Organizational Commitment and Pay Satisfaction

Organizational Commitment and Pay Satisfaction LITERATURE REVIEW This chapter discusses about organizational commitment and pay satisfaction and dimensions under these two variables. ORGANIZATIONAL COMMITMENT Meyer, Allen, Smith (1993) say that the three types of commitment are a psychological state that either characterizes the employees relationship with the organization or has the implications to affect whether the employee will continue with the organization. Meyer et al (1993) continue to say that generally the research shows that those employees with a strong affective commitment will remain with an organization because they want to, those with a strong continuance commitment remain because they have to, and those with a normative commitment remain because they fell that they have to. Meyer Allen (1997) define a committed employee as being one stays with an organization, attends work regularly, puts in a full day and more, protects corporate assets, and believes in the organizational goals. This employee positively contributes to the organization because of its commitment to the organization. Organizational commitment is a psychological state that binds an individual to the organization. It is a link between an employee and the organization that makes turnover less likely (Allen Meyer, 1990). Affective commitment is defined as an employees emotional attachment to, identification with, and involvement in the organization (Allen Meyer, 1990). Continuance commitment is a desire to continue to engage in consistent lines of activity as a result of the accumulation of Aside [emailprotected] which would be lost if the activity were discontinued (Allen Meyer, 1990; Becker, 1960). A considerable amount of research in the field of organizational commitment, which is aimed at locating the antecedents and the correlations with variables like turnover and absenteeism. In order to have a good understanding of the construct of organizational commitment, Table 2.1 was constructed to presents the historical definitions of organizational commitment. Liou Nyhan (1994), Guffey, et al. (1997) A. The attitudinal approach refers to the attitude that an employee has towards ones organization. B. The Behavioral approach states that an employee becomes attached or committed to an organization based on one;s individual investment of time, money or training that would be lost of one left the organization. A) an employee who has a high organizational commitment will: strongly belief in and accept the organizations goals and values exert a significant effort for the firms benefit desire to remain as a member of the organization Porters, Steers, Mowday and Boulian (1974) The relative strength of an employees identification with and involvement in a particular organization. Three factors influencing organizational commitment: acceptance of the organizations goals and values willingness to work on behalf of the organization strong motivation to remain in the organization. Development of organizational commitment is a process that evolves through stages over a period of time. Sheldon (1971), Buchanan (1974) Positive evaluation of the organization and the intention to work toward its goals. Buchanan (1974) a) identification adoption as ones own the goals and values of the organization b) involvement psychological immersion or absorption in the activities of ones work role c) loyalty a feeling of affection and attachment to the organization. Hrebeniak and Alluto (1973) The unwillingness to leave the organization for increments in pay, status, or professional freedom or for greater colleague friendship. Kantor (1968) Willingness of social actors to give energy and loyalty to the organization. Becker (1960) Employees organizational commitment develops through their actions and choices over time. Commitment is viewed as a function of employee behavior. Multiple definitions of organizational commitment are found in the literature. Bateman and Strasser (1984) state that organizational commitment has been operationally defined as multidimensional in nature, involving an employees loyalty to the organization, willingness to exert effort on behalf of the organization, degree of goal and value congruency with the organization, and desire to maintain membership. Mowday, Steers, and Porter (1979) identified commitment-related attitudes and commitment-related behaviors. Porter et al. (1974) discuss three major components of organizational commitment as being a strong belief in and acceptance of the organizations goals, a willingness to exert considerable effort on behalf of the organization, and a definite desire to maintain organizational membership. Sheldon (1971) defines commitments as being a positive evaluation of the organization and the organizations goals. According to Buchanan (1974) most scholars define commitment as being a bond between an individual (the employee) and the organization (the employer), though his own