PAY LEVELS AND PAY CHANGES JASON D. SHAW Chair Professor Co-director, Centre for Leadership and Innovation The Hong Kong Polytechnic University Faculty of Business Department of Management and Marketing

The author reviews 15 years of applied psychological research on the antecedents and consequences of pay levels and pay changes. Although the research has been unevenly distributed and sporadic, the literature has progressed significantly and generated numerous few new themes. In particular, pay level research has uncovered widely varying stable determinants including individual and physical characteristics, personality, intelligence, and nuanced social-context-based explanations for explaining the gender pay gap. The literature on the consequences of pay changes (e.g., merit pay and bonuses) includes findings of positive relationships between incentives and performance quantity, and recent evidence establishing and solidifying a robust positive relationship between financial incentives and performance quality. Also evaluated are studies linking pay levels and pay changes with broader outcomes including creativity, innovation, antisocial behavior, turnover, job attitudes, and sleep patterns. The review concludes by identifying topics for future research. Pay Levels and Pay Changes 3 A paradox confronts industrial and organizational psychologists studying compensation and financial incentives in the workplace. On one hand, academic and practitioner circles widely discuss pay-related issues. They find, for example, strong evidence that financial incentives are positively related to individual performance (Jenkins, Mitra, Gupta, & Shaw, 1998) and retention (Dineen & Williamson, 2012; Gerhart & Rynes, 2003; Shaw & Gupta, 2007), and that financial incentives typically have stronger effects than other organizational interventions for enhancing motivation and performance (Aguinis, Joo, & Gottfredson, 2013). Also, practitioneroriented circles frequently spark heated media debates about compensation-related issues. Even in the United States, long a bastion of pay-for-performance, much controversy surrounds debate about whether to grant financial incentives to public school teachers and government workers (e.g., Fryer, Levitt, List & Sadoff, 2012; Gupta & Shaw, 2014). Lively discussions about cultural applicability of merit pay have also accompanied trends toward merit pay in places such as Finland and Hong Kong, where longevityand seniority-based provisions were long the norm (Mitra, Teniahlia, & Shaw, 2014). Resistance to performance-based pay persists despite many cross-culturally stable findings in the compensation literature (e.g., Du & Choi, 2010; Mattson, Torbiörn, & Hellgren, 2014). Finally, compensation levels for top management teams and executives, and pay levels for celebrities and athletes are endlessly fascinating (e.g., Trevor, Reilly, & Gerhart, 2012). On the other hand, compensation research has been on a downward trend in applied psychology (Cascio & Aguinis, 2008; Gupta & Shaw, 2014). ). At the 2013 Society for Organizational and Industrial Psychology conference, for example, only 3 of 1,200 sessions were devoted to compensation-related topics (Gupta & Shaw, 2014). To reinvigorate research in this Pay Levels and Pay Changes 4 area, I undertook an exhaustive review of the literature related to pay levels and pay changes in the domains of work psychology, I/O psychology, organizational behavior, and human resource management. Given the downward research trends, I cast a broad net for papers related to pay levels and pay changes and evaluated the literature over a 15-year period, from 2000 to 2014. I reviewed and evaluated the studies in terms of their conceptual and empirical antecedents and consequences. My review of the extant empirical and conceptual literature allowed me to draw some general conclusions about the findings and about the state of the literature. Based on these conclusions, I outline several areas of need and promising research directions. In addition to the time frame, this review has some boundary conditions. I focused on individual-level research, those areas closest to the domain of industrial, work, and organizational psychology, although some of the papers appear in journals not typically associated with applied psychology. I mostly excluded research on the team-level and organizational consequences of compensation levels and structure, such as organizational performance outcomes associated with pay structure (e.g., Trevor et al., 2012; Shaw, Gupta, & Delery, 2001; 2002; Shaw & Gupta, 2007) and executive compensation, because those studies have been reviewed extensively elsewhere in recent years (e.g., Conroy, Gupta, Shaw, & Park, 2014; Gerhart & Rynes, 2003; Gerhart, Rynes, & Fulmer, 2009; Gupta, Conroy & Delery, 2012; Shaw, 2014). My review includes only studies in applied psychology that include information about pay levels or pay changes, and excludes studies that examine non-monetary and other forms of rewards. Studies on the antecedents of pay changes are so scarce that