merit pay preferences among public sector employees

38 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 11 NO 4, 2001

Merit pay pre f e rences among public sector employees

Michelle Brown, University of Melbourne

Human Resource Management Journal, Vol 11 No 4, 2001, pages 38-54

O rganisations have choices about methods of pay, and employee pay adjustment

p re f e rences are an important consideration in this decision-making process. Of

particular organisational interest currently are pay systems that seek to link incre a s e s

with individual performance, usually re f e r red to as merit pay. Researchers have shown

that pay adjustment systems that are incompatible with employee pre f e rences can be

costly for organisations, and have identi® ed a range of demographic factors that pre d i c t

support for merit adjustments. This article extends this line of re s e a rch by investigating

the impact of a performance appraisal system and a range of situational factors on the

level of support for merit pay in a large public sector re s e a rch organisation in Australia.

The study ® nds that higher levels of perceived job security are associated with support

for merit pay, while good promotional opportunities are associated with lower levels of

support. Those who saw the outcomes of the current performance appraisal system as

fair were unlikely to support merit pay.

C o n t a c t: Michelle Brown, Department of Management, Faculty of Economics

and Commerce, University of Melbourne, Parkville VIC 3010, Australia. E m a i l :

b ro w n m @ u n i m e l b . e d u . a u

Pay is a potentially powerful tool in the employment relationship, and the shift to

local level pay bargaining has meant that organisations have assumed gre a t e r

responsibility for the design and operation of pay systems, and there f o re they

must decide on the principles that will guide the determination of pay increases. Pay

i n c reases may be determined on the basis of changes in the cost of living, years with the

o rganisation, acquisition of new skills or some measure of performance. Survey

evidence in both Australia and the United Kingdom has demonstrated significant

o rganisational interest in performance-related pay (PRP) systems (Morehead et al, 1997;

M i l l w a rd et al, 2000).

The choice of a pay adjustment system can be critical to successful org a n i s a t i o n a l

operations. Beer and Gery (1972: 325) pointed out that an organisational pay system is

one of the key forces available for in¯ uencing the behaviour of its members.’ Belcher

and Atchinson (1976) argued that organisational pay practices provide information to

employees about what is valued and re w a rded, while Gerhart and Milkovich (1988)

demonstrated that the method of pay is a way that organisations are able to distinguish

themselves from other employers in the labour market.

C o n g ruence between the pay adjustment pre f e rences of employees and the feature s

of the pay system under which they work can have an effect on the level of pay

satisfaction, which in turn can in¯ uence broader organisational performance indicators.

Lawler (1971: 229) found that `pay satisfaction increases when pay is perceived to be

based upon criteria employees feel it should be based upon.’ Dyer et al (1976: 241)

reported that perceived discrepancies between criteria that are and should be used to

determine salary increases explained about 30 per cent of the variance in managerial

Michelle Brown

39HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 11 NO 4, 2001

pay satisfaction. Lawler (1966: 274) found that, if blue collar employees do not consider

the basis on which pay is determined to be legitimate, `they exhibit resistance that

f requently leads to the failure of the programs.’ More re c e n t l y, it has been reported that

o rganisational `loyalty is being threatened by employees’ dissatisfaction with their pay

and the methods used to determine pay’ (LeBlanc and Mulvey, 1998: 24). Employee

pay pre f e rences are particularly important when organisations are contemplating a

change to a pay system. The prospects for success of a new system are enhanced when

it has the support of employees (Heneman and Young, 1991; Nigro, 1981). There f o re ,

employee support for the pay adjustment system operated by an organisation is an

important element in a system’s eff e c t i v e n e s s .

Management, however, has tended to make assumptions about the pay adjustment

p re f e rences of its employees (Mahoney, 1964). An example of managerial thinking is

p rovided by Nigro (1981: 84), who claimed that merit pay would be `of direct bene® t to

the vast majority of federal workers who do their job well and want to be judged on

the basis of their performance.’ A recent survey demonstrated a wide discrepancy in

the pre f e r red approaches to pay by American employers and their employees, noting

that ...workers prefer permanent base increases based on merit, while management is

fonder of one-time variable pay systems, since these systems cost less and are more

short-term focused’ (LeBlanc and Mulvey, 1998: 25).

Despite the importance of employee pay pre f e rences, these are rarely given

explicit consideration in the pay policy-making processes of organisations (Finn and

Lee, 1972). Nor have they attracted a significant amount of attention from pay

re s e a rchers. In a survey of re s e a rch on employee attitudes to pay, Heneman and

Judge (2000: 94) observed that `surprisingly little re s e a rch has addressed this issue.’

The absence of good data on this issue is a signi® cant problem, as organisations seek

to make choices about pay systems without a detailed understanding of the

expectations of their employees, which in turn has an impact on the overall

e ffectiveness of pay policy.

This Australian study examines the level of employee support for an individual

form of PRP, commonly re f e r red to as merit pay. It is based on a single org a n i s a t i o n

with a unionised workforce employed under the same pay system which has been in

place since 1991. This permits an analysis of employee pre f e rences in the context of a

particular pay system. The article investigates the effects of demographic and

situational factors on the level of employee support for merit pay; the situational factors

include the performance appraisal system, employee perceptions of job security and

p romotional opportunities, and the effects of internal and external pay comparisons.

