this
confirms the assumption that job satisfaction of stayers decreases over time.53
Grund and Sliwka (2005) also proved that employees who have a higher tenure are less happy
if they receive the same pay and pay increase as compared to someone in a similar situation
with a shorter tenure. Tenure variable corresponds to the same firm and not necessarily the
same job. These results however confirm that individuals staying with the same company
become less satisfied over time.
Recapitulating, overall findings reveal that job satisfaction particularly depends on wage
increase and also on the absolute wage level. As the research also shows, job satisfaction
decreases over time if employees stay with the same firm. Moreover job satisfaction utility
function explain that employee’s well-being can be worsen due to lowering of absolute
income level and his job satisfaction further decreases due to the relative loss.54
53
54
Ebd.
- 39 -
5.4 Pay cuts and Unionisation
Smith (2009) provided evidence on relationship between wage dynamics and job satisfaction.
The main result was that the relationship between job satisfaction and pay rises has a
significant concave function. This output vitally confirms Grund and Sliwka (2005) findings
which were investigated in the last paragraph. We now however will widen the analysis on
wage increase. Namely, Smith (2009) also showed a significant difference in terms of pay
cuts and unionisation. Her results took into consideration the size of change on job satisfaction
which was for instance not investigated by Grund and Sliwka (2005). Data come from the
BHPS and first 17 waves have been investigated.
Sometimes pay cuts can be accepted by workers, if for instance the company performs very
poor. Thus workers might perceive the pay cuts as the possible way to preserve their work
places. On the other hand the industry might also do very badly and this fact influences all
entities on the market. Moreover workers pay cuts may take place if workers bargaining
power will lower (that might be case when job and wage opportunities on the market are
reduced).55 Figure 5 demonstrates the relationship between pay growth and job satisfaction in
case when industry experiences a fall in real output growth compared to the industry output
which rose in real terms.
Figure 5 illustrates the effect on nominal rigidity at real earnings growth equal to minus the
sample average inflation rate. Nominal rigidity has a significant impact on job satisfaction
when industry output falls – this shows the spike in the solid line slightly below zero.
Moreover this evidence reveals that there is no difference between nominal and real rigidity in
terms of satisfaction among those employees whose industry output not fell.56
55
Smith (2009)
56
Ebd.
- 40 -
Figure 5 Effect of Industrial Output Growth on the Pay Growth – Job Satisfaction
Relationship, Great Britain, 1992 – 2007
Source: Smith (2009)
There are a plenty of different opinions about unions and their advantages and disadvantages
in the firm. Some claims that unions highly support workers and negotiate profitable work
conditions. On the other hand, opponents suggest that unions might affect the company
negatively through their overstated demands. Dickens et al. (2007) stated that unions provide
‘public good’ services to their members. Empirical evidence also confirmed that unions
enhance real wage rigidity. Furthermore, unions members are distinctive in the literature by
lower satisfaction with a given pay level than non-union workers.57
Figure 6 demonstrates differences in job satisfaction with pay growth and its relationship
between union members and non-members (first column) and between those whose workplace
is covered by a union bargaining agreement and uncovered workers (second column).
57
Smith (2009)
- 41 -
Figure 6 Effect of Unionisation on the Pay Growth – Job Satisfaction Relationship, Great
Britain, 1992 - 2002
Source: Smith (2009)
Findings indicate that unions reduce the effect of a particular pay change and job satisfaction.
In Figure 5 we distinguish following variables: men employed full-time, women employed
full-time, and women employed part-time. Thus, for full-time men non-union workers are
significantly more satisfied with pay raises and cuts. Dissatisfaction however show male
- 42 -
union members and covered men. Moreover, women don’t demonstrate a meaningful effect of
unionisation. It is worthy however to notify that among women covered working full-time
show lower satisfaction with pay cuts. Nevertheless it is interesting that Figure 5 doesn’t
unveil significant dissatisfaction with real cuts. This however can be caused by the fact that
unions may adjust the impact of external facets (bargaining power).58
There has been observed a significant impact of pay changes on job satisfaction. The
relationship between pay cuts and job satisfaction is less precipitous in comparison with pay
rises. Unfortunately there is no pattern concerning pay cuts that can be applied overall. Pay
cuts vary from the environment and different factors. Yet, unionisation affected also pay cut.
Findings show that there exists dissatisfaction with pay cuts among full-time male workers
and moreover the same effect has been observed between coverage full-time females. Nonunionised workers however did not reveal any significantly lower satisfaction with pay cuts.
5.5 Hourly Job Compensation
It seems very trivial and rational that hourly compensation should make people happy (i.e.
work for 8 hours, get money and do not care about the company performance). And that is
fully true. Accordingly to DeVoe and Pfeffer (2009) there is a strong relationship between
money and happiness. The study illustrates that employees paid by the hour tend to be happier
than those who are paid salary. Thus, hourly employees are reminded of the value of their
time. Pfeffer commented this issue following:
“If you are paid by the hour or account for your time on a timesheet, you begin to see the
world in terms of money and in terms of economic evaluation. To the extent that time becomes
like money and money becomes more salient, the linkage between how much you earn and
your happiness increases. If you are thinking about the income, then all of a sudden, even
people who are paid by salary become much more like hourly paid workers; they think of
their time in terms of money, the connection between income and happiness goes up and they
become economic evaluators of their use of time in their life. How organizations pay people
has profound effects outside of that organizational context. If you're paid by the hour, you
58
Smith (2009)
- 43 -
come to see your time in a certain way that doesn't change when you walk out of your
employer's door”59
One limitation concerning these findings is the fact that happiness is not equal job satisfaction.
Overall well-being in terms of psychological concept might indicate a contented state. It is
vital however for this empirical analysis to demonstrate the relationship that exists between
hourly compensation and job satisfaction. Namely, Acheampong et al. (2010) provided
evidence that hourly compensation have not a significant impact on job satisfaction. Data used
for the analysis come from the National Longitudinal Survey of Youth (NLSY97). 9000 youth
have been interviewed from 1997 until 2007. Sample data is taken from 2006 and 2007. One
limitation of this study is the age of 12 to 16 years. These results therefore explain only the
pattern in this particular range. Nevertheless, it is still worthy to take into account this
research as it confirms the results of previous studies that the hourly compensation can
decrease job satisfaction.60
Results of the relationship between job satisfaction and hourly compensation are presented in
Table 5 and 6.
Table 5 Regression Analysis of Job Satisfaction by Hourly Compensation, Work Hours, and
Job Mobility, 2006
Source: Acheampong et al. (2010)
59
URL: http://news.stanford.edu/news/2010/january25/money-happiness-research-012210.html [Access:
6.11.2010]
60
Acheampong et al. (2010)
- 44 -
Table 6 Regression Analysis of Job Satisfaction by Hourly Compensation, Work Hours, and
Job Mobility, 2007
Source: Acheampong et al. (2010)
The b value of hourly compensation was not significant for both years. It is hard however to
explain this phenomena due to the small number of variables provided in this study. Further,
there is observed a significant level between work hours and job mobility. This result however
has no importance for this thesis.
Summarizing, the positive relationship between hourly compensation and happiness is by no
means related to the link between hourly compensation and job satisfaction. This comparison
was implemented on purpose to explain and highlight on one hand the insignificance between
hourly compensation and job satisfaction and on the other hand to expose the enormous
difference between overall happiness and job satisfaction.
5.6 Peer Salaries
Peer salary is probably a taboo issue within many employees. Very less people declare in
public the high of own salary from many reasons. Secrecy and private information play here
surely important role. However spreading that information may lead on one hand to inequity
at the work, which is a broad discussed topic nowadays. On the other hand this could also
evoke overall employees’ pay and job dissatisfaction, decrease in productivity and ultimately
in employees’ well-being. Thus, it is very vital to investigate the relationship between peer
salaries and employees’ job satisfaction.
