PAY-SYSTEM CHANGE AS AN AFFECTIVE EVENT

According to the Affective Events Theory (Weiss & Cropanzano, 1996), employees react to events like changes in their monetary compensation and these affective reactions can partly explain why employees adopt certain attitudes and behaviors. We study employee reactions to a pay system change in two organizations that had recently adopted a new pay system based on job evaluation and performance appraisal. According to the results, the pay system elicited equal amounts of positive and negative affect, significantly depending on the direction and amount of change in an individual employees’ pay. In a mood-congruent manner, positive affective reactions were related to high levels of effort, positive work behaviors and organizational commitment. However, the results regarding the negative affective reactions were not as straightforward. Negative affective reactions were related to lower levels of effort on the job, but also higher levels of positive work behaviors directed at improving the work environment. Overall, our results provide evidence to suggest that affective reactions are an important underlying mechanism which can help explain why a pay system change may influence employee behaviors and attitudes. The implications for theory and management practice are discussed. Pay-system Change as an Affective Event 2 PAY-SYSTEM CHANGE AS AN AFFECTIVE EVENT Given the mixed results surrounding pay-reform success, researchers have been increasingly focused on understanding when and why incorporating a pay system will promote desired outcomes (for a review, see Rynes, Gerhart, & Parks, 2005). The research on employee pay systems has been focused on explaining 1) incentive effects (i.e., how compensation influences attitudes and behaviors or the current workforce) and 2) sorting effects (i.e., how compensation influences the ability and personality characteristics of the current workforce via attraction, selection and attrition.) Although researchers have investigated many factors which explain how employees react to a pay reform, they have largely ignored how an individual’s emotional reaction toward one’s pay change impacts outcomes (Brief & Weiss, 2002). This omission is striking given that: 1) employee affect has been found to be an important predictor of several of the desired outcomes that employers seek to encourage by instating a new pay system (for a meta-analytic review, see Thoresen, Kaplan, Barsky, Warren & Chermont, 2003) and 2) research has demonstrated that certain pay systems elicit negative, and others positive affect (e.g., Begley & Lee, 2005; Shaw, Duffy, Jenkins & Gupta, 1999, Shaw, Duffy, Mitra, Lockhart & Bowler, 2003). In the last decade or so, researchers and theorists have increasingly acknowledged that affective reactions are common in organizational settings, and our affective states can have important influences on employee attitudes and behaviors (for reviews, see Brief & Weiss, 2002; Forgas & George, 2001). This acknowledgement of the role of affect is nicely captured in one of the primary arguments of Affective Events Theory (AET, Weiss & Cropanzano, 1996) which Pay-system Change as an Affective Event 3 proposes that important events at one’s work will elicit affective reactions, which partly explain why employees adopt certain attitudes or behaviors at work. In the current paper, we present the results from a study that examines how affective reactions to a pay-system change are related to self-perceived accounts of desired outcomes (i.e., commitment, effort, and positive work behaviors). By incorporating key assumptions from Affective Events Theory (AET, Weiss & Cropanzono, 1996) and recent findings on the role of affect on cognition and behavior, we develop and test a model which predicts that affective reactions to a paysystem change would mediate the relationship between pay changes and outcomes. We test the predictions of this model with data gathered from two governmental organizations which had recently introduced a new pay system. The structure of the literature review is four-fold. First, we introduce literature on the relevance of and challenges in pay reforms. Secondly, we review theory and prior work to suggest that a pay change will be viewed as an affective event. Third, we review literature on the role of affect in employee behavior and attitudes. Fourth, we introduce the primary hypotheses of the paper which, consistent with Affective Events Theory, argues that affective events (such as pay changes) are distal causes of behaviors and attitudes, mediated by affective reactions. Literature Review and Hypotheses In an effort to increase and/or maintain high levels of performance, organizations frequently rely on human resource practices to achieve desired attitudes and behaviors. One specific type of practice, which frequently requires the investment of large amounts of money and time, is the implementation of a new pay system (Cox, 2005). Pay systems