The next section details eight hypotheses and their rationales. This is followed by a

discussion of the public sector organisation in which the data was collected and a

conclusion which considers the implications of the results for pay policymakers.

PREDICTORS OF EMPLOYEE SUPPORT FOR MERIT PAY

Heneman and Young (1991) observed that not all employees support merit pay. A w a y

in which to understand levels of support is v i a two established theories: expectancy

theory and equity theory. Expectancy theory suggests the conditions under which PRP

will be attractive to employees (Bartol and Locke, 2000). There are three main elements:

e ffort will result in improved performance, good performance will be recognised and

re w a rded by management, and the employee values the re w a rd. In this article the

impact of these preconditions on the level of support for individual PRP is examined.

In equity theory (Adams, 1963) an individual compares their outcome-input ratio to

that of a comparitor. There are three possible outcomes: equity, under- re w a rd inequity

and over- re w a rd inequity. Inequity generates a range of employee reactions in order to

re s t o re equity perceptions. Here, some perceived inequities in the org a n i s a t i o n ’ s

p resent pay system are tested as predictors of support for a merit pay system. The

following eight hypotheses are grouped into three themes: effect of the performance

appraisal system, situational factors and pay comparison pro c e s s e s .

Performance appraisal system

The fairness of the system of performance appraisal can be considered from two

perspectives: the fairness of the outcomes received (distributive justice) and the

fairness of the decision processes used to determine how re w a rds are allocated

( p rocedural justice). Equity theory ® rst raised the issue of distributive justice, with

Adams (1963) arguing that inequity, especially under- re w a rd, would motivate

employees to re s t o re equity by altering their behaviour, attitudes or both. Research on

p rocedural justice is a more recent development and a response to frustrations with

equity theory. Questions about how pay plans were administered prompted concerns

about fairness which were more process-oriented (Gre e n b e rg, 1990). The re l a t i o n s h i p

between these two forms of organisational justice has been extensively debated in the

l i t e r a t u re. Researchers have consistently demonstrated that distributive and pro c e d u r a l

justice perceptions are distinct, but positively correlated, dimensions of justice

(Aquino, 1995; Heneman and Judge, 2000). Further, it has been shown that each form

of justice has distinct and equally important consequences. For example, Heneman and

Judge (2000) argued that procedural justice perceptions had a more important

i n uence than distributive justice perceptions on overall ratings of fairness. Gre e n b e rg

(1990) has shown that procedural justice had particularly strong effects on attitudes

about inst itutions and systems, while distributive justice was more likely to be

associated with the outcomes of a system.

R e s e a rchers have demonstrated the importance of distributive justice on pay

p re f e rences. Beer and Gery (1972) have shown that an individual’s past experience of

an appraisal system informs expectations of what it would be like under a given pay

system, and this determines future pay adjustment pre f e rences. Con® dence with the

appraisal process builds support for merit pay. Pearce and Perry (1983) reported that

those who felt most con® dent that the appraisal process was effective were also the

most likely to favour merit pay.

P rocedural justice is also important, as control over the performance appraisal

p rocess mitigates feelings of inequity and a belief that control might yield more

favourable outcomes (Aquino, 1995; Gre e n b e rg, 1990). Beer and Gery (1972) found that

the more an individual feels understood by their supervisor, and the more freedom an

individual feels to discuss personal goals with them, the greater the pre f e rence for a

merit pay system. Pearce and Perry (1983), looking at US federal agencies, found that

t h e re was a significant and positive relationship between perceptions of a fair and

objective appraisal system and pre f e rences for merit pay. An alternative ® nding was

that of Koys et al (1989) who reported that the perceived validity of an appraisal system

to make merit decisions did not have an impact on pre f e rences for merit pay in a

university setting. Applying expectancy theory to these empirical ® ndings leads to the

observation that, when performance appraisal processes and outcomes are perceived to

be unfair, the employee will be less likely to support merit pay, as the employee

believes that their work efforts are unlikely to be recognised by management. However,

under merit pay, pay increases are contingent on management recognition, so the

absence of this recognition means that the employee will find this system of pay

Merit pay preferences among public sector employees


unattractive. The foregoing discussion of organisational justice there f o re suggests the

following two hypotheses:

1. T h e re will be a positive relationship between the perceived level of distributive justice and

support for merit pay.

2 . T h e re will be a positive relationship between the perceived level of procedural justice and


For the employee, the most obvious outcome of an appraisal system is their

performance rating, which is distinct from assessments of distributive justice.

Distributive justice refers to the employee’s assessment of fairness of the distribution of

re w a rds, while the rating is the supervisor ’ s annual measure of an employee’ s

performance. The rating is a valued outcome as it re p resents an assessment of the

employee’s worth to the organisation and can be important in maintaining an

employee’s self-esteem. Expectancy theory would predict that employees with a high

performance rating believe their efforts have resulted in improved performance, and

this has been recognised by their supervisor, leading to support for merit pay. There is

some support for this prediction. Gabris and Mitchell (1988: 381) reported that `only 5

per cent of the lowest scoring employees perceived the system as fair, in comparison to

63 per cent of the high performers.’ Beer and Gery (1972) found that individuals with

higher assessed performance were more likely to prefer merit pay over alternative pay

i n c rease policies. Heery (1998) also reported that employees with a low rating were

m o re likely to express a negative view of PRP. The third hypothesis there f o re states that:

3. T h e re will be a positive relationship between the last performance rating and the level of


Situational factors

P e rceptions of job security, promotional opportunities, the level of co-worker support

and the availability of re s o u rces all potentially have an impact on employee pay choices.