definition of commitment. According to Maume (2006) Organizational Commitment is typically measured by items tapping respondents willingness to work hard to improve their companies, the fit between the firms and the workers values, reluctance to leave, and loyalty toward or pride taken in working for their employers (Maume, 2006). Meyer and Allen (1991) and Dunham et al (1994) identified three types of commitment; affective commitment, continuance commitment, and normative commitment. Normative commitment is a relatively new aspect of organizational commitment having been defined by Bolon in 1993. AFFECTIVE COMMITMENT Affective commitment is defined as the emotional attachment, identification, and involvement that an employee has with its organization and goals (Mowday et al, 1997, Meyer Allen, 1993; OReily Chatman). Porter et al (1974) further characterize affective commitment by three factors (1) belief in and acceptance of the organizations goals and values, (2) a willingness to focus effort on helping the organization achieve its goals, and (3) a desire to maintain organizational membership. Mowday et al (1979) further state that affective communication is when the employee identifies with a particular organization and its goals in order to maintain membership to facilitate the goal. Meyer and Allen (1997) continue to say that employees retain membership out of choice and this is their commitment to the organization. CONTINUANCE COMMITMENT Continuance commitment is the willingness to remain in an organization because of the investment that the employee has with nontransferable investments. Nontransferable investments include things such as retirement, relationships with other employees, or things that are special to the organization (Reichers, 1985). Continuance commitment also includes factors such as years of employment or benefits that the employee may receive that are unique to the organization (Reichers, 1985). Meyer and Allen (1997) further explain that employees who share continuance commitment with their employer often make it very difficult for an employee to leave the organization. NORMATIVE COMMITMENT Normative commitment (Bolon, 1993) is the commitment that a person believes that they have to the organization or their feeling of obligation to their workplace. In 1982, Weiner discusses normative commitment as being a generalized value of loyalty and duty. Meyer and Allen (1991) supported this type of commitment prior to Bolons definition, with their definition of normative commitment being a feeling of obligation. It is argues that normative commitment is only natural due to the way we are raised in society. Normative commitment can be explained by other commitments such as marriage, family, religion, etc. therefore when it comes to ones commitment to their place of employment they often feel like they have a moral obligation to the organization (Wiener, 1982). PAY SATISFACTION To fully understand the concept of pay satisfaction, it is necessary to review research on the construct. From the inception of organizational science, pay has been considered an important reward to motivate the behavior of employees (Taylor, 1911). Yet it was not until theorists began exploring fairness in social exchanges (Adams, 1963) that the specific cognitive mechanisms through which pay motivates workers began to become clear. Soon after, organizational researchers hypothesized that feelings of fairness lead to organization relevant attitudes such as job satisfaction (Locke, 1969) and, more specifically, pay satisfaction (Locke, 1976), and that these attitudes impact employee behavior within organizations (Farell Stamm, 1988; Judge Bono, 2001; Scott Taylor, 1985; Tett Meyer, 1993). Pay satisfaction has received considerable research attention since the constructs introduction into the literature, although conceptualization of the construct has changed over time. Table 2.2 constructed by Faulk II (2002) traced the development of the pay satisfaction construct from pay level research to current multi-dimensional approaches. The first model includes pay and recognizes that pay has implications for employee behavior in organizations but does not explain why this is so. Initial research on pay satisfaction relied upon equity (Adams, 1963) and discrepancy theories (Lawler, 1971) to explain how individuals determine satisfaction with pay. Treated as a global construct in these models, pay satisfaction motivates individuals to engage in certain behaviors, but these approaches do not specify which behaviors will be chosen. In the late 1970s, Heneman and Schwab (1979) built upon the work of Lawler (1971) and Dyer and Theriault (1976) to develop the modified discrepancy model that proposes that pay is multidimensional; Heneman and Schwab (1979) describe five related but unique dimensions whose antecedents and consequences depend on the different ways they are administered within organizations. PAY Pay has long been considered one of the most important