Procedural justice perceptions 1 Running head : SKILL-BASED PAY Procedural Justice Perceptions and Withdrawal Intentions Related to Skill-Based Pay

This study demonstrates that specific procedural justice perceptions related to a skill-based pay system impact organizational withdrawal intentions. Perceptions of fairness were negatively related to intentions to leave, suggesting that low procedural justice may lead to increased desire to leave. Organizations using skill-based pay should monitor perceptions of procedural justice. Procedural justice perceptions 3 Procedural Justice Perceptions and Withdrawal Intentions Related to Skill-Based Pay An organization's compensation system can have a significant impact on employee attitudes and performance (Roth, 2006). Historically, workers have been compensated under a system in which compensation was based on seniority or job responsibilities. However, the changing nature of work in the past 30 years has resulted in jobs becoming more fluid, rather than a concrete collection of tasks that can be easily assessed (Heneman & Ledford, 1998). This has led to the creation of alternative systems, which enable employers to compensate their employees in different ways. Traditional joband seniority-based compensation systems have started to incorporate more person-contingent pay systems (Mahoney, 1989). One such system, skill-based pay (SBP), compensates individuals for developing and maintaining skills that are useful to the organization. Perceptions of justice are important to the effectiveness of compensation practices (Tremblay, Sire, & Balkin, 2000) and have been linked to organizational withdrawal (Colquitt, Conlon, Wesson, Porter, & Ng, 2001). The incentive value or motivating effect of compensation has been related to withdrawal as well (Tekleab, Bartol, & Liu, 2005). The purpose of the current study is to investigate the influence of employees’ perceptions of a SBP system’s fairness and its motivating effect on intentions to leave a military organization. Skill-Based Pay. Alternatives to pay for the job or job tenure (seniority) include pay-forperformance (merit pay), pay-for-education, or other special systems that reward employees for making valuable contributions to the organization. One type of special pay system that has gained recent popularity is SBP. In SBP systems, employees are paid a wage, a special bonus, or monthly stipend that structure pay levels and differentials relative to a particular skill (or set of skills) valued by the organization (Jenkins, Ledford, Gupta, & Doty, 1992; Murray & Gerhart, 2000). To receive SBP, employees must possess or demonstrate a particular level of the skill or Procedural justice perceptions 4 skills. However, performance of the skill is not the basis of compensation—instead, certification serves as a proxy for the employee’s ability to perform a behavior in the future if called upon to do so. With a SBP system, the organization is often paying for the availability of valued skills in the workforce, not their daily use. Certification for these skills is analogous to traditional performance appraisal in a pay-for-performance system (Ledford, 1995). Often, organizations will offer training to assist in the certification process, either by conducting training directly or offering incentives to obtain external training. Several potential positive outcomes can result from implementation of such a system. By redefining work as a collection of knowledge, skills, and abilities, employees gain the ability to become more global, and more oriented toward change (Heneman & Ledford, 1998). SBP can improve employees’ motivation to receive cross-training, further adding to their development of new technical and social skills. Many organizations use special pay systems in order to increase organizational flexibility. This is especially important when an organization must adapt to a quickly changing environment. This flexibility also minimizes the negative effects of turnover, as the remaining workers will have the necessary skills to compensate for those who have left the organization (Ledford, 1995). Additionally, SBP can be used as a supplemental pay to retain workers with critical skills in a competitive labor market. Thus, the benefits of a wellimplemented SBP system can affect employees directly, and the organization as a whole. Recent research in the area of compensation has emphasized the growing popularity of SBP systems. Despite the fact that this type of compensation is being used more frequently in organizations (Lawler, Mohrman, & Ledford, 1998), research related to this topic in the field of industrial/organizational psychology is lacking. Procedural justice perceptions 5 Literature regarding SBP systems has consistently emphasized the positive outcomes that follow its implementation. Lee, Law, and Bobko (1999) indicated that implementation of SBP systems is associated with increased organizational flexibility, employee productivity, and employee satisfaction in addition to decreased absenteeism and