Job security refers to an employee’s expectation of ongoing employment with the

c u r rent employer (Oldham et al, 1986). The public service career stru c t u re has

traditionally meant that individuals identi® ed with the public service and not with

individual public sector organisations. Job security reduced the threat of dismissal for

arbitrary reasons and thereby ensured a degree of independence from possible

c o r rupting in¯ uences’ (Wood, 1995: 88). The importance of job security in ensuring an

e ffective public sector was seen to have influenced the character of the workforc e .

Mayntz (1985 ± quoted in Marsden and French, 1998) has argued that public servants

a re more risk averse than other employees. In other words, these employees were

attracted to the public sector by its high level of job security. The traditional emphasis

on seniority-based pay increases (Wood 1995), which generated regular and pre d i c t a b l e

pay increases, complemented the emphasis on job security. When job security is a

valued re w a rd from work, expectancy theory suggests that workers will be unwilling

to support merit pay. It introduces an element of unpredictability into the conditions of

employment for a workforce that is risk averse. This leads to the following hypothesis:

4. Employees who perceive that they have low job security will be less likely to support merit pay.

P romotional opportunities can have an impact on the level of support for merit pay

t h rough a number of mechanisms. First, promotions can be seen as an alternative to

merit pay increases. Milkovich and Newman (1996: 388) suggested that promotions can

generate a larger increase in pay than merit increases and send a clear message to

Michelle Brown


employees that good performance is `valued and tangibly re w a rded’. Promotions can

also be seen as a form of `relative compensation’ (Lazear, 1998) in that some individuals

a re promoted over their peers on the basis of a comparison of their performance levels.

This avoids the dif® culties associated with assessing employees against an absolute

s t a n d a rd, particularly when the performance of an employee cannot be objectively

m e a s u red ± for example, the units of output pro d u c e d .

S e c o n d l y, promotions provide access to other re w a rds of work. A p ro m o t i o n

p rovides access to higher status and more interesting work (Lazear, 1998). However, a

p romotion also comes with an organisational expectation of increased work eff o r t .

G re e n b e rg (1990) has shown, using equity theory, that these expectations were offset by

the increased re w a rds received by an employee in the form of a higher job title, thus

bringing about a state of equity. Third l y, the additional skills and experiences pro v i d e d

by a promotion can potentially enhance the employment prospects of an employee

e l s e w h e re, should the need arise (LeBlanc and Mulvey, 1998).

Employment in the public sector has traditionally been on the basis of an internal

labour market (Wood 1995). Employees enter the service’ at low-level entry point jobs

and pro g ress through the stru c t u re on the basis of promotions. Heery (1998) has

a rgued that internal labour markets in the public sector have broken down in re c e n t

years, thereby reducing the promotional opportunities of current employees.

T h e re f o re, if employees cannot achieve pay increases through promotions, equity

theory will predict that employees will seek out alternative ways to bring about a state

of equity, and pay increases via merit pay will become an attractive option. It is

hypothesised that:

5. Employees who perceive their promotional opportunities within the organisation as good

will be less likely to support merit pay.

Merit pay is based on a view that greater levels of employee efficiency can be

achieved by re w a rding individuals for their efforts. It is a system of pay explicitly

designed to foster competition between workers as a means to maximise the

p roductivity of workers (Heneman, 1992). Limited merit pay budgets and re q u i re m e n t s

on supervisors to generate a `normal’ distribution of performance ratings pro m o t e

competition between workers, and the achievement of individual work targets can be

j e o p a rdised by working co-operatively with colleagues.

Marsden and Richardson (1994) reported that 62 per cent of 2,423 Inland Revenue

Service employees believed that the performance pay system caused jealousies between

s t a ff. Marsden and French (1998) noted that employees were less willing to help

colleagues experiencing work dif® culties, PRP undermined staff morale and teamwork

and made staff less tolerant of absences among their colleagues. A quarter of their

respondents believed that PRP had caused their colleagues to pressurise them to work

h a rder (Marsden and French, 1998: 51). It has also been shown that good relations with

co-workers are part of the equity calculation that workers make. Gre e n b e rg (1990)

points out that workers value long-term relationships with groups and this leads them

to value pro c e d u res that promote group solidarity. There f o re, it is appropriate to

hypothesise that:

6. High levels of co-worker support will be associated with less support for merit pay.

Expectancy theory postulates that, in order for a merit pay system to be attractive to

employees, they need to believe that they have opportunities to improve their

performance. However, the intensity of competition in the product/service market has

encouraged organisations to pay close attention to the amount of money spent on



equipment and facilities for employees. Inadequate re s o u rces can have an impact on

employee perceptions of their ability to perform at the re q u i red levels, and this may

work against support for merit pay. More o v e r, evidence suggests that workers see PRP

systems as a tool of management that seeks greater employee effort with fewer

re s o u rces (Kohn, 1993). It is there f o re hypothesised that:

7. A high level of re s o u rce inadequacy will be associated with low support for merit pay.

Pay comparison processes

The ® nal hypothesis deals with the relationship between the importance attached to pay

re f e rents and support for merit pay. A distinction can be made between internal

( o rganisational re f e rents) and external (market re f e rents). An organisational re f e rent is a

pay comparison made within the organisation, and a market re f e rent relates to pay

comparisons made outside the organisation (Blau, 1994). Research on pay re f e rents is

derived from equity theory: an employee makes an assessment of equity on the basis of

a comparison other ’. Pay re f e rent re s e a rchers have sought to identify these comparison

others’ , and the consequences of perceived pay inequity, for pay satisfaction. For

example, Goodman (1974) found that equity with all re f e rent categories was associated

with pay satisfaction. Further, Goodman found that pay comparisons involving other

external re f e rents were more strongly associated with employees’ pay satisfaction than

comparisons involving a number of self-re f e rents. Scholl et al (1987) found that all forms

of inequity were signi® cantly associated with pay dissatisfaction. In the public sector

Taylor and Vest (1992) found that employees who make frequent use of pay re f e re n t s

who work in other organisations tend to have lower satisfaction with their pay.

Employee support for merit pay may be driven by comparisons with employees in

comparable jobs in external organisations, especially given that small public sector

wage increases have meant that rates of pay for many jobs lag behind those of

equivalent private sector jobs. Merit pay re p resents a way of bringing about incre a s e s .

T h e re f o re, the ® nal hypothesis states that:

8. T h e re will be a positive relationship between the importance attached to a market re f e rent and


CASE STUDY ORGANISATION

P R P is particularly popular in the public sector but, as Wood (1995: 81) notes, it is a

`highly contentious component in the public sector reform programs of many OECD

countries.’ On the one hand, PRP is a response to pre s s u res to create and run more cost-

e ffective and responsive public sector departments and agencies. However, the use of

P R P in the public sector rests on the assumption that this system will promote market-

like efficiencies and improve effectiveness ± in other words, that the public sector

w o r k f o rce is the same as the private sector workforce (Perry, 1996).

P R P in the federal public sector in Australia is the result of current government

p o l i c y. In 1996 the new conservative federal government released a discussion paper

(Reith, 1996) which sought to develop a performance culture within the A u s t r a l i a n

public service. The paper argued for greater ¯ exibility in the way agencies re c o g n i s e

and re w a rd performance, a view that was subsequently translated into a re q u i re m e n t

that all government agencies include performance provisions in enterprise agre e m e n t s

(MacDonald, 1998).

The data for the present study was collected in a large public sector re s e a rc h

o rganisation ± `PSR’ ± which undertakes scienti® c re s e a rch, employs just under 7,000

Michelle Brown


employees and currently receives about 70 per cent of its funding from the government.

The balance of its funds are derived from commercial activities. Just over half (59 per

cent) of the workforce is unionised, covering employees in all salary classi® cations up

to and including corporate employees. Both union and non-union employees are

c o v e red by an enterprise agreement that provides for a nine-level salary system. Each

pay classi® cation has a de® ned pay range ± on average plus or minus 12 per cent fro m

the midpoint ± and a number of increments of predetermined size. Level 1, 2, 3 and 4

employees are typically engaged in clerical and re s e a rch support roles, level 5 and 6 are

re s e a rch scientists and levels 7, 8 and 9 are senior management and corporate

employees. Usually employees are appointed at the bottom of their pay classi® c a t i o n

and pro g ression through the increments is based on a supervisory assessment of

performance. Each year the supervisor and the employee will jointly develop objectives

which are monitored during the year. At the conclusion of the 12-month evaluation

cycle, the supervisor makes an assessment of the employee based on the agre e d

objectives, using a ® ve-point scale. Employees must receive a `3’ or better in order to

move to the next increment. There is no provision for re g ression through the

i n c rements. Movements in the overall pay stru c t u re are the outcome of negotiations

between the union and management.

Data collection

The study is based on the results of a mail survey of 6,957 employees of PSR

conducted from December 1998 to March 1999. The con® dential survey was sent to all

employees v i a internal post to their place of employment, and were returned dire c t l y

to the re s e a rc h e r. Most items on the questionnaire were derived from established

scales, as can be seen from the contents of Table 1. Completed questionnaires were

returned by 3,335 employees ± an overall response rate of 47.9 per cent. In constru c t i n g

the mailing lists for the survey, PSR had supplied details on the demographic

characteristics of the total workforce. Comparisons, using t-tests, between the sample

and the population on the basis of gender and geographic location identif ied no

statistically signi® cant diff e rences. After taking into account missing data, the eff e c t i v e

sample size was 2,408.

Variable de¢nitions

All the measures used were self-reported and used ® ve-point scales unless otherwise

indicated. Using self-reports to examine pay pre f e rences was appropriate because

` p e rceptions of equity and expressions of satisfaction re p resent unique responses of

individuals’ (Dittrich and Carrell, 1979: 34). Table 1 provides the de® nitions, items and

descriptive statistics for all variables used in this study. For all multi-item scales a re l i a b i l i t y

analysis was undertaken, and the Cronbach alphas are also reported in Table 1. All the

reliability coef® c i e n t s a re at an acceptable level (Nunnally, 1978). Table 2 (o v e r l e a f)

p rovides correlation coef® cients and indicates that the data is within acceptable limits.