Card et al. (2010) conducted very recent study on peer salary and its link with job satisfaction.
So far, some scholars (e.g., Clark and Oswald, 1996) demonstrated that relative income
correlate with job satisfaction. Card et al. (2010) however implement a new approach for
- 45 -
investigating the effect of relative pay comparisons, based on manipulation of access to
information on co-workers’ pay.
In March 2008 has been launched a data base called the Sacramento Bee.61 This database
contains individual pay information for California public employees including workers at the
University of California and the California State system. Public salary was basically always
available information but the access to data was extremely restrictive and time-consuming.
The Sacramento Bee contains pay information for all University of California employees paid
$20,000 and over. To conduct the study Card et al. (2010) informed randomly employees at
three University of California campuses, informing them about the existence of the
Sacramento Bee.62 A few days later authors surveyed all campus workers concerning
following factors: pay and job satisfaction and job search intentions. Ultimately, authors
compared the answers from employees in the treatment group (who received information
about the site) and the control group (who did not receive any information).63
There are two theoretical reasons why information on peer salaries may have an impact on
employees’ utility. Existing literature assumes that employees pay much attention concerning
their salary related to peers’ wage. Moreover workers could predict their own future pay due
to the information on co-workers’ salary. On the other hand, lack of external information
leads to imperfect information on the co-workers’ pay. Thus, through obtaining information
from the Sacramento Bee, employees are able to locate their pay between co-workers’ pay.
This comparison therefore affects the level of job satisfaction. Thereby, we could distinguish a
linearly effect of job satisfaction and relative pay, if a negative effect of job satisfaction would
be observed on below-median earners and a positive effect of job satisfaction on abovemedian earners. However if job satisfaction would be a concave function of relative pay64,
thus below-median earners would demonstrate larger negative effect on job satisfaction, than
the positive effect on job satisfaction observed on above-median earners.65
To investigate the overall job satisfaction following question has been asked: “In all how
satisfied are you with your job?” Possible answers were: “very satisfied”, “somewhat
61
Database is accessible at www.sacbee.com/statepay
62
Emails were sent in October 2008 for University of California Santa Cruz campus, in November 2008 for
University of California San Diego campus, and in May 2009 for University of California Los Angeles campus.
63
Card et al. (2010)
64
Concave function also has been observed in the inequality-aversion model of Fehr and Schmidt (1999).
65
Card et al. (2010)
- 46 -
satisfied”, “not too satisfied”, “not at all satisfied”. Results reveal that University of California
employees are basically very satisfied with their job about 85%, however there was observed
lower satisfaction with their pay, i.e. about 50%. And almost the same number of employees
stated a willingness to look for a new job next year. The evidence in Table 7 provides the
effect of treatment group with implication of pay level whether paid above or below the
median of the particular unit.
Thus evidence reports that employees with below-median and above-median pay (columns 2,
6, 10) tend to demonstrate a larger negative impact on satisfaction for below-median wages.
But for those with above-median wages there is only observed very weak positive effect on
job satisfaction. Moreover accordingly to columns 7 and 11, there is observed a pattern that
documents the negative treatment effects on job satisfaction and positive effects on search
intensions. This let us presume that some workers have been highly affected by the
information concerning the co-workers’ pay. Thus, the impact on search intention of lowerwage workers is highly significant. Further, columns 6, 7 and 8 report that in the control group
low wage employees don’t reveal a lower job satisfaction level. This can be caused by a
difference in job amenities but not necessarily wage. Furthermore, the negative impact of
introduction of the Sacramento Bee database on below-median employees and lack of any
positive effect for above-median workers responds to inequality aversion wherein pay levels
and positive comparison with others have no impact on satisfaction.66
66
Card et al. (2010)
- 47 -
Table 7 Ordered Probit Models for Effect of Information Treatment on Measures of Job
Satisfaction
Source: Card et al. (2010)
- 48 -
Moreover information about the peers’ salary highly affects the overall fairness. Accordingly
the following statement: “My salary is set fairly in relation to others in my department or
unit”, 12% strongly disagreed with this opinion, 31% disagreed, 47% agreed, and 10% agreed
strongly. This might suggest that information provided influenced negatively the lowerearners. In result however it created a new awareness of their position in terms of pay in the
particular department. Ultimately information about co-workers’ salary relate to the
inequality, and highly influences the lower-earners. The reason behind can probably refer
more to fairness than to overall envy.67
Summarizing, the evidence unveils a significant relationship between introduction of
information on peers’ salary and job satisfaction. There is evidence that proves the negative
impact of information on co-workers’ salary on employees paid below the median. These
people reveal lower job satisfaction and also tendency for searching a new job. On the other
hand highly-paid employees unveil no significant effect on job satisfaction. Further, results
are consistent with inequality aversion, which states that there is a negative effect of payments
below the median, but for wages above the median there is no impact of negative factors.
Recent results are moreover consistent with past empirical evidence. And finally, Card et al.
(2010) suggest that employers have a meaningful inducement to introduce pay secrecy within
the company. In fact, information on peer pay could decrease the overall employee’s utility
and increase disparity within workers. Maybe therefore about one-third U.S. companies force
to introduce pay secrecy within the firm.68
5.7 Job Disamenities
Basically employees receive higher wages for the additional output, great performance or
overtime work. There are however another issues that can contribute toward increase in the
workers’ wage. Namely adverse working conditions might determine individual wage and in
result could also affect overall job satisfaction. In this paragraph we investigate the
relationship of individual wages and job satisfaction in terms of adverse working conditions.
Böckerman and Ilmakunnas (2004) conducted study in this field examining the Finnish labour
market. Authors claim that adverse working conditions affect fairness of pay at the workplace,
which can be an alternative and indirect measure of job satisfaction.
67
Card et al. (2010)
68
Ebd.
- 49 -
The evidence reveals that worker can receive a higher wage just to compensate e.g. bad
working conditions. Further, compensating wage differentials are consistent with other job
disamenities. This includes for instance the selection of workers into risky workplaces. The
reason behind is that more dangerous jobs will be selected by workers who are less averse to
dangers at the workplace. Thus, the literate unveils the pecuniary aspect of adverse working
conditions wherein workers will be rewarded for accepting a particular environment.69 If we
however focus in this thesis on job satisfaction and its relationship with compensation, thus
we must investigate, if really wage differentials compensate adverse working conditions and
what is its impact on job satisfaction.
Empirical evidence reveals three aspects of compensating wage differentials and job
satisfaction. All of them base however on the Finish labour market. First, collecting labour
agreements already focus on rewarding for adverse working conditions. These are pecuniary
compensations for unfavorable working hours, e.g. 3-shift workers. Thus, collective
agreements definitely take into considerations all facets of working conditions which are
relevant for workers. Second, because the evidence of the study comes from 1997, and also in
this year Finland suffered 12,7% unemployment rate, therefore it let predict that workers’
bargaining power in the market could be reduced. In result job satisfaction would be affected
and it tends to decline over the time. Third, as noticed before, fairness of pay might be an
alternative and indirect measure of satisfaction taking adverse working condition into
account.70
The study was conducted using the data set of the Quality of Work Life Survey of Statistic
Finland. 3795 individuals were invited for a personal face-to-face interview. The survey
includes information concerning among other things the level of job satisfaction, and fairness
of pay. It is vital to notice that job satisfaction is measured with a variable
“DISSATISFACTION” and the alternative measure is “PAYUNFAIR”. However, adverse
working conditions are represented by dummy variables “HARM” and “HAZARD”, if there
is at least one clearly adverse factor and if there is at least on distinct hazard respectively.71
See Table 8 for precise results concerning job dissatisfaction.
69
Böckerman and Ilmakunnas (2004)
70
Ebd.