turnover. However, as Lee et al. (1999) point out, there has been little exploration of the conditions that are associated with the occurrence of these outcomes. They proposed that one condition required for the success of a SBP plan is the perception that the procedures associated with the plan are fair. This research was based in part on a study by Gupta, Ledford, Jenkins, and Doty (1992), who found that a key factor in the success of a SBP plan is the employee’s understanding and knowledge of how the system works, such as the availability of training and the details of the certification process. These findings were confirmed by Lee et al. (1999), who found that the system failed to achieve the outcomes of increased satisfaction or flexibility when procedural justice attributions were low. The certification process is a highly important feature of the pay system. The way the plan is enforced also has implications for its effectiveness. The design of the pay levels and skill certification methods must be handled in such a way as to appear fair and clear to all involved. As Gupta et al. (1992) found, all employees must be able to understand the plan, and the rationale that underlies the plan, in order for it to be effective. If they do not understand, then employees are more likely to believe it is unfair. This finding is most clearly demonstrated in research related to procedural justice. Procedural justice theory asserts that if a procedure is unclear, it is unfair (Levanthal, 1976). Procedural Justice. Procedural justice is traditionally defined as the perceived fairness of an organization’s procedures. However, some debate exists regarding the best definition of Procedural justice perceptions 6 procedural justice. Thibaut and Walker (1975) define it simply as process control, or the perception of having adequate voice in the resolution of a legal dispute. Alternatively, Levanthal (1976) delineated six specific rules for procedural justice, three of which are applicable to SBP systems: (1) decisions must be based on accurate information, (2) allocation procedures should be consistent over time and across people, and (3) all decisions must be correctable. The literature regarding organizational justice and organizational withdrawal is quite rich. Colquitt et al. (2001) reported meta-analytic findings from over 180 studies demonstrating that organizational justice was negatively related to withdrawal behaviors, including lateness, absenteeism, and turnover. Procedural and distributive justice were shown to separately influence withdrawal, but some evidence exists that suggests that of the two types of justice, procedural justice has a larger impact on withdrawal (Dailey & Kirk, 1992). Masterson, Lewis, Goldman, and Taylor (2000) found that procedural justice played a large role in predicting withdrawal, in combination with interpersonal justice (i.e., justice in interpersonal relationships). Although some debate exists as to the proper definition of procedural justice, the results of Colquitt et al.'s (2001) meta-analysis demonstrated that regardless of the definition, procedural justice did relate to withdrawal behaviors. Colquitt et al. reported an overall effect of r= -. 36 (N=39) for broadly defined procedural justice, r= -. 27 (N=21) for procedural fairness perceptions, r= -. 19 (N=10) for process control, r= -. 23 (N=6) for Levanthal’s criteria, r = -. 02 (N=2) for interpersonal justice, r = -. 21 (N=8) for informational justice, and r= -. 41 (N=18) for distributive justice. Taken together, these effects present a strong case for the relationship between procedural justice and withdrawal. While we can conclude that organizational justice does relate to withdrawal, the antecedents of justice attributions are not as clear. Contributing to the lack of understanding is Procedural justice perceptions 7 the fact that justice is most often measured as global affect toward the organization. A typical procedural justice measure includes items addressing all aspects of the organization’s procedures (i.e., grievance, pay, promotion, etc.; Fryxell & Gordon, 1989). There is reason to believe that different organizational information may influence different types of justice attributions. While satisfaction with pay is typically understood to influence distributive justice perceptions (Colquitt et al., 2001), SBP is associated with specific rules and procedures, the clarity of which impacts perceptions of procedural justice. Based on the assertion that global evaluations of justice have an impact on employee withdrawal behaviors, the current study investigated whether justice evaluations tied to the SBP system features would have a similar effect on intent to leave the organization. Intent to leave has been found to predict actual turnover (e.g., Masterson et al., 2000) and has often been used in research (e.g., Clugston, 2000). Therefore, the influence of the perceived motivating effects of the SBP system on intent to leave the organization was investigated. Research Context and Questions.