Dependent and independent variables

The dependent variable `merit’ is a categorical variable that measures high (= 3) to low

(= 1) support for merit pay. Procedural justice was measured by `pjustice’, a scale

c reated by Tang and Sarsfield-Baldwin (1996). These authors developed a series of

items that sought to measure five aspects of procedural justice associated with a

performance appraisal system: clarity about the re q u i rements of the system, fairness of

the supervisor, level of trust in the supervisor to make appropriate evaluations, the

extent of two-way communications between the supervisor and the employee and



Michelle Brown


employee understanding of the uses of the system. This scale can take values of 1

t h rough to 5, with 5 re p resenting a high level of procedural justice.

`Djustice’ is a ® ve-item scale that measures the fairness of performance appraisal

outcomes given the employee’s efforts, re s p o n s i b i l i t y, stress and education (Curry et al,

1986). Five on this scale re p resents a high level of distributive justice. `Rating’ is the

s u p e r v i s o r ’s performance assessment of the respondent in the last performance cycle.

Rating is a 1 to 5 measure, with 5 being the highest point on the scale.

The level of co-worker support is shown by co-worker’, using a measure based on the

scale developed by House (1981). On this ® ve-point scale, high levels of co-worker support

take the value of 5. Perceptions of promotional opportunities are measured by `promote’, a

t h ree-item scale created by Price and Mueller (1981). A ® ve on this scale re p resents a belief

that promotional opportunities are good. `Resource’ is a three-item measure that assesses

the level of re s o u rce inadequacy, based on a scale by Iverson (1992). A ® ve on this scale

re p resents a high perceived level of re s o u rce inadequacy. Secure’ measures the extent to

which employees felt that their job with PSR was secure. This measure was developed by

Oldham et al (1986) ± on this scale ® ve re p resents feeling secure in one’s job.

The pay re f e rents measures are taken from the items developed by Blau (1994).

`Market’ rates the importance of pay comparisons with others doing like work in

comparable organisations (three items). `Organisation’ measures the importance

attached to pay comparison with other employees within PSR (three items). On both

these scales, a ® ve indicates a high level of importance attached to the re f e re n t .

Control variables

Four control variables were included in the analysis: age, gender, salary classi® c a t i o n

level and union. Research suggests that there are significant diff e rences in pay

adjustment pre f e rences on the basis of age. A n d rews and Henry (1963) found that, with

i n c reased age, there was a slight trend towards less emphasis on merit. A c c o rding to

B e rgmann et al (1983), older workers are more likely to support seniority or tenure -

based systems of pay adjustment. Torrington (1993) reported that young workers were

m o re attracted to merit pay. In the analysis, `age’ is a continuous variable.

T h e re is some suggestion of a gender effect, with Majors (1988) suggesting that

women allocators prefer to distribute pay across the board to all employees rather than



1 2 3 4 5 6 7 8 9 1 0 11 1 2 1 3 1 4

M e r i t 1 . 0

Age - . 1 5 1 . 0

G e n d e r . 1 0 - . 2 1 1 . 0

C S O F - . 0 9 . 4 7 - . 3 8 1 . 0

U n i o n - . 1 6 . 2 3 - . 0 8 . 1 8 1 . 0

D j u s t i c e - . 0 5 - . 0 0 . 0 6 . 1 2 . 0 1 1 . 0

P j u s t i c e . 1 0 - . 0 5 . 0 5 . 0 4 - . 0 6 . 4 8 1 . 0

R a t i n g . 0 9 - . 0 7 - . 0 1 . 0 6 - . 0 3 . 0 7 . 2 5 1 . 0

M a r k e t . 11 - . 0 5 - . 0 2 . 0 7 . 0 6 - . 1 8 - . 0 5 . 0 4 1 . 0

O rg a n i s a t i o n . 0 7 . 0 7 - . 0 5 . 1 0 . 1 0 - . 2 1 - . 0 6 . 0 5 . 5 0 1 . 0

C o - w o r k e r - . 0 0 - . 0 2 . 0 5 . 0 2 . 0 1 . 3 1 . 4 1 . 0 9 - . 0 7 - . 1 0 1 . 0

P ro m o t e - . 0 0 - . 1 7 - . 0 7 . 2 1 - . 0 3 . 4 4 . 3 9 . 1 8 - . 0 6 - . 1 0 . 2 3 1 . 0

R e s o u rc e - . 0 4 . 0 0 - . 1 4 . 0 4 . 0 8 - . 3 1 - . 3 2 - . 11 . 1 5 . 1 3 - . 2 7 - . 1 7 1 . 0

S e c u re . 0 9 - . 0 0 . 0 4 . 0 5 - . 11 . 1 9 . 2 4 . 1 4 - . 11 - . 0 8 . 1 6 . 2 2 - . 2 2 1 . 0

TA B L E 2 C o r relation matrix

on the basis of merit. Koys et al (1989) reported that men pre f e r red merit pay more than

women did. Brenner and Bertsch (1983) found that gender pre f e rences might be

moderated by personality. Assertive men pre f e r red pay increases based on merit, while

assertive women pre f e r red pay increases based on seniority. In the analysis, gender is

coded 1 for females.