71
Ebd.
- 50 -
Table 8
- 51 -
Source: Böckerman and Ilmakunnas (2004)
- 52 -
Böckerman and Ilmakunnas (2004) provided evidence that unfavorable working hours are
compensated through wage differentials. Thus, workers having 3-shifts employment get
around 19% higher hourly wages. This issue is however more affected by collective labour
agreement than employer’s goodwill. Further, employees that work in general outdoors
receive about 13% higher hourly wages to compensate the adverse working conditions. There
is however lack of evidence that explain the compensation of wage differentials in terms of
harms and hazards. Recapitulating, the evidence reveals that working conditions don’t affect
significantly the determination of individual wages in the Finish labour market. Thus, it is
likely that workers are not significantly rewarded for adverse working conditions.72
Furthermore, the result in Column 1 from Table 8 demonstrates that adverse working
conditions definitely increase the level of job dissatisfaction. This can be caused by no breaks
at work, strong experience of at least one kind of harm or uncertainty, lack of voice within the
company, feel of neglect, bad atmosphere, also mentally and physically heavy work,
discrimination, and finally lack of promotion possibilities. Thus, we can assume that the
particular wage has no impact on overall job satisfaction. Investigating results in details, it is
worthy to notice that females demonstrate higher job satisfaction and also older workers are
more satisfied. Education has nevertheless no significant impact. Workers performing very
well, who are paid overtime, report quite significant job satisfaction. The explanation could be
that these workers are more motivated and thus more committed to their jobs. The alternative
way of job satisfaction measure i.e. fairness of pay reports similar results. Thus, now job
hazards show a significant positive effect on the feeling of the unfairness of pay (see Table 8,
Column 2).73
Recapitulating, there is the relationship between the individual wage, taking adverse working
conditions into consideration, and job satisfaction. In addition, the alternative measure of selfreported fairness of pay can be implemented to measure job satisfaction. Finally, evidence
reveals that working conditions don’t demonstrate a significant impact on individual wages in
the labour market. Adverse working conditions however increase the job dissatisfaction and
unveil the unfairness of pay.
72
Böckerman and Ilmakunnas (2004)
73
Ebd.
- 53 -
5.8 Work Motivation
Work motivation is one of more significant facets that enhance employee’s effort at work and
further to perform very effectively. Many companies therefore attempt to increase employees’
motivation by for instance increasing pay, allowance, providing promotions and bonuses. In
result employees ought to put more commitment to their tasks and have a feeling of jobs welldone. In the competitive market experienced and motivated workforce is an important asset to
the firm. Further, in long-term these workers contribute toward surviving the company in
terms of low turnover rate, high efficiency and effectiveness, low absenteeism, and high
productivity.74
The correlation between pay, work motivation, and job satisfaction documents a number of
interesting insights. It is rather incoherent to have a satisfied worker but not enough motivated
within the company. Thus, these three factors presumably should correlate together. One
exception of the following example can be an unsatisfied worker that simple is worried about
the loss of a job. His/her motivation therefore can be dictated by pure pecuniary reason.
Nevertheless the high effort of such worker will not last for long time.
Saleem (2009) conducted study on personnel working in banks in Pakistan. Despite the fact
that Pakistan is very unstable country in terms of government, policy, financial situation,
author’s results however confirm previous findings as regards the relationship between
motivation, pay and job satisfaction.
There have been investigated two independent variables: monetary benefits and work
motivation as well as one dependent variable: job satisfaction. The results of the study are
shown in Table 9 and 10.
Table 9 Summary Data for Regression
Beta (Constant)
Beta (WM)
Beta (Pay)
R
R-square
P-values
0.631
0.258
0.407
0.666
0.443
0.000
Source: Saleem (2009)
Table 9 shows in details that p-value is less than 0.05 thus we predict that variables are highly
significant. Further, R-square 0.666 let us claim that there exists the relationship between
74
Saleem (2009)
- 54 -
variables. And finally, the Beta demonstrates a significant relationship between dependent and
independent variables.75
Moreover Table 10 unveils the very close relationship between dependent and independent
variables. Especially this is noticeable in the relationship between job satisfaction and pay
(0.615) and job satisfaction and work motivation (0.354). As mentioned before, this is not any
new finding and it is only a confirmation of past research.
Table 10 Correlation
Job Satisfaction
Job Satisfaction
Pay
Work motivation
1
Pay
0.615
1
Work motivation
0.354
0.168
1
The relationship of all three variables is also presented in Figure 7. The chart presents the
significant positive correlation.
Figure 7 Correlation
75
Saleem (2009)
- 55 -
As observed, work motivation, pay and job satisfaction correlate positive in our example. This
result is very fundamental for organizations because a motivated and satisfied worker is an
asset to the company. If there will be although a discrepancy for instance between job
satisfaction and work motivation, employer should take action to resolve the issue. Moreover
Saleem (2009) suggests that incentive and reward structure considerably affect job
satisfaction. However employees should concentrate on their particular jobs. Further,
promotion should be granted to those who deserve it.
5.9 More Money or New Management?
In the last paragraph we will discuss the pecuniary aspect that might affect the level of job
satisfaction. We will try to answer the question: do employees really focus on pay level or
maybe there are other factors that might increase overall job satisfaction?
Many scientists claim that money is one of the most frequent answers if we ask a question
why people work. And it is nothing unusual. People need to live, pay bills and mortgage, pay
for elementary commodities. Thus, money gives somehow security and also privilege.
Most studies unveil a positive relationship between job satisfaction and pay level. For
example Beutell and Wittig-Berman (1999), Saleem (2009) or Sanchez and Brock (1996).
This evidence is sometimes not coherent with other results. Namely, for instance Dunham and
Hawk (1977) and Adams and Beehr (1998) demonstrate that this relationship is fairly weak.76
Judge et al. (2010) conducted a meta-analysis of the relationship between pay level and job
satisfaction. Scientists compare the variables for U.S. and international samples, taking
different measures of satisfaction into consideration (MSQ, JDI, and other). The meta-analysis
provides also following criteria: measure of pay, independence of data source, publication
status and ranking of journal source. Judge et al. (2010) reveal that pay level is basically
positively correlated with overall job satisfaction.
To determine if there the relationship between pay level and job satisfaction varies between
studies, Judge et al. (2010) conducted a separate analysis of the mean level meta-analytic data.
The mean pay level amounted $64,119 for 61 studies included the between-study analysis.77
The average percent of job satisfaction was 76%. Figure 8 shows the entire chart.
76
Judge et al. (2010)
77
Ebd.
- 56 -
Figure 8 Between-study relationship between average pay level and average level of job
satisfaction
Source: Judge et al. (2010)
The average level of job satisfaction seems to be relatively stable across studies. Therefore,
job satisfaction gives the impression to be independent of pay level. Moreover job satisfaction
percentage is widely spread in the low range of pay level as well as in the higher range of pay
level. Thus, the level of pay has modest relation to job satisfaction. This means that those who
earn more money within an organization are little more satisfied than those who earn
noticeably less. In Figure 8 we can also observe that some individuals with lower pay level
might be more satisfied with their job then individuals with higher pay level. For instance,
lawyers with an average wage of $148,000 per year was less satisfied with their job (68% of
scale maximum; Wallace, 2001) than child care workers with wage of $23,500 per year (79%
of scale maximum; Kontos & Stremmel, 1988).78
If not pecuniary aspect then what is important for employees? Study supports two main
implications for employees and employers. Employees might aim at obtaining a job that
fulfills particular individual corresponding to, for instance, intrinsic job characteristic. Further,
employees are not able to select the management or leader. However the leadership exposes
78
Judge et al. (2010)
- 57 -
considerable correlations with job satisfaction. Probably workers nowadays really care who
do lead the group or team. And thus, the atmosphere within the firm and work environment
might be significant variable for some individuals. Yet, it must be admitted that the results are
not applicable to everyone, as there is evidence that for some individuals a higher income still
plays a meaningful role. Employers however must be aware that even though the pay level
doesn’t affect significantly job satisfaction thus that does not mean that the pay does not
motivation an individual at all. Moreover paying high wage is not likely that it will result in
overall job satisfaction within the firm.79
Thus, Judge et al. (2010) provide evidence which reveals that the pay level not always must
impact the job satisfaction. Scholars claim that there are other facets which contribute toward
the higher level of job satisfaction. Results however also unveil some limitations therefore
future research should explore for instance aspect such as diverse conditions of job
satisfaction in terms of pay level.
