Influence of Pay for Performance on Employee Engagement & Turnover Intention.

AuthorMittal, Shweta


The pay for performance (PFP) performs the significant role by optimizing the cost of compensation and rewarding the high performers (Bhattacharyya, 2013). Pay for performance is not a universal policy, it varies with the organization and place (Bhattacharyya, 2013). Gerhart et al., (2009) stated that pay for performance is based on appraisal ratings provided by the supervisor's, distinguishing the high performers. Organizations are witnessing a paradigm shift from the traditional HR practices like lifetime employment and seniority-based pay after liberalization towards more specific motivating HR polices like pay for performance, with the specific aim of monitoring and recognizing the performance of employees.

The five-dimensional model of Hofstede (2001) characterized India with the cultural values of high-power distance and collectivism. High power distance reflects hierarchical, paternalistic and status whereas medium collectivist orientation is influenced by extended family, caste, religious and linguistic. The emotional aloofness combined with high control of subordinates characterized by the British style of Indian management was inherited when the latter left India in 1947 (Singh, 2009). Indians are to a greater extent still more parochial in thinking, feeling, and behaving. They are more accustomed to thinking in terms of narrow identities like our own selves, castes, communities, regional and linguistic groups (Desai, 2008). The differences mentioned above suggest that the behaviors and influence mechanisms needed to manage Indian workforce can be substantially different from that developed in the West.

Although Indians are indeed collectivists, there are strands of thoughts, feelings, and actions in their minds that reflect the underlying value of individualism. India is divided into two parts inward looking and outward looking. The inward looking has characteristics of collectivism and high-power distance whereas outward-looking is marked by individualism and low power distance. Researchers have provided proof that economic growth and appropriate infrastructure makes individuals independent, in-turn increases the individualistic behavior and intentions (Hofstede, 1991; Triandis, 1995). The studies have found that with economic development, urbanization, technology adoption, competitive environment, market capitalism has brought individualism in the collective society (Gupta & Panda, 2003). Economic development and cultural changes are correlated; the economic development marks major social and cultural changes. Hofstede's (2001) research suggests that economically developed societies adopt the fundamentals of western capitalism. Thus, the younger, educated employees of today nourish western values of achievement, advancement and ability utilization.

Professionals working in Indian organizations today are better educated and tend to have more evolved thought process. Such employees generally crave for greater autonomy and responsibility to work on their own. Sinha (2008) emphasizes the importance of a participative style of leadership along with a nurturanttask style. As the organizations become more global and there is a greater exchange of knowledge and manpower between the West and the East, we believe that PFP will become salient in driving employee performance. The pay for performance has become relevant to employees who are conscious of their status, promotion, and competence. Today's employees find their worth in the amount they earn, thus pay for performance takes a central position for these employees.

Pay for Performance

HR policy through PFP aims at higher level of performance, remunerated with higher level of pay. Rewards are given to the employees in one or other forms of compensation. The biggest challenge is to decide the form of compensation which impacts employees'attitude and behavior as well as acquire and retain the human capital (Lazear & Rosen, 1981). The organizations aiming for the compressed financial status amongst its employees will be creating an egalitarian environment (Bloom, 1999). This environment does not promote the high performers, as lack of reward and recognition deter their performance. Thus, organization started investigating how the compensation in different forms, can impact the attitude and behavior of employees for the effective and growth-oriented organization (Gerhart & Rynes, 2003; Pfeffer, 1998; Rigby, 2001). Thus, this led to the growth and extensive use of pay for performance plans (Schuster & Zingheim, 1992). The study by Carla O'Dell and Jerry McAdams, Gibson (1995) stated that pay for performance executed by organization had the net return of 134%. Pay for performance will make the organization less hierarchical and highly competitive, focused, adaptable, and collaborative (Baker, 1993). Thus, the pay for performance acknowledges the performance of the employees and makes them more glued towards their goals. Gerhart & Milkovich (1990) found the compensation like PFP, as a strategic decision because it "typically accounts for 20 to 50 percent of total operating expenses.... and how impli cations for attraction, retention, and performance motivation across business units and functional areas and thus perhaps for organizational performance." Research has shown that PFP improves the productivity (Rynes et al., 2005) and thus influence work motivation. Lazear (2000) showed that the productivity increased by 44% with the commencement of pay for performance; Gielen et al. (2010) also gave the similar results where productivity increased by 9%. The metaanalysis done with 45 studies, where incentives were utilized to improve productivity, Condly et al. (2003) showed that productivity improved by the incentive programs by 22 percent. On the contrary, PFIP with the course of time has also resulted in negative consequences; Pfeffer (1998) argued that extrinsic motivation can reduce the creativity and innovation involved in work. The economic and accounting literature has also shown the negative impact of PFIP on intrinsic motivation (Kuntz & Pfaff, 2002; Prendergast, 2008). The book, Drive (Pink, 2009) has strongly highlighted that PFIP has negative impact on intrinsic motivation, and reduces the performance of employees. Fang and Gerhart (2012) have shown that PFIP may result in the increase of intrinsic motivation by boosting employees' perceived autonomy and competencies and these results are not in cognizance with the above-mentioned research. Similarly, Ogbonnaya et al. (2017) found that PFIP is positively associated to job commitment, job satisfaction and trust in management. Thus, after looking at the mixed results, it becomes even more imperative that we understand how extrinsic motivation impacts employees' attitude and behavior.

Social Exchange Theory

Social exchange theory (SET) is one of the most important conceptual frameworks to understand workplace behavior. Social exchange theory posits that interdependent relationships with numerous interactions result in the reciprocity and mostly, quid pro quo reciprocity (Blau, 1964; Kuvaas et al., 2020). The reciprocity rule in exchange theory (Gouldner, 1960) states that positive treatment provided by the party gets obligated to pay back favorably. On the contrary, the opposite also holds true, that negative treatment would also be responded.It also states that, when employer begins a positive action, the employee pays back with positive reciprocation (Cropanzano et al., 2017). Employee-organization relationship is impacted by the pay for performance. Pay contingent performance is an economic exchange between the employer and the employee in a tangible form (Rousseau & Ho, 2000; Shore et al., 2006). The successive positive reciprocal exchange relationship can change the economic relation into high quality social exchange relationship (Cropanzano et al., 2017). The beneficial act of the organization creates obligation for the employee, the employees must pay back by getting...

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