organizational rewards (Heneman Judge, 2000) because it allows employees to obtain other rewards (Lawler, 1971). Frederick Taylor (1911) was one of the earliest to recognize the motivating effects of pay when he proposed that workers put forth extra effort on the job to maximize their economic gains. Although this premise lost favor in the late 1920s with the emergence of the human relations school (Wren, 1994), money remains the fundamental way that organizations reward employees. Yet, despite the long-standing importance of pay, the way pay impacts the behavior of employees remains to be explained. Reinforcement theory and expectancy theory emerged as the earliest theories to shed some light on how pay influences employee behavior. REINFORCEMENT THEORY Reinforcement theory (Skinner, 1953) suggests that pay acts as a general reinforcer because of its repeated pairing with primary reinforcers. People learn from life experiences that a primary need, such as food or shelter, can be satisfied if money is obtained. Other theorists suggest that through similar experiences a drive for money itself develops (Dollard Miller, 1950). Whether treating pay as a means to an end or as an end itself, reinforcement theory does not provide a clear explanation for how pay acts as an impetus for action. People engage in behaviors because of past experiences, but the process by which past experiences determine an individuals future behavior remained unclear. EXPECTANCY THEORY Vrooms (1964) expectancy theory helped clarify how pay influences future behavior. According to expectancy theory, three components determine motivation: 1) a judgment regarding the likelihood that an effort leads to a certain level of performance (expectancy); 2) a judgment regarding the likelihood that this level of performance leads to a certain outcome (instrumentality); and 3) the importance of the outcome to the individual (valence). Life experience, the key determinant of behavior as suggested by reinforcement theory, influences the determination of both expectancy and instrumentality. If an individual has prior experience which leads him or her to believe that a certain level of effort will lead to a given level of performance and that this level of performance will lead to a given outcome, that person will be more likely to engage in that behavior, if the outcome is desirable (high valence). Vroom (1964) suggests that pay motivates behavior only if valued by the employee or if pay allows individuals to obtain some other highly valued outcome. UNIDIMENSIONAL PAY SATISFACTION One key component not specifically delineated by either reinforcement or expectancy theory is the desirability of the outcome. This suggests an affective reaction to the outcome that influences an individuals behavior. Herzbergs (1968) two-factor motivational model provides an important link between pay research and pay satisfaction research by suggesting that it is the individuals affective reaction to pay, pay satisfaction, that impacts motivation. Herzberg (1968) suggests pay is a hygiene, or contextual factor, that prevents an employee from being motivated by such things as the work itself. Herzberg (1968) suggests that if an organization wishes to motivate employees, the organization must first make sure pay and other hygiene factors are at such levels that dissatisfaction does not occur. Along with reinforcement (Skinner, 1953) and expectancy theories (Vroom, 1964), Herzbergs (1968) two-factor theory begins to explain why pay is generally regarded as a major mechanism for rewar ding and modifying behavior (Opsahl Dunnette, 1966). However, it is difficult to relate pay directly to outcomes. It is actually attitudes such as pay satisfaction that have been shown to be important intervening variables in the relationships between pay and outcomes. Once research recognized an employees affective reaction to pay is what is important, not simply objective pay, it was necessary to determine the nature and domain of pay satisfaction, its antecedents, and consequences. Initially, pay satisfaction was conceived as a unidimensional construct. It was assumed an individual has a general feeling about his or her pay and that this overall feeling is an important determinant of the individuals attitudes and behaviors (Lawler, 1971). Equity and discrepancy theories offer insight into how pay satisfaction is determined and suggests possible consequences of pay dissatisfaction. EQUITY THEORY Equity theory suggests that individuals are interested in maintaining fairness in their relationships with organizations. Fairness is determined by social comparison (Festinger, 1957) based on a social exchange (Homans, 1961). The exchange takes place between the individual and the organization. As shown in Figure 2.1, the individual examines the ratio of what is received from the organization (outputs) to what is contributed to the organization (inputs). Outputs include pay, time-off, benefits, and recognition, while inputs