79
Judge et al. (2010)
- 58 -
6. Empirical
Evidence
of
the
Relationship
between
Performance Pay and Job Satisfaction
Performance pay is a very broad discussed topic in the literature. Many scientists already
investigated different dimensions of this financial reward. Consequently performance pay
increases in value and many organizations attempte to implement it. Incentive pay partially
motivates employees and encourages to more efficient work. On the other hand merit pay can
also be counterproductive concerning for instance unsatisfied workforce which receive low
wages.
Very valuable findings presented Lazear (2000) in his paper examining data from Safelite
Glass Corporation, a large auto glass company. Between 1994 and 1995 company changed the
reward system from hourly payment to piece-rate pay. This situation is presented in Figure 9.
Figure 9 Compensation Before and After at Safelite
Source: Lazear (2000)
Figure 9 demonstrates both groups: hourly workers and those who switched to piece-rate pay.
Within the second group we distinguish those workers who perform very well and receive
[be – K] and those who perform less efficient however they receive guaranteed pay W.
Following equation illustrates the following scheme:
‫ = ݊݋݅ݐܽݏ݊݁݌݉݋ܥ‬max ሾܹ, ܾ݁ − ‫ܭ‬ሿ
- 59 -
Therefore, guaranteed wage W receive those workers who performed e0 and those who are
below e*. For output over e* workers will receive additional compensation which is [be – K].
Workers with lower produced output have steep indifference curve A.
Results of the study reveal that through the switching from hourly wages to piece-rate pay
productivity effects, i.e. the level of output and its variance, increased. Also more able
workers are willing to switch to piece-rate pay because of the increase in their compensation
[be – K]. All in all, the company’s performance increased by 44%. Further, tenure effect is
considerably related to productivity because less productive workers quit jobs first. And
finally, wages of those workers who switched to piece-rate pay increased about 10% and 90%
of these workers had higher wage being paid for their performance.80 Therefore, results
expose that performance-related pay can be a good method to encourage workforce for more
productive work. Moreover, both the firm and highly motivated workers will take mutual
advantage, i.e. greater performance for company and higher wages for workers. Nevertheless,
performance pay affects also the overall job satisfaction. Literature characterizes many
aspects of performance pay and job satisfaction and these will be discussed in this chapter.
The empirical evidence in this chapter is organized similar to the previous chapter. Thus,
findings of different studies are collected and analyzed, then ordered in terms of results.
Researchers have used sometimes different methods. The author however aims to determine
the output in an understandable and logical manner thereby following division is applied.
6.1 Different Dimensions of Performance Pay
Through the implementation performance-related pay workers’ earnings will increase as
documented in evidence Lazear (2000) or Parent (1999) but performance pay scheme itself
can have occasionally less favorable effect on job satisfaction. We can stipulate different
reasons why performance-related pay may reduce job satisfaction.
First reason why performance-related pay fails can be caused by the fact that this reward
method was simple wrongly implemented, as already discussed in Chapter 2. Objective
measures of performance may be uncorrected introduced with any link for instance to
company profit. Therefore, performance-related pay could basically increase productivity of
firm but in exchange quality may fall, maintenance deteriorates or injuries increase and
therefore profitability may decrease (Freeman and Kleiner, 2005). There is also evidence
80
Lazear (2000)
- 60 -
claiming that supervisor’s evaluation may lead to different biases which not contribute toward
increase surplus (Prendergast, 1999). And finally, some schemes documented that teamwork
and co-operation not always affect positively employees’ well-being (Drago and Garey,
1998). Following characteristics might be well assigned to lower worker satisfaction.81
Further, performance pay can be seen as a disciplinary tool that does not focus on workforce
well-being but merely on increase work effort and on lowering satisfaction, particularly for
low skilled workers. This theory confirms Drago (1996) and Fernie and Metcalf (1999)
findings. Scientists unveil that low wages and high stress are descended from computerized
monitoring and piece rates. Also peer pressure can affect negatively job satisfaction of
workers whose earnings increased (Kandel and Lazear, 1992). Furthermore workers’
satisfaction from job can be reduced due to the increased earnings risk related to performance
pay scheme. Lack of clear compensation scheme might evoke overall fear concerning the
workers’ wage demands (Milgrom and Roberts, 1992).82 The risk issue will be however still
discussed in this thesis.
Moreover, pay dispersion a natural factor that results from individual performance pay
scheme. Evidence unveils that such schemes decrease the morale of the least productive
workers and also decrease the effort which directly corresponds to reduction of firm’s
productivity (Kennedy, 1995). Sometimes demotivating factors have the basis in difficulties
in measurement methods and in evaluation of workers performance. This thus can be seen by
workforce as unfair behavior. Study of Brown (2001) also reveals that workers who believe
their payment methods are fair demonstrate higher job satisfaction. Therefore, if some types
of performance pay scheme might be perceived as unfair, thereby workers will probably
report lower job satisfaction.83
Let now consider the issue if pay performance really increases job satisfaction? Green and
Heywood (2007) provided general evidence using BHPS84 data where all job satisfaction
questions are reported in the following scale: 1 being the least satisfied and 7 the most
satisfied. Table 11 demonstrate mean of job satisfaction.
81
Green and Heywood (2007)
82
Ebd.
83
Ebd.
84
For more information see Appendix.
- 61 -
Table 11 Summary Statistics, Pay Scheme and Job Satisfaction: Employees Aged 20–65, 1998
Job satisfaction reported on 1-7 Likert scale. Facets investigated: (1) overall job satisfaction, (2) pay satisfaction,
(3) satisfaction with hours worked, (4) satisfaction with job security, (5) satisfaction with the work itself.
Source: BHPS, Green and Heywood (2007)
In general Table 11 does not appear to report a significant link between job satisfaction and
performance pay schemes. Results provide that overall job satisfaction is highest for those
workers who do not obtain any type of performance pay or profit sharing/bonuses. Pay
satisfaction however is the highest for those who receive profit sharing/bonuses only and
nearly the same for those who are rewarded for performance only. Accordingly these results
we may state that the role of performance pay is determined on different dimensions of job
satisfaction. Therefore several findings will be identified. First, there is no general tendency
that performance pay ought to be implemented if only the job satisfaction of all workers will
increase. Performance-related pay was established inherently to particular production
technologies and adaptation there is very effective. As discussed before, performance pay can
also be counter-productive under some circumstances and can reduce surplus. Therefore,
workers will never reveal in this case high level of job satisfaction. Furthermore, different
dimensions of job satisfaction can negatively correlate with performance pay. Namely
performance pay may affect negatively satisfaction with management, co-workers. Even
stress could lower the overall job satisfaction. And finally, measures of performance pay also
influences employees’ satisfaction with their work. Evidence unveils that piece rates may
lower satisfaction even though workers’ earnings raise satisfaction.85
In particular we will be discussing many factors which influence significantly level of job
satisfaction in performance-related pay scheme in next paragraphs.
