Effects of Choice of Pay Plans on Satisfaction, Goal Setting, and Performance

Abstract

Research shows that individuals will choose among alternatives in a rational manner to maximize expected rewards (Vroom, 1964). When individuals are faced with a decision to choose among different reward plans, they are expected to choose the alternative perceived to yield either maximuni expected rewards or minimum expected costs (House, Shapero and Wahba, 1974; Mitchell, 1974; Peters, 1977). Thus, employees with high self-perceived ability levels would be expected to prefer plans that distribute reward based on performance. On the other hand, employees with low self-perceived ability would be expected to choose time-based reward plans such as hourly pay. In one experiment involving pay choice, Chow (1983) found that student subjects selected reward schemes based on their prior performance. However, in the Chow study, subjects did not receive pay for their performance. Although ability (prior performance) and types of reward schedule selected were related in that study, the reported results could have been attenuated by the absence of pay. Hypothesis 1 (Hl) was based on the above: Individuals will choose pay plans based on ability; specifically individuals with high ability are more likely to choose a performance-based reward system, whereas individuals with low ability are more likely to choose a time-based reward system.

The very act of choice binds individuals to their choices and results in behavioral commitment, provided that the choices are made voluntarily and irrevocably (Salancik, 1977; Staw, 1980). In addition, allowing individuals to choose their pay plans probably will increase the likelihood that they will get what they expect to get with regard to pay (qf. Mitchell, 1974), and thus better satisfy their needs (Strauss, 1963). Need satisfaction, presumably, will lead to job satisfaction. Based on these results, selecting a pay plan should result in greater satisfaction with the resulting pay and its associated work. Therefore, we advance the next two hypotheses: Individuals who have the discretion to choose their pay plans will be more satisfied with their pay than those who have no choice (H2); and individuals who have the discretion to choose their pay plans will be more satisfied with their work than those who have no choice (H3).

The effect of selecting a pay plan on peformance is rather difficult to predict. The increased commitment associated with the free choice of a pay plan may have different implications for performance depending on the chosen pay plan. Consider an individual with low ability facing the decision to choose among pay plans. This individual may choose a fixed-rate plan and expect a modest payoff. Under this condition, there is no compelling reason to believe that increased commitment to the fixed-rate plan will resuit in greater motivation to perform. In contrast, an individual with high ability may expect to perform at a high rate and aspire to get the maximum payoff. This individual probably will choose a piece-rate plan. which rewards high performance. Under this condition, increased conlmitnlent to the piece-rate plan may enhance one's motivation to perform. Based on the above discussion, it seems evident that pay choice may not have a uniformly positive or negative effect on performance. Because of the exploratory nature of this study and the lack of research and theory on this issue, a specific hypothesis concerning the effects of pay choice on performance was not stated.

Moreover, goal setting theory suggests that individual behavior is guided by their intention (Locke, 1968) and numerous studies have demonstrated that personal goal is a major determinant of task performance (Locke, Shaw, Saari and Latham. 1981). It is expected that whatever the effect pay choice may have on performance, it is probably mediated by the individual's personal goal. Therefore, personal goals were measured in this study and used as a direct indicator of motivation to perform.

The present study tested the above three hypotheses and observed the effects of pay choice on performance and goal setting using a laboratory experiment.