include experience, tenure, effort, and education. Once the ratio is determined, the individual compares his or her ratio to a referent others ratio. This referent other can be someone doing a similar job within or outside the organization, someone doing a different job in the organization, or even the focal individual at a different point in time. The more similar the ratios are, the greater the satisfaction. However, if the ratios are significantly different, t ension will result, and the individual will be motivated to reduce that tension. To reduce this tension, the individual may change his or her behavior, cognitively adjust his or her inputs and/or outputs or those of the referent, change the referent, or exhibit withdrawal behaviors (Adams, 1963; Campbell Pritchard, 1976). Clearly, providing an employee with a satisfactory pay package is important to the operations of an organization. If employees do not feel they are being treated fairly, they will act to reduce the tension caused by inequity. For example, if the employee feels the output/input ratio is below the referent other, the employee may reduce the number of organizational citizenship behaviors (OCBs) exhibited (Organ, 1994; Williams Anderson, 1991). Alternatively, the individual may come in late, miss work altogether, or quit the job. If the employee is a strong performer, none of these activities benefit organizational operations. Equity theory is an important advancement in the study of pay satisfaction because it explains how individuals form an attitude regarding pay. Equity theory also suggests that once an attitude regarding pay is formed, this attitude will cause individuals to act in certain ways, either maintaining their current behavior or changing their behavior in order to reach a state of satisfaction. Although equity theory offers a range of behaviors that individuals may engage in to reduce perceived inequity, it does not suggest how strong an influence perceived inequity has on each of the outcomes. DISCREPANCY THEORY Another relevant social cognitions theory that is important in the development of pay satisfaction research is discrepancy theory (Lawler, 1971). As shown in Figure 2, discrepancy theory builds on equity theory by incorporating inputs and outputs to form a perception of fairness and uses a referent other in this assessment. However, discrepancy theory adds important variables, revises the mechanism by which individuals determine their level of satisfaction, and incorporates expectancy theory (Vroom, 1964). The focal individual assesses his or her level of inputs and uses a referent others inputs and outcomes to partially determine the amount of pay that should be received. A difference between this model and equity theory is that the individual also takes into account perceived job characteristics including job level, perceived difficulty of the task, and perceived responsibility when determining the perceived amount of pay that should be received. This set of perceptions forms one half of the key comparison in the discrepancy model that determines pay satisfaction. The other half of the comparison is the perceived amount of pay received that is determined by actual pay received as compared to the perceived pay of a referent other. If there is a discrepancy between an individuals perception of how much he or she receives and how much he or she feels should be received, the individual will be motivated to reduce the dissonance in much the same way explained by equity theory. According to discrepancy theory, and unlike equity theory, motivation to engage in behaviors to reduce tension is not solely determined by a difference between what is expected and what is actually received. Lawlers discrepancy model further enhances equitys explanation of pay satisfactions relationship with behavior by incorporating a component of expectancy theory (Vroom, 1964), valence, to determine whether a person will react to the discrepancy. If the outcome is has a low valence, the individual will not react strongly to the discrepancy. If pay is important, a discrepancy will have an impact on the individuals behavior; if it is not, the individual will not be motivated to change his or her behavior. The incorporation of valence is important because it explains why two individuals in the same inequitable or discrepant situation react differently. EMPIRICAL FINDINGS The majority of global pay satisfaction research focuses on its antecedents. Considerable progress has been made in identifying the causes of pay satisfaction (Berkowitz et al., 1987; Dreher, 1981; Dyer Theriault, 1976; Sweeney et al., 1990). For example, perceptions of future inequity (Berkowitz et al., 1987), education (Lawler Porter, 1966), occupational level (Schwab Wallace, 1974), actual pay level (Berger Schwab, 1980; Dreher, 1980; Dreher et al., 1988; Hemmasi, Graf Lust, 1992; Rice, Phillips, McFarlin, 1990), and the sources of an individuals information regarding compensation (Capelli Sherer, 