85
Green and Heywood (2007)
- 62 -
6.2 Impact of Performance Pay on High- and Low-paid Workers
Many economists, for instance Lazear (2000), documented significant effect of performancerelated pay in productivity. Notwithstanding most of evidence investigate the short run
benefits of incentives. The reason of it is because long-run effects were not documented very
broadly in the databases. The psychological literature suggests that these long-run effects may
negative affect motivation and job satisfaction. Therefore the relationship between
performance-related pay and job satisfaction could reveal the manner in which incentive pay
influence productivity in the long-run. Thus, it is interesting to investigate how the
compensation methods influenced particular attitudes towards different jobs. To do so we will
examine the difference in job satisfaction between workers receiving performance-related pay
and those who do not obtain this type of compensation.86
McCausland et al. (2005) provided evidence on performance pay and its relationship with job
satisfaction. Scientist used the data of BHPS87 which is a sample of nearly 10,000 individuals
from British households interviewed randomly.
The evidence reveals very interesting outlook on those who are rewarded for performance and
those who are compensated in other manner. Thus, there is a greater group of male workers
who receive performance-related pay than among workers on another wage schemes. Also
workers paid for performance tend to be younger, have union coverage at the workplace, work
full-time with prospect of future promotion and career opportunities, and are employed in
larger firms. Furthermore, there is evidence that claims that men are less satisfied with overall
jobs than women and moreover so called U-shaped effect of age on job satisfaction, discussed
in this thesis before, is observable too. Other facets that affect positively job satisfaction are
no union coverage, promotion and career opportunities, and also part-time employment. As
well individual with a partner, on permanent jobs in smaller firms unveil a higher average
satisfaction level. All results are presented in Table 12.
86
McCausland et al. (2005)
87
See Appendix
- 63 -
Table 12 Mean reported job satisfaction scores by method of pay
Source: McCausland et al. (2005)
Surprisingly, most categories report higher mean satisfaction of workers on non performancerelated pay than of those receiving performance pay. Exceptions are here higher educated
- 64 -
individuals, also those with non-permanent contracts and those who work in the National
Health Service (NHS)/Higher education sector.88
For further analysis we will use the plot of predicted overall job satisfaction by pay status (see
Figure 10). Now we only concentrate on performance-related pay individuals (PRP) and non
performance-related pay individuals (NO PRP).
Figure 10 Predicted Overall Job Satisfaction by Pay Status
Source: McCausland et al. (2005)
Thus, from Figure 10 is clear observable that those who receive PRP have lower average job
satisfaction to a particular hourly wages. On the other hand, those on the other compensation
scheme unveil much larger overall job satisfaction. The break-even point in this graph is
£10.80 per hour. In this point the curve of PRP employees is steeper and simultaneously
implies that obtaining more than £10.80 unveils greater job satisfaction for this group.
Further, the greater increase in hourly wages the greater is the overall satisfaction of PRP
workers. On the other hand, NO PRP employees don not report such as immense increase of
overall satisfaction with increase of the hourly wages. Thus, we can state that incentive pay
88
- 65 -
has a significantly positive effect on the mean job satisfaction of (very) high-paid workers
only.89
The above described pattern can be explained concerning the basis facets. First, workers who
obtain low wages and are in PRP scheme derive lower satisfaction from their job. This
statement goes hand in hand with the idea that low wage workers might perceive such
compensation scheme as controlling tool. It is vital however that worker do not perceive PRP
as a punishment tool. Moreover, findings concerning the aspect of controlling tool are
consistent with evidences also provided in the Chapter 4 pertaining to the fact that lower wage
workers are not less satisfied with their jobs compared to high-paid workers (Pouliakas and
Theodossiou, 2005). This can be caused by different non-pecuniary and intrinsically
rewarding aspects of work. In result such behavior suggests that low wage workers have a
need to convince themselves that their job is important despite the low wage. On the other
hand, workers receiving higher wages in PRP scheme are more likely to perceive this
inducement as supportive. “In terms of Maslow’s (1954) hierarchy of needs, excess income
can aid in the satisfaction of esteem needs because high income implies high competence and
overall personal worth. So, even when satisfaction of basic physiological and security needs is
not an issue, some people will value high income as a marker of competence and personal
worth”90 Further, higher income can be a predictor of recognition and higher status within the
company but only for those who are high in the hierarchy.91
McCausland et al. (2005) also reports that using performance pay as inducement can in some
cases be counterproductive in the long-run for certain low-paid employees in the UK.
6.3 Individual and Gain-sharing Incentives
Over the last years there has been observed the increase of adaptation performance pay
schemes within many companies. Therefore general discussion about intrinsic job satisfaction
became very often an important issue for firms. Scientists thus suggest that the impact of
performance-related pay on job satisfaction is an empirical question where a number of
89
90
Malka and Chatman (2003) p.744
91
- 66 -
individual- and job-related characteristics play a role. Different facets of the contracts to some
degree affect overall job satisfaction.92 Some of them will be discussed in this paragraph.
Pouliakas and Theodossiou (2009) provided very interesting analysis of the relationship
between performance pay and job satisfaction. Scholars used two data bases: data from waves
8 to 15 of the BHPS and very unique cross-sectional EPICURUS93 database for the year 2004.
Descriptive statistics from BHPS and EPICURUS databases unveil very interested
characteristics of workers who receive incentive pay and of those on alternative wage
schemes. In some points results are coherent with findings of e.g. McCausland et al. (2005)
which we discussed in this chapter. Thus, it is observed that the number of male, young and
non-unionized employees working under performance-related pay scheme is higher than
among those workers who received alternative compensation. Further, those who obtain
incentive pay are more likely to be in full-time and permanent employment, in private sector
jobs with possibility to receive promotion. Also larger firms tend to employ often on
performance-related pay scheme. Moreover, incentive pay contributes towards higher mean
wages and a greater average number of hours. Concerning the job characteristics, workers
with performance pay do basically repetitive tasks and work under tight deadlines, also high
speed and fatigue are observed. But on the other hand greater individuals paid for
performance claim that they are in safer and of superior quality jobs.94
6.3.1
Gain-sharing Incentives
Gain-sharing is a variable that explains the existence of any bonuses, such as Christmas or
quarterly bonus, profit-related pay, profit sharing bonus or occasional commission. These
incentives are basically designed to motivate and increase effort of employees at their jobs. To
examine the relationship between job satisfaction and performance-related pay or
performance-related pay with bonuses, we use Table 13.
As we observe, the EPICURUS database is very precisely concerning particular facets of job
satisfaction. Notwithstanding, it is clear visible that performance incentives, especially
92
93
The EPICURUS data have been collected as part of a survey of workers in lower- and middle-skilled
occupations that was undertaken as part of the EU-funded EPICURUS project in August and September 2004 in
seven European countries (Denmark, Finland, France, Greece, the Netherlands, Spain and the United Kingdom).
For the purposes of this study we use the UK questionnaire only, which was administered online via the Internet.
This led to a sample of 1,002 random respondents (Pouliakas and Theodossiou, 2009).
94
- 67 -
bonuses 6.63, demonstrate higher satisfaction with the job but not only. It is very vital that
workers pay much attention to the job security (bonus and PRP). On the other hand, noncontingent compensation schemes tend to be more satisfied with the hours (and times)
comparing with PRP schemes. Additional findings also unveil that PRP workers are more
dissatisfied in terms of the relation with the boss, level of workload, work tension and job
stress. These outcomes are however consistent with the reality due to the fact, that workers are
motivated to perform better and faster. In results they may suffer some tensions and overall
stress in the job. Summarizing, from the evidence provided, PRP workers are the leastsatisfied. Moreover, the other group of employees receiving performance bonuses is usually
more satisfied than workers on time rates.95
Table 13 Mean job satisfaction by facets of jobs and mode of incentive pay
Source: Pouliakas and Theodossiou (2009)
Furthermore, the BHPS and the EPICURUS databases were examined in the regression
analysis and showed that only performance bonuses have a positive and significant impact on
job satisfaction. Moreover bonuses at the end of the year were mostly observed by employees.