Mahoney (1964) found that higher-income levels generated an increased pre f e re n c e

for merit pay, arguing that high-income employees favoured it because they have

income to rely on should their merit increases be less than adequate. Low-income

employees are less willing to gamble on the prospect of a large merit increase. It is

t h e re f o re appropriate to control for the effect of income, and in the analysis `CSOF’ is

salary classification level of the respondent, with nine re p resenting the highest

possible classi® c a t i o n .

T h e re is a body of re s e a rch demonstrating that unions have a pre f e rence for pay

systems that reduce wage inequality. For example, Balkin (1989) found that union

workplaces devoted a smaller relative share of compensation to PRP. Drago and

Heywood (1990) reported that unionised workplaces were less likely to operate PRP

schemes. Union objections to merit pay derive from a number of concerns. Most

n o t a b l y, they are concerned about the subjective nature of performance ratings and the

potential for merit pay to undermine union solidarity. `Workers who receive diff e re n t

pay increases may be more likely to compete with one another, which is less conducive

to union solidarity’ (Balkin, 1989: 303). This union effect is controlled for by the variable

`union’, which is coded 1 for members.

Method of analysis

The data were analysed using an ord e red probit model.1

The dependent variable

(merit) is categorical and ord e red, making this form of analysis the most appro p r i a t e .

F u r t h e r, as Gabris and Mitchell point out (1988), experiences of a performance

appraisal system create polar views on pay adjustment pre f e rences. It is there f o re

a p p ropriate to use a method of analysis that compares the views of those who support

merit pay with those who do not.

The ® rst stage of the analysis consisted of running an ord e red probit in order to

identify the direction of the effects. The second stage involved the generation of

m a rginal effects, i e the effect of a one-unit change in a single independent variable on

the dependent variable, holding all other variables constant.

Results

Overall there was support for the use of merit pay (Table 1). The mean for the variable

was 2.31, with 23.2 per cent indicating a low level of support for merit pay and 53.2 per

cent a high level of support. From Table 3 (o v e r l e a f) it is apparent that younger workers

a re statistically more likely to support merit pay than their older colleagues.

U n e x p e c t e d l y, women workers were more likely than their male counterparts to

support merit pay, suggesting that women are particularly optimistic about the eff e c t s

of a merit pay system. Unionists were signi® cantly less likely to support merit pay than

their non-union colleagues.

The ® rst two hypotheses were concerned with the effect of organisational justice on

the level of support for merit pay. The first hypothesis was that there would be a

positive relationship between distributive justice and support for merit pay. The re s u l t

was statistically signi® cant but in a negative direction (Table 3). Employees who felt

that the outcomes of the current system were fair were less likely to indicate support

for merit pay. The second hypothesis postulated that procedural justice in the

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appraisal system would generate support for merit pay. It is apparent that there was a

statistically signi® cant and positive relationship with the level of support for merit

p a y. The results in Table 3 support hypothesis three, as there is a positive and

s i g n i ® cant relationship between the performance rating and the level of support for

merit pay.

Those who perceive their jobs as secure are more likely to support merit pay. Those

with insecure jobs seem reluctant to deal with the additional uncertainty of PRP

i n c reases or possibly fear giving management additional controls over their pay.

Hypothesis ® ve was concerned with the impact of promotional opportunities. There is

a signi® cant and negative relationship indicating that, as an employee’s perceptions of

p romotional opportunities increase, the level of support for merit pay falls. A s

hypothesised, promotions are seen as an alternative for merit pay. The level of co-

worker support has some impact on the level of interest in merit pay. Those who felt

that they had a high level of support from their co-workers were signi® cantly less likely

to support merit pay. Although the results on hypothesis seven ± re s o u rce inadequacy ±

a re in the direction hypothesised, they are not signi® c a n t .

The ® nal hypothesis (eight) postulated that there would be a positive re l a t i o n s h i p

between the market re f e rent and support for merit pay, which was the result, to a

statistically signi® cant level. PSR has been re q u i red to raise funds through commerc i a l

activities, which has had the effect of placing employees in direct contact with the

market, putting them in a good position to make informed comparisons.

The second stage of the analysis generated marginal effects on the level of support

for merit pay; the results are reported in Table 4. It can be seen that union membership

(-20.67 per cent) and satisfaction with the current outcomes of the performance

appraisal system (-7.29 per cent) had large negative effects on support for merit pay.

The employment of women (12.76 per cent), use of market re f e rents (8.62 per cent) and



Beta coef® c i e n t

C o n t r o l s

A g e - . 0 1 4 2 * * *

G e n d e r . 1 7 5 6 * * *

C S O F . 0 0 1 2

U n i o n - . 2 9 3 8 * * *

Performance appraisal factors

Djustice - . 1 0 2 9 * * *

Pjustice . 2 1 3 4 * * *

Rating . 0 9 2 7 * * *

Situational factors

Co-workers - . 0 6 3 2 *

P romote - . 0 6 9 1 * *

R e s o u rce - . 0 2 4 2

S e c u re . 1 0 0 0 * * *

C o m p a r i s o n s

Market . 1 2 3 9 * * *

O rg a n i s a t i o n . 0 4 8 3

* signi® cant at the p < 10 per cent level

** signi® cant at the p < 5 per cent level

*** signi® cant at the p < 1 per cent level

TA B L E 3 O r d e red probit results on `merit’ (n = 2,408)

