Date of Graduation

8-2014

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Management

Advisor/Mentor

Nina Gupta

Committee Member

John Delery

Second Committee Member

Anne O'Leary-Kelly

Keywords

Compensation, Incentives, Motivation, Pay, Performance

Abstract

Compensation is an area of research rife with debate among experts. These debates are primarily concerned with the effectiveness of pay-for-performance. The pay variation and performance relationship is a subset of this research where disagreement and inconclusive findings are common. Is pay variation conducive to higher performance or is pay compression ideal? This study contributes to the pay variation and performance debate by focusing on performance-based pay variation and addressing fundamental assumptions of prior work. Past research has treated pay variation as a proxy for allocation rules and incentive intensity. Separating these two constructs rather than confounding them provides a more comprehensive treatment. This study addresses the effects of these two policies, incentive intensity and allocation rules, as separate, independent influences on performance outcomes. Incentive intensity is treated as a range of potential pay outcomes, whereas the allocation rule is an approach to distributing rewards either based on individual contribution or equally to members of a group. While theories predict individual level performance is affected by pay variation, tests of these theories are typically at the organizational level. In this study, the effects of pay variation policies are tested at the individual level using an experimental design. In addition to testing the relationship between pay variation policies and individual performance, expectancy theory as an explanatory framework is explored. Allocation rules and incentive intensity are predicted to affect the motivational mechanisms described by expectancy theory, which in turn influence individual motivation and performance. Results of a real pay/real effort experiment provide evidence that allocation rules affect objective individual performance while changes in incentive intensity are not significant in predicting objective performance. Objective performance is significantly higher in equity allocation rule conditions than in equality allocation rule conditions. In addition, expectancy theory components are affected as predicted; these components are positively related to motivation, and motivation is positively related to both subjective and objective individual performance measures.

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