Surprisingly, individual performance-related pay does not reveal any significant effect on
overall job satisfaction.96
95
96
Ebd.
- 68 -
6.3.2
Individual Incentives
The evidence from BHPS and EPICURUS databases discloses also different facets that affect
significantly job satisfaction. Because there are many factors which has been taken into
account, findings will be collected and presented in this paragraph.
As already mentioned EPICURUS database let us investigate more precisely the relationship
between pay performance and job satisfaction taking unexplored job factors into account.
Thus, a system of rotating shifts and jobs with variety of duties unveil higher utility of
employees than those workers with fixed time schedules and standard workplace routine.
Moreover, non-repetitive jobs are seen more favorable due to the fact that they are with higher
quality. And finally workers who are contented and have a good relationship with their
supervisors and also colleagues are more satisfied.97
Regarding the job-specific characteristics it is noticeable that performance-related pay has a
greater effect on the job satisfaction in case of permanent contract employees. This finding
also supports the belief that job security is one of the most important factors for employees.
Once again, this result is consistent for instance with outputs provided by other scholars but
also refers significantly to Job Satisfaction Survey explained in Chapter 3 where job security
is one of the most important factors. Furthermore, a greater job satisfaction of performancerelated pay is observed among unionized workers. The same evidence unveils also Green and
Heywood (2007). This output has a practical implication. Namely, when unions are involved
in formation and application of performance-related pay schemes within the company, the
success is therefore more possible as there were not involved. Moreover quite rational seems
to be that performance bonuses, in terms of job-characteristics, have a larger utility impact on
employees who work longer hours and who are thinking that the job they are performing is
physically tiring. This can be a reason to claim that there exists a policy of rewarding hardworking individuals. On the other hand, there is noticeable finding of smaller utility effect of
performance bonuses for employees who work in teams. One explanation of this fact is that
there exists among co-workers a tense relationship caused by performance-related pay
scheme.98
97
98
Ebd.
- 69 -
Recapitulating, facets of job characteristics affect significantly the relationship between job
satisfaction and performance-related pay. Therefore following results are crucial for
companies who intend to implement incentive pay scheme or to improve current performance
pay scheme. From the practical experience and also from the literature it is considerable that
incorrect implementation of particular scheme might be counter-productive for organization.
Hence it is vital that company will examine all aspects of performance-related pay scheme.
6.3.3
Additional Evidence from the U.S.
Basically different payment schemes are designed to meet expectations of workers and
expectations of firms. Thus, the increase in effort on different dimensions is associated with
particular payment. Accordingly to this fact we look at the evidence from the U.S. which
discloses the close relationship between performance pay (its different elements) and job
satisfaction.
Heywood and Wei (2006) provided evidence on performance pay using the 1988 wave of the
National Longitudinal Study of Youth. This survey is represented by sample of more than
12,000 men and women between 14 and 22.
Table 14 summarizes all results. The crucial finding is that workers receiving individual
performance pay or profit-sharing demonstrate higher overall job satisfaction. This
relationship is fairly significant and is represented in Column 1. This outcome moreover is
consistent with Pouliakas and Theodossiou (2009) conclusions. Further, in Column 2
individual performance pay is split into few categories: piece rates, commissions, bonuses,
stock options or tips. Noticeable is that all those facets of individual performance pay and also
profit-sharing have significant coefficient. Also variables such as promotion, supervisors, and
pension are significant in terms of jobs satisfaction and their results confirm past studies.99
Moreover, it was suggested that gender may be a central estimator. The evidence also reveals
this fact by differences for example in the pension and hours in the sample generated for men
and on the other hand in the sample for women in the childcare and marital status. All
variables mentioned above are significant in terms of job satisfaction. Moreover, female
unveil a different pattern in Table 14. Thus, profit-sharing seems to be not important for
women. This result validates the assumption that women will not be well motivated by group
schemes. All in all monitoring that is combined with profit sharing can have less positive
99
Heywood and Wei (2006)
- 70 -
influence on least able workers to respond to such monitoring with extra effort. Therefore
greater cooperation in profit-sharing causes is observed by man. Women are unfortunately
less able to respond to group incentives. The second pattern observed for women is that they
do not unveil the same negative effect in piece rates or the positive influence from
commissions or bonuses. Therefore examining job satisfaction of women the methods of pay
are less likely to play important role.100
Briefly summarizing, individual performance pay scheme and profit-sharing are related to the
greater job satisfaction. Further, there exists a difference between genders. Men are basically
unveiling a significant level of different facets than women are demonstrating. This is
probably caused by different personal attitudes. Heywood and Wei (2006) however notify that
the results are specific for the U.S. in this particular time frame.
100
Heywood and Wei (2006)
- 71 -
Table 14 Panel Estimates on Job Satisfaction (1988 – 1990 NLSY)
Source: Heywood and Wei (2006)
- 72 -
6.4 Firm Size
Until now this thesis has a cursory look at the relationship between performance pay and job
satisfaction and its impact on firm size. There is evidence that explains basic differentiation in
small and large firms.
Artz (2008) conducted study using data from the Working in Britain in the Year 2000 survey
of 2,466 workers. This data consists of four types of performance pay including: individual,
workers team performance, as well as profit-sharing and 15 measures of job satisfaction
related to overall job satisfaction. Moreover the study differentiates three category of firm
size: small firms with less than 51 workers, medium firms between 51 and 500 employees and
big firms containing over 500 workers.
Despite the fact that the relationship between performance-related pay and job satisfaction is
ambiguous as increase in wages level from performance pay has a positive impact on job
satisfaction whereas increased effort has a negative effect. Scientists consistently investigate
the performance pay’s impact on job satisfaction. This is because of its importance.
Artz (2008) claims that performance pay significantly increases job satisfaction but only in
big firms. The reason why it happens is that performance pay can decrease the distance
between workers and decisions makers and moreover contribute towards the opportunity of
optimization of workers’ effort. Small firms are stood out by the fact that the productivity
measurement is relative ease to conduct. Thus, there is no significant sign of increase in level
of job satisfaction from individual performance pay as productivity is already transparent.
Employees however are able to optimize their effort at the small firm level. Furthermore,
taking individual performance pay into account, we observe increase in job satisfaction among
big firms. This result can be partially explained by the fact that performance pay somehow
increases worker sense of belonging, and on the other hand decrease worker distance from
decision makers. Further, workers are able to choose the optimal amount of effort
simultaneously giving the opportunity for managers to monitor workers effort. And finally,
evidence unveils that males and union workers show higher job satisfaction when their pay
bases on individual performance pay. In result, more satisfied workers are pleased with their
jobs and thus decrease the possibility of turnover while low satisfied workers with their job
might leave the firm.101
101
Artz (2008)
- 73 -
6.5 Risk attitudes
So far we already examined many factors that affect job satisfaction and performance pay.
Between them we can still stipulate different dimensions of risk attitudes. Every person shows
a particular level of risk and this is noticeable in the daily life. In the literature however we
distinguish in general three type of risk: averse, neutral and seeker. All these dimensions are
characterized by specific level of risk absorption. In this paragraph we concentrate on risk
tolerance between performance pay workers and those who are not rewarded through this
method. Given these particular attitudes we look at overall job satisfaction between those
employees.
Cornelissen et al. (2008) provided evidence about risk attitudes and its relationship between
job satisfaction and performance pay. Scholars used data from 2004 wave of the German
Socio-Economic Panel where data on risk preferences and information on performance
appraisals were gathered. The sample consists of 3724 observations.