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an emphasis on procedural justice (15.03 per cent) had a sizeable positive impact on


DISCUSSION AND CONCLUSIONS

The article con® rms that not all employees are pre p a red to support merit pay, a re s u l t

consistent with earlier re s e a rch (Marsden and French, 1998). Further, it demonstrates

the importance of employee pre f e rences for pay decision making in organisations in a

number of ways. First, demographic and situational factors can be used to identify

consistent patterns in the level of support for merit pay; management no longer need

make assumptions about employee pre f e rences when evaluating the viability of a

merit pay system. Secondly, organisations that impose a merit pay system on their

employees will ® nd that employees either do not respond to inducements or actively

resist the system. Third l y, merit pay can be divisive as it has the effect of magnifying

small diff e rences in assessed performance. As Gabris and Mitchell (1988: 384) pointed

out, the `paradox of merit pay is that, while it potentially satis® es the needs of one

g roup, it may downgrade the needs and opportunities of another ’ . The task is to

design and implement a system that is acceptable to the largest number of employees.

Beer and Gery (1972) made the observation that, over time, a workforce may turn over

such that those who do not ® nd a merit system satisfying will leave. For PSR and other

o rganisations, the challenge is to be certain that those who leave are the ones who they

want to quit.

Expectancy theory provides guidance as to why some employees do not support

merit pay. In order for a merit pay system to be attractive, employees must believe that

performance can be accurately measured and increased pay must be a valued

Low support for High support for

merit adjustments M i d merit adjustments

( % ) ( % ) ( % )

C o n t r o l s

A g e . 4 1 . 6 2 - 1 . 0 3

G e n d e r - 5 . 0 3 - 7 . 7 3 1 2 . 7 6

U n i o n 8 . 1 5 1 2 . 5 2 - 2 0 . 6 7

Performance appraisal factors

D j u s t i c e 2 . 8 8 4 . 4 2 - 7 . 2 9

P j u s t i c e - 5 . 9 2 - 9 . 11 1 5 . 0 3

R a t i n g - 2 . 5 4 - 3 . 9 1 6 . 4 5

Situational factors

C o - w o r k e r s 1 . 7 4 2 . 6 7 - 4 . 4 1

P ro m o t e 2 . 0 1 3 . 0 8 - 5 . 0 9

R e s o u rc e . 6 8 1 . 0 5 - 1 . 7 3

S e c u re - 2 . 7 5 - 4 . 1 9 6 . 9 4

C o m p a r i s o n s

M a r k e t - 3 . 4 0 - 5 . 2 3 8 . 6 2

O rg a n i s a t i o n - 1 . 3 2 - 2 . 0 2 3 . 3 4

* Measures the effect of a one-unit change in each independent variable on the three outcomes

for the dependent variable, merit. No marginal effects for CSOF calculated due to small non-

s i g n i ® cant coef® cients. Calculations based on the means for all independent variables.

TA B L E 4 M a rginal effects*

outcome. Performance appraisal systems and extrinsic re w a rds in the public sector are

particularly problematic. Unlike in the private sector, there is no single measure of

o rganisational performance. The goals of government departments and agencies can

be dif® cult to de® ne and are sometimes contradictory. Nor are there any shared criteria

for success due to the varying stakeholder demands (SSCFPA, 1993). At PSR

respondents were concerned about being re q u i red to set and then meet performance

t a rgets when the pace of scientif ic discovery is so unpredictable. Further, the

government-imposed re q u i rement to raise 30 per cent of revenue from commerc i a l

activities was an issue. Many respondents joined PSR to undertake scienti® c re s e a rc h ,

and the absence of business skills meant that many felt ill-equipped to handle this new

job re q u i re m e n t .

PSR employees, however, appear to see the existing system of performance appraisal

as fair, although this could be the result of the low level of discrimination under the

system: 95 per cent of all employees received a rating of three or better. More o v e r, the

rating serves only to determine whether an employee receives the next increment in the

pay classif ication. Linking these performance ratings to sizeable performance

payments, as would occur under a merit pay system, would undermine these curre n t

assessments of the performance appraisal system for two reasons. First, re s e a rch has

demonstrated that relations between supervisors and their employees are strained by

the demands of a merit pay system (e g Milkovich and Newman, 1996). Secondly, there

is an inherent tension between performance appraisal and merit pay. Milkovich and

Widgor (1991) note that linking ratings to pay will sti¯ e communication, as employees

refrain from discussing issues with their supervisor that have the potential to damage

their performance rating.

T h e re is a body of re s e a rch that demonstrates that public sector workers attach

importance to the intrinsic value of their work. Public sector pay re s e a rchers (Perry

1996) have found that public employees have a greater interest in altruistic or

ideological goals ± such as helping others or doing something worthwhile for society ±

and less interest in monetary re w a rds than do their private sector counterparts.

C rewson (1997) noted that public employees rate extrinsic re w a rds lower in importance

than do employees from the private sector. In turn, intrinsic re w a rds are more

important to public employees than to those employed in the private sector. Further

evidence on the values of public servants was evident in the submission of an agency

head to an inquiry into public sector performance pay in Australia, who stated that:

. . . s t a ff of this agency are insulted by the crude assumption that they work better when

bribed’ (SSCFPA, 1993: 51).