I did not include a separate section on the topic. The rare studies I found also examined pay levels as an outcome, so I assigned them to the pay level section. I also excluded studies that examined Pay Levels and Pay Changes 5 consequences of compensation attitudes and that omitted data on actual pay levels of changes partly because of recent meta-analytic activity (Williams, McDaniel, & Ford, 2007; Williams, McDaniel, & Nguyen, 2006). Finally, I ignored the growing “money prime” literature that appears mostly in social (e.g., Zhou, Vohs, & Baumesister, 2009) and economic psychology (e.g., Pfeffer & DeVoe, 2009) outlets. I organized the review into two major sections—(1) the antecedents and consequences of pay levels, and (2) the antecedents and consequences of pay changes. I followed the review with a conclusion section that includes directions for future research. PAY LEVELS Antecedents The major contributions to the empirical literature on the determinants of pay levels are a series of studies that primarily use the exhaustive, publicly available National Longitudinal Surveys of Youth (NLSY79) data set from the United States (e.g., Judge & Cable, 2011; Judge & Hurst, 2008; Judge, Hurst, & Simon, 2009; Judge, Klinger & Simon, 2010; Judge & Livingston, 2008). Perhaps the dominant theme in the literature on pay level determinants relates to the persistent pay gap between men and women. For example, in a study of government employees in the United States, gender was a stable predictor of pay levels (women earned less than men), even after controls for a set of job-related factors that explained two-thirds of the variance in pay levels (Harris, Gilbreath, & Sunday, 2002). Perhaps more surprising—gender related to pay increases such that women earned higher raises than men. The authors provided two potential explanations for the pay increase relationships. First, women in the sample earned higher performance evaluations than men did, which might explain the relationship Pay Levels and Pay Changes 6 between gender and pay changes. The second argument and finding was structural: women more frequently occupied lower levels within the organization’s pay grades and received higher percentage pay increases as a result. The two factors—higher performance and lower pay grade positions—accounted for the relationship between gender and pay changes in their study. The applied psychology literature, however, has moved well beyond direct examinations of the gender pay gap and toward nuanced explanations of why the gap persists. In a sample of more than 2,000 managers, the gender pay gap persisted in the presence of human-capitalbased control variables (Ostroff & Atwater, 2003). But, as the authors predicted, characteristics of the managers’ reference group also significantly influenced pay levels: managerial pay levels were lower when managers’ referent groups were predominantly female and when coworkers were younger. Working with predominantly female referent groups negatively affected managerial pay levels and most prominently when subordinates were primarily women. Their findings also demonstrated substantial pay level penalties when a manager’s subordinates were either younger or older than prime working age (defined as around 40 years) or when a manager’s supervisor was younger than prime working age. The issue of mentoring and gender was examined in terms of total cash compensation in Ramaswami, Dreher, Bretz, and Wiethoff (2010). Taking a signaling theory view, they argued that women in male-dominated industries benefit most in terms of pay when they have a mentor who has high signal visibility. In line with their theory and controlling for a number of correlates to pay levels (e.g., age, prior career interruption, career priority, number of children, education), women who had a senior male mentor in male-gendered industries earned over $70,000 more per year than women without a senior male mentor in the same industries. Pay Levels and Pay Changes 7 Judge and Livingston (2008) offered an alternative perspective on the gender pay gap. In their study a variety of background and demographic characteristics such as demography, intellect, and family background were found related to gender role orientation, or beliefs about proper roles for women and men at work and at home. The authors predicted that beliefs about proper gender roles would predict different pay levels over time for men and women. Among participants in the NLSY79 data set, gender role orientation was positively related to pay levels among men and negatively related to pay levels among women. One fascinating study shows the dark side of procedural justice in explaining gender pay gaps. Belliveau (2012) argued that social accounts, explanations, apologies, or justifications for a decision could activate gender stereotypes prior to pay decisions. Managers are likely to believe that women will value procedural justice more deeply than men will, whereas men will attend to and value distributive justice more than women will. Consequently, managers “are likely