To examine the relationship between the risk attitude, performance pay and job satisfaction
we use Table 15 and Table 16. The results in Table 15 unveil that performance pay and
greater risk tolerance independently determine job satisfaction. Further, those employees who
work under performance pay scheme report higher job satisfaction, the coefficient is
significant. Moreover, the same workers reveal a greater risk tolerance with higher job
satisfaction.102 This output seems to be rational with the fact that workers paid for their
performance are continuously dependent on their effort produced.
102
Cornelissen et al. (2008)
- 74 -
Table 15 Results Limited to Those with Performance Pay: Risk and Job Satisfaction
Source: Cornelissen et al. (2008)
Furthermore, Table 16 demonstrates that those workers without performance pay indicate
insignificant coefficient between risk tolerance and job performance.
- 75 -
Table 16 Results Limited to Those without Performance Pay: Risk and Job Satisfaction
Source: Cornelissen et al. (2008)
Diverse tests: the simple comparison and the parsimonious regression provided by
Cornelissen et al. (2008) considerable reinforce the results that the positive link between risk
tolerance and job satisfaction remaining for those who are under performance pay scheme but
no significance output for those not on performance pay.
- 76 -
6.6 What is the optimum bonus to pay?
In this paragraph we deal with very interesting question: how high bonuses should company
pay to their workers? This particular issue is not only important from the employee or
employer point of view that place one or the other side better-off. The results of bonus
payment have much wider influence. Thus, incentives whether motivate or not an individual
to perform more efficient. In result this directly corresponds to overall job satisfaction.
Already discussed findings from McCausland et al. (2005), Artz (2008), Green and Heywood
(2008), and Heywood and Wei (2006) investigated the difference in job satisfaction between
workers receiving performance-related pay and those on alternative schemes. Scientists
however ignored that employee’s performance and satisfaction might differentiate in relation
to magnitude of incentives. Pouliakas (2010) examines the impact of the intensity of
incentives (i.e. ratio of workers’ salary to bonuses) on job satisfaction.103
Pouliakas (2010) investigated data from waves 8 to 17 (1998 – 2007) of the BHPS. Crucial
aspect of this database was the fact that survey contained information on the amount of bonus
pay from 1997. Interesting information is also the average bonus/profit-sharing payments of
£1684 per annum which corresponds to 6.7% of average yearly gross earnings. Further,
evidence from the mean amount and intensity of annual gross bonus/profit-sharing by group
reveals that men experience higher bonus/profit-sharing than women. Employees who are
married and are more educated disclose significant level of bonus/profit-sharing payments.
Moreover, in terms of working conditions, full-time workers, in the private sector, on
permanent contracts and in non-union jobs unveil to receive larger bonuses. Ultimately firm
size and the type of occupation affect significantly additional compensation.104
6.6.1
Effect of bonus intensity on satisfaction
We already demonstrated in this thesis that profit-sharing plays important role towards job
satisfaction. Now we precisely will investigate particular effect of bonuses and profit-sharing
in terms of the intensity. Table 17 provides data with Fixed Effects Estimates of Bonus
Intensity on Facets of Job Satisfaction.
103
Pouliakas (2010)
104
Ebd.
- 77 -
Table 17 Fixed Effects Estimates of Bonus Intensity on Facets of Job Satisfaction
Source: Pouliakas (2010)
Thus, the estimated coefficients reveal that higher financial incentives increase employees’
satisfaction with their total pay, job security. There is however no significant effect on
satisfaction with their hours of work. Nevertheless, it is noticeable that smaller bonuses reveal
a significant negative effect on the satisfaction from workers’ actual work. Pouliakas (2010)
claims that following negative effect relates to the so-called crowding-out hypothesis which
can derive from the magnitude of the financial reward. Thus, even though workers are
rewarded they still suffer lower satisfaction from their job.105
Pouliakas (2010) also provided evidence which reveals a significant effect on changes in
bonus status. Thus, findings relate to individuals who have experienced a change in the
frequency of bonus pay. Therefore there workers received a bonus in one year and did not
receive any bonus in the following year (or are not paid a bonus continuously over the time)
105
Pouliakas (2010)
- 78 -
are less likely to reveal significant level of job satisfaction. Results also assert that workers
who receive bonuses for a number of following years unveil a lower level of job satisfaction
compared to those who do not receive similar pay over time. The reason why it takes place
can be explained on the basis of adaptation of workers to their compensation.106
6.6.2
Effect of bonus intensity in terms of key characteristics
Furthermore, we can stipulate bonus intensity in terms of key characteristic. To do so we use
Table 18 with Fixed Effects Estimates of Bonus Intensity on Job Satisfaction by Subgroups.
From the following evidence we observe that higher job satisfaction unveil male workers at
the highest level of the bonus distribution. Female employees however do not reveal any
significance effect at any of diverse segments. Furthermore, surprisingly only non-union
workers whose compensation is at the upper level of the bonus distribution reveal significant
job satisfaction. Similarly, for unionized employees there has not been found any significant
effect on job satisfaction. On the basis of the sizeable literature and also from evidence in this
thesis we observe that the job satisfaction effect on unionized and non-unionized workers is
ambiguous. And moreover so-called “large” bonuses significantly affect only job satisfaction
of private sector workers and those how are in skilled occupations.107
106
Pouliakas (2010)
107
Ebd.
- 79 -
Table 18 Fixed Effects Estimates of Bonus Intensity on Job Satisfaction by Subgroups
Source: Pouliakas (2010)
- 80 -
7. Conclusions
The fundamental findings of this thesis reveal that there is the noticeable relationship between
compensation, pay performance and job satisfaction. The empirical evidence indicates that
many variables affect the satisfaction from the job. Thus, there has been observed a significant
effect on the level of satisfaction between male and female, high- and low-paid workers and
also union and non-union employees. All findings can certainly be examined by managers and
thus it might contribute towards the better understanding of workers’ job satisfaction.
Nevertheless sustaining the high level of job satisfaction within the workforce is a very
important challenge for managers because, as empirically proved, it affects to a large degree
the overall performance of the company. Satisfied workers reveal higher productivity, lower
turnover and absenteeism.
In the specific case when performance-related pay is implemented it is vital that management
take all aspects of this particular reward into account. Thus, some of the important facets, that
play enormous role, are: individual and profit-sharing incentives, firm size, risk attitudes and
bonus intensity. Once again, as the literature unveils, the implementation of performance pay
can be in some cases counter-productive but also already existing performance pay scheme
may become counter-productive if the job satisfaction decreases over time.
Results and the recommendation of their implementation are associated with particular
limitations. First, the analysis of different papers bases on miscellaneous types of jobs. We
cannot flatten workers in the production line and those who work in the bank or in the public
institutions. Therefore, the general implementation of findings within the company for all
types of job would not be appropriate. Further, for the analysis we used diverse databases.
Some of them consisted of very broad characteristics, i.e. wide range of age, different types of
job, heterogeneous types of employment (part time, full time), large sample and many others.
On the other hand some of studies based on very small samples, on particular group (i.e. bank
sector).Furthermore, some databases worked on particular state. Thus, we observe for instance
that Europe is divided into two labour markets. First labor market, where considerable
relationship between level of pay and job satisfaction is significantly observed and second
market where the relationship between job satisfaction and level of pay is visible, however not
significant. Moreover the study on peer salary comes from Finland and is closely related to
this country. Through this bias we cannot claim that all results are applicable for others.
- 81 -
Moreover, scholars used different methods to examine variables wherein some of them
received significant results and others provided fairly different output. That is the case with
unionization where findings are very ambiguous.
Nevertheless, there has been observed quite few limitations in this analysis. Nonetheless
results are still attractive to investigate them and to ponder upon their implementation within
the company.