These observations have important implications for public pay policymakers. First,

merit pay systems cannot work when employees do not value the marginal incre m e n t s

associated with merit pay (Bartol and Locke, 2000). This emphasis on intrinsic re w a rd s

m a y, however, be changing. Access to information on private sector salaries and small

a c ro s s - t h e - b o a rd increases has contributed to some of the interest in merit pay within

PSR. The problem for public sector organisations is to provide meaningful pay incre a s e s

under a merit pay system when the amount of merit pay available for distribution is

generally very small. Secondly, there can be a con¯ ict between an economic versus a

service culture. Crewson (1997) argues that public sector organisations need to ® nd a

balance between providing adequate economic re w a rds without destroying the intrinsic

needs of public employees. Further, hiring economically-oriented employees can be

detrimental to an organisation with a service culture, and limited economic re s o u rc e s

mean that most public sector organisations cannot rely on monetary re w a rds to keep

employees. Third l y, Heery (1998: 98) found a low incidence of problems arising from the



P R P system in local government. He concludes that the public service ethos inoculates’

employees against adverse reactions to performance pay.

Additional insights into the results at PSR on the situational and pay comparison

p redictors can be understood from the perspective of equity theory. While there is a

positive relationship between procedural and distributive justice (as shown by the

c o r relation matrix in Table 2), they differ in the relationship with merit pay (Table 3).

Employees unhappy with the current outcomes (distributive justice) of the

performance appraisal system sought to re s t o re their perceptions of equity by

supporting merit pay. Employees uncomfortable with the pro c e d u res (pro c e d u r a l

justice) of the present performance appraisal system were less inclined to support a

merit pay system. This presents a dilemma for organisations. Low levels of distributive

justice may help build support for an individual merit system but it may also have

negative effects for other HR indicators: for example, job satisfaction and org a n i s a t i o n a l

commitment. Employees who perceive that their promotional prospects as poor, or

believe that they are underpaid relative to jobs in other comparable org a n i s a t i o n s ,

believe that merit pay would rectify their inequities.

The study of PSR found a level of in-principle support for merit pay although, as

Dowling and Richardson (1997) have pointed out, employees can report in-principle

support but express reservations when PRP is put into practice. The processes of

implementation can be just as important as the stru c t u re of the merit pay plan, as they

can have an impact on employee reactions to the new system (Bartol and Locke, 2000).

Lawler (1990) has suggested that the best approach is to use taskforces, thus allowing

employee participation. His reasoning was that participation provides better information

for design decisions, fosters understanding of the decisions and builds commitment and

acceptance. This, however, is not always the outcome. Heneman and Young (1991: 44)

found, in a longitudinal study, that school administrators ± who were involved in the

design and implementation of an incentive pay system ± did not support its use prior to

its introduction, and subsequent actual experience did nothing to alter their scepticism ±

and indeed may have heightened negative reactions to the pro g r a m . ’

P roblems such as these can be a consequence of insuf® cient consideration about the

suitability of a PRP scheme for the organisation and its employees. Wood (1995) has

shown that public sector agencies have assumed that PRP would be effective simply

because it had been introduced elsewhere. Ingraham (1993: 354) has argued that pay

success `occurs in the context of organisational characteristics not likely to be found in

most public sector org a n i s a t i o n s . ’

It is important to continue the study of employee pay pre f e rences, and there are a

number of ways that re s e a rch could proceed. First, future re s e a rchers might usefully

c o m p a re and contrast the determinants of various pay adjustment systems, including

s e n i o r i t y, cost of living and skill-based systems. Secondly, future models should include

a number of psychological states, for example risk-taking and self-ef® c a c y. Cable and

Judge (1994: 323) have shown that individuals with more con® dence in their personal

ability (high self-ef® cacy) may perceive greater expectancy in their actions, and they

may be more attracted to pay systems that link their individual behaviour to re w a rd s . ’

Risk avers ion is also an important conside ration influencing an individual’ s

p re f e rences for a ® xed or contingent pay system. Third l y, there is a methodological

challenge for re s e a rchers. A characteristic of most pay-pre f e rence re s e a rch is the need to

get respondents to react to hypothetical alternatives. Researchers are forcing people to

make choices that they may not have previously considered. Fourthly, merit pay

systems are based on the assumption that money motivates, although Heneman and

Judge (2000) have shown that workers consistently rank pay as less important than

Michelle Brown




other job attributes. Future re s e a rchers might usefully include an assessment of the

importance of money in their models of pay adjustment pre f e rences. Finally, it is

unclear to what extent organisations are able to affect the pay pre f e rences of their

employees and the stability of these pre f e rences over time. Findings on this would be

particularly useful to pay policymakers.

Acknowledgements

The re s e a rch was funded by a grant received from the Faculty of Economics and

C o m m e rce, University of Melbourne. I would like to thank the management of PSR

and the of® cials of the Community and Public Sector Union for their ongoing support

of the project. David Marsden genero usly provided access to his pay pre f e re n c e s

questions. Helpful comments on earlier versions of this article were provided by Joe

Isaac, Carol Johnson and Kim Sawyer (University of Melbourne), the anonymous

journal re f e rees and H R M J’s editor.

Note

1. An ord e red probit model is used to estimate relationships between ord i n a l

(categorical and ord e red) dependent variables and a set of independent variables.

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