Digest 47. Pay satisfaction: what factors influence it and what does it contribute to?
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In a time when many companies are experiencing high rates of voluntary turnover and struggling with attracting and retaining talents in a more and more volatile and competitive environment, securing the commitment of employees to the organization seems pivotal to support retention and discourage turnover. Organizational commitment is basically the extent to which employees identify themselves with their organizations and participate with it.
While there are various economic and non-economic factors influencing organizational commitment, how organizations try to retain talents, and how they compensate them are among such influential factors. Salaries are shown to be the biggest cost for businesses in the U.S. in 2016 according to the Bureau of Economic Analysis which makes up for 43.4% of the total values of the produced goods and services; therefore, organizations may want to make sure that they are setting equitable salaries that satisfy employees and assist them in achieving the strategic goals. In fact, how employees react to their salary, that is pay satisfaction, is of quite importance as it may influence their commitment. Therefore, it is of interest to understand how organizations can influence employee satisfaction with their pay.
What influences employee pay satisfaction?
To answer this question, Yao and colleagues (2018) considered employees’ pay satisfaction to be shaped by the amount of money employees receive -pay level- and the amount they think they should receive in comparison to their standards -pay discrepancy. To test this, they surveyed 481 full-time employees who worked in different sectors in the U.S. Specifically, they measured pay discrepancy against four comparison standards, assessing the perceived discrepancy between participants’ reported salary and a) the minimum annual salary that they would find acceptable for the job; b) the salary of a colleague; c) the market average annual salary for people with similar jobs in the region; and d) the perceived annual salary they should receive.
The results showed that both pay level and pay discrepancy influence employee pay satisfaction, meaning that a higher salary and the perception to be paid more than the comparison standards boost satisfaction with pay. More interestingly, they found that the influence of pay discretion on pay satisfaction was stronger when pay level is low, as opposite to high, which means that perceiving to be overrewarded is more important that the blatant amount.
In the case where there is no discrepancy, that is when the pay level matches the comparison standard, Yao and colleagues showed that employees would be dissatisfied with their pay when this is low. In the case where the pay level is higher that the comparison standard, that is when the employee is overpaid, the researchers found that overpayment actually increases employee pay satisfaction. This contradicts past studies that had shown overpayment results in demoralizing employees by increasing their guilt.
In another study, Luna-Arocas and colleagues (2020) aimed to find out how pay satisfaction, viewed as an economic factor, contributes to the success of an organization by supporting employee loyalty alongside a non-economic factor, that is the employee perception of the talent management strategies used by the business. The researchers collected data from 198 Spanish workers from both public and private sectors via a questionnaire. They showed that pay satisfaction, defined as being satisfied with pay-level (the income), positively influenced organizational commitment. They also found that that talent management strategies such as job autonomy/empowerment, task significance, job feedback, and talent management development, while having a direct positive effect on employee commitment, also had an indirect effect on it via increasing pay satisfaction.
Organizational implications
In order to keep employees committed to their organizations, the following points are recommended:
Organizations should take both economic and non-economic factors into consideration if they want to boost employee commitment. So, monetary compensation should not be used as an exclusive method to motivate employees and HR practitioners are recommended to mix various compensation methods. HR practitioners need to implement talent management strategies to identify, attract and retain talents and they need to complement such strategies with clear policies for financial compensation.
Increasing pay level is obviously a good strategy to increase employee satisfaction with pay. However, if and when limits to increase pay levels apply, knowing the comparison standards used by people with reference to their pay is important. In fact, when low pay levels are offered, individuals are still satisfied with their pay if they feel high pay discrepancy versus their standards.
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References:
Luna-Arocas, R., Danvila-Del Valle, I., & Lara, F. J. (2020). Talent management and organizational commitment: The partial mediating role of pay satisfaction. Employee Relations, 42(4), 863–881. https://doi.org/10.1108/ER-11-2019-0429
Yao, A., Locke, E. A., & Jamal, M. (2018). On a combined theory of pay level satisfaction. Journal of Organizational Behavior, 39, 448–461. https://doi.org/10.1002/job.2243