The doctoral dissertations of the former Helsinki University of Technology (TKK) and Aalto University Schools of Technology (CHEM, ELEC, ENG, SCI) published in electronic format are available in the electronic publications archive of Aalto University - Aaltodoc.
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Psychological Mechanisms Explaining Merit Pay Acceptance and Effectiveness

Aino Salimäki

Dissertation for the degree of Doctor of Philosophy to be presented with due permission of the Faculty of Information and Natural Sciences for public examination and debate in Auditorium TU1 at Helsinki University of Technology (Espoo, Finland) on the 22nd of May, 2009, at 12 noon.

Overview in PDF format (ISBN 978-951-22-9835-8)   [362 KB]
Dissertation is also available in print (ISBN 978-951-22-9834-1)

Abstract

In Finland, especially in central governmental and municipal sector, collective pay agreements make it possible to use—and even require—job evaluation and individual performance appraisals to determine employee base pay levels. These practices are generally designed to enhance pay satisfaction and the motivation of the current workforce, as well as to attract and retain skilled work force. This dissertation provides new insights into the psychological mechanisms that explain why employees adopt certain attitudes and behaviors in response to merit pay reforms, often referred to as incentive effects in the literature on compensation psychology. The dissertation summarizes five studies that draw upon different theoretical perspectives and concepts, including psychophysics, affective events theory, reflection theory, organizational politics and fairness. Each study contributes to our understanding of how merit pay in particular influences attitudes and behaviors of the existing workforce. The data were gathered from seven public sector organizations in Finland via employee surveys (sample size totals N=1350 for all the studies). We used records-based pay data from five of the seven organizations.

Based on the results, I argue that pay increases of less than eight percent might not be meaningfully noticed. However, employees are comparatively more sensitive to negative pay changes such as indirect pay cuts. The results suggest that organizations should be aware that employees react to pay reforms affectively depending in part on how the reform personally impacts their pay, and these affective reactions may influence attitudes and behaviors at work. I argue that employee acceptance of merit pay practices depends on their understanding of why the system is being implemented and accepting these reasons in such a way that the pay system transmits positive symbolic and instrumental messages. Managers can have a positive impact on pay system success through participatory goal-setting processes and by creating trusting relationships where subordinates perceive performance appraisals as fair. The results imply that for a pay system to be effective, it is essential for employees to believe that politics do not play a part in performance appraisals and pay decisions. If employees believe that pay decisions are based on politics instead of performance, the organization risks having not only an ineffective pay system but one that produces undesirable outcomes. The results also suggest that employee participation in pay system development only matters when employees believe that managers' actions are sincere.

This thesis consists of an overview and of the following 5 publications:

  1. Atul Mitra, Aino Salimäki, and Jason D. Shaw. 2009. Just noticeable differences in positive and negative pay changes. Espoo, Finland. 27 pages. Helsinki University of Technology, Department of Industrial Engineering and Management, Working Paper no. 2009/1. © 2009 by authors.
  2. Aino Salimäki and Robert B. Lount, Jr. 2008. Pay-system change as an affective event. Espoo, Finland. 42 pages. Helsinki University of Technology, Department of Industrial Engineering and Management, Working Paper no. 2008/1. © 2008 by authors.
  3. Aino Salimäki, Anu Hakonen, and Robert L. Heneman. 2009. Managers generating meaning for pay: A test for reflection theory. Journal of Managerial Psychology, volume 24, number 2, pages 161-177. © 2009 by authors and © 2009 Emerald Group Publishing. By permission.
  4. Aino Salimäki, Anna Ylikorkala, Kiisa Hulkko, Göte Nyman, and Pertti Keskivaara. 2005. Managerial influence on the implementation of pay systems: A model describing how managers can contribute to pay system success. Journal of the Finnish Psychological Society, volume 40, number 1, pages 53-70. © 2005 by authors and © 2005 Finnish Psychological Society. By permission.
  5. Aino Salimäki and Sini Jämsén. Perceptions of politics and fairness in merit pay. Journal of Managerial Psychology, in press. © 2009 by authors and © 2009 Emerald Group Publishing. By permission.

Keywords: compensation psychology, incentive effects, merit pay, pay satisfaction, pay-for-performance

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© 2009 Helsinki University of Technology

Last update 2011-05-26