- 82 -
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Internet:
URL: http://www.guardian.co.uk/business/2009/nov/22/banks-top-20-earners [Access:
5/10/2010]
URL: http://www.iser.essex.ac.uk/survey/bhps/ [Access: 15/10/2010]
URL: http://news.stanford.edu/news/2010/january25/money-happiness-research-012210.html
[Access: 6/11/2010]
- 92 -
List of Abbreviations
ECHP
European Community Household Panel
GSOEP
German Socio-Economic Panel
JCM
Job Characteristics Model
JDI
Job Descriptive Index
JDS
The Job Diagnostic Survey
JIG
The Job in General Scale
JSS
Job Satisfaction Survey
MSQ
The Minnesota Satisfaction Questionnaire
NLSY97
National Longitudinal Survey of Youth
NLSY
National Longitudinal Survey of Youth
SHRM
The Society for Human Resource Management
PRP
Performance-related Pay
NO PRP
Non Performance-related Pay
- 93 -
Appendix
British Household Panel Survey (BHPS)
The British Household Panel Survey began in 1991 and is a multi-purpose study whose
unique value resides in the fact that:
•
it follows the same representative sample of individuals – the panel – over a period of
years;
•
it is household-based, interviewing every adult member of sampled households;
•
it contains sufficient cases for meaningful analysis of certain groups such as the
elderly or lone parent families.
The wave 1 panel consists of some 5,500 households and 10,300 individuals drawn from 250
areas of Great Britain. Additional samples of 1,500 households in each of Scotland and Wales
were added to the main sample in 1999, and in 2001 a sample of 2,000 households was added
in Northern Ireland, making the panel suitable for UK-wide research.
All members of the household aged 16 or over are interviewed. In addition children aged 11 –
15 complete a self-completion questionnaire – the Youth Questionnaire introduced in 1994.
The questionnaire for each adult individual lasts approximately 45 minutes and there is an
additional short household level questionnaire asked of one person only.
The core questionnaire covers a broad range of social science and policy interests including:
•
household composition
•
housing conditions
•
residential mobility
•
education and training
•
health and the usage of health services
•
labour market behavior
•
socio-economic values
- 94 -
•
income from employment, benefits and pensions
There is also a variable component containing questions which need to be asked less
frequently than annually, new questions engendered by changing policy and research issues,
and questions to elicit retrospective data on panel members’ life histories before the first
interview. These have included a lifetime history of marriage, cohabitation and fertility;
lifetime job history; questions on wealth and assets, additional health measures, ageing,
retirement and quality of life, children and parenting, neighborhood and social networks.108
108
URL: http://www.iser.essex.ac.uk/survey/bhps/ [Access: 5/11/2010]
- 95 -
Abstract (English)
This thesis investigates the relationship between compensation, performance pay and job
satisfaction. The entire document is basically divided into three sections: theoretical part, the
relationship between compensation and job satisfaction and the relationship between pay
performance and job satisfaction.
Job satisfaction is a foundation of sustainable competitive advantage to an organization. The
more satisfied is a worker from his job, the more is his contribution to the company. Satisfied
workers tend to perform their work more willingly which contributes towards the
organization. Evidence reveals a positive and also negative relation between compensation,
performance pay and job satisfaction. As far the composition of this thesis, the author first
includes overview and fundamental theory about compensation, performance pay and job
satisfaction. Further, the author focuses on particular relationship between compensation and
job satisfaction. At the beginning the author differentiates between high- and low-paid
workers and investigates closely the influence of these particular groups on job satisfaction.
Further, it will be examined group of those whose wage increased over the time and those
who suffered from pay cuts. Further, impact of unionization on workers` satisfaction will be
explored. Moreover, the author will determine the influence on job satisfaction of those
workers how received hourly compensation and investigate the impact of peer salaries. And
finally, the author will determine also the impact of motivation. In the third part of this thesis
there will be examined the basic relation between different dimensions of performance pay
and job satisfaction. Further, the author specifies the impact of performance-related pay on
high- and low-paid workers. And also individual and profit-sharing incentives will be taken
into consideration. Moreover there will be defined the influence of firm size and risk attitudes
towards the overall job satisfaction. Finally the author considers what would be the optimum
reward for workers to be paid.
- 96 -
Abstract (Deutsch)
Die vorliegende Magisterarbeit beschäftigt sich mit der Zusammenhang zwischen der
Vergütung, der leistungsbezogenen Bezahlung und der Arbeitszufriedenheit. Das ganze
Dokument ist grundsätzlich in drei Teile gegliedert: theoretischer Teil, Teil mit dem
Zusammenhang zwischen Vergütung und Arbeitszufriedenheit und letzendlich der Teil mit
dem
Zusammenhang
zwischen
der
leistungsbezogenen
Bezahlung
und
der
Arbeitszufriedenheit.
Arbeitszufriedenheit ist Grundlage des nachhaltigen Wettbewerbsvorteils der Organisation. Je
zufriedener der Mirarbeiter ist, desto größer ist sein Engagement für das Unternehmen.
Zufriedene Mitarbeiter neigen dazu, ihre Arbeit lieber für Organisation auszuüben. Die
Literatur zeigt eine positive aber auch eine negative Beziehung zwischen der Vergütung, der
leistungsbezogenen Bezahlung und der Arbeitszufriedenheit und darüber hinaus die
Implikation dieser Variablen in der realen Welt. Am Anfang gibt der Autor einen Überblick
und eine grundlegende Theorie über Vergütung, leistungsbezogene Bezahlung und
Arbeitszufriedenheit. Außerdem konzentriert sich der Verfasser auf den Zusammenhang
zwischen der Vergütung und Arbeitszufriedenheit. Am Anfang unterscheidet der Autor
zwischen gut und schlecht bezahlten Mitarbeitern. Darüber hinaus wird die Gruppe
untersucht, deren Einkommen im Laufe der Zeit gestiegen ist, und die Gruppe derer, die durch
die Gehaltskürzung gelitten haben. Außerdem wird die Auswirkung von Gewerkschaften auf
die Arbeitszufriedenheit eruiert. Weiters wird der Verfasser Mitarbeiter, die stündlich bezahlt
werden, und die Auswirkungen von Peer-Gehältern auf die allgemeine Arbeitszufriedenheit
untersuchen. Und schließlich wird auch der Autor den Einfluss der Motivation determinieren.
Im dritten Teil dieser Arbeit wird die grundlegende Beziehung zwischen den verschiedenen
Dimensionen der leistungsbezogenen Bezahlung und der Arbeitszufriedenheit revidiert.
Ferner präzisiert der Verfasser den Einfluss der erfolgsabhängigen Vergütung auf die gut und
schlecht bezahlten Mitarbeiter. Überdies werden individuelle Anreize und solche der
Gewinnbeteiligung in näheren Betracht gezogen. Weiters wird der Einfluss der Firmengröße
und der Einstellung zum Risiko auf die gesamte Arbeitszufriedenheit definiert. Schlussendlich
befasst der Vefasser sich mit der optimalen Belohnung, die die Arbeiter erhalten sollten.
- 97 -
CURRICULUM
VITAE
PERSÖNLICHE DATEN
Name
E-mail
Nationalität
DARIUSZ WALIGORA
dariusz.waligora@univie.ac.at
Polen
BERUFSERFAHRUNGEN
• Datum (von – bis)
• Name des Betriebs
• Position
1.10.2009 Universität Wien
Studienassistent
AUSBILDUNG
• Name der Bildungseinrichtung
• Fakultät
Universität Wien
Betriebswirtschaftslehrestudium
PERSÖNLICHE
FÄHIGKEITEN
UND KOMPETENZEN
MUTTER SPRACHE
ANDERE SPRACHEN
POLNISCH
DEUTSCH
sehr gut
HOBBYS
ENGLISCH
sehr gut
Französich
grundlegend
Gitarre und Piano spielen
- 98 -

MAGISTERARBEIT

Transcription

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