have a great potential to be powerful motivators. Indeed, several meta-analyses have documented that performance contingent pay systems have a Pay-system Change as an Affective Event 4 substantial impact on employee performance (see for reviews Rynes, et al., 2005; Gerhart & Rynes, 2003; Jenkins, Mitra, Gupta & Shaw, 1998). One type of pay for performance practice is called merit pay, where pay increases are based on performance appraisals typically conducted by ones immediate supervisor. Although merit pay is the most widely used pay for performance program in organizations today, there is surprisingly little evidence on the incentive effects of these systems in particular (Rynes, et al., 2005; R.L. Heneman & Werner, 2005). Moreover, practitioners have paid attention to the several kinds of the implementation problems that hamper the effectiveness of merit pay. These problems include, but are not limited to, the difficulty in creating measures for individual performance in interdependent work contexts, problems getting supervisors to provide credible assessments of performance for administrative purposes, as well as limited pay budgets available for merit increases because of the an annuity effect (see for a review Campbell, Campbell & Chia, 1998; Beer & Cannon, 2004). All of the implementation problems above result in a typically weak link between performance and pay increases (Heneman, R.L., 1990). Thus, even if there is strong evidence to suggest that performance contingent pay systems would be strongly motivating to employees, the extent to which the systems actually are performance contingent in reality might be insignificant, and consequently, the effect on employee motivation marginal (Gerhart & Milkovich, 1992). Furthermore, many practitioners and academics alike have been concerned that organizations waste a significant amount of money in compensation systems because the organizations end up ‘hoping for A while rewarding for B’ (Kerr, 1995). Thus, organizations might end up wasting money because the compensation system motivates not-hoped-for behaviors (Kohn, 1993). For example, employees might Pay-system Change as an Affective Event 5 focus on their job task goals so intensively that they do not have as much time to help others (Wright, George, Farnsworth & McMahan, 1993), or perhaps develop the organization long term. Pay-System Change as an Affective Event Pay reforms also have another potential downside to them. Unlike other human resource management interventions such as training, shortcomings in the design or maintenance of pay-system change can cause significant problems such as bitter feelings and damage to important relationships (Beer & Cannon, 2004; Ledford & R.L. Heneman, 2000). Ledford and Heneman (2000) have argued that although most organizational changes can produce affective reactions in employees, changes in one’s compensation seem to be especially capable to elicit affective reactions. A complete pay-system change will likely alter one’s psychological contract at work (Rousseau & Greller, 1994), and should be viewed as an important event which will elicit affective reactions among employees. In recent years, researchers have begun to explore the relationship between employee affect and compensation systems. For instance, Begley and Lee (2005) predicted that employees’ tendency to experience high subjective distress, nervousness, anxiety and self-criticism – a personality factor called negative affectivity – should influence how employees react to a pay-at-risk bonus. They found that employees low in negative affectivity were more sensitive than those high in negative affectivity to changes in bonus awards. The authors interpret the results relying on the literature on met expectations. Those high in negative affectivity expected unfavorable outcome, so they were not surprised when they received a small bonus, and for this reason did not react strongly to it. Pay-system Change as an Affective Event 6 Relying on signal sensitivity theory, Shaw and colleagues (Shaw et al., 1999; Shaw et al., 2003) predicted that employees who generally feel active, cheerful, enthusiastic and alert – high in a personality factor called positive affectivity – would be very sensitive to reward signals, and would be more sensitive to pay increases than people low in positive affectivity. The results from their studies demonstrated that even when there have been no new changes associated with one’s pay (Shaw et al., 1999), or the pay changes have been in line with existing merit pay policy (Shaw et al., 2003), individual differences in positive affectivity play a major role in terms of how individuals interpret their pay. In the current study, we examine a pay system change in a context where a merit pay system was introduced to replace a system where pay was based on seniority and job titles. This new merit pay system, where pay is based on appraised value of the job and performance of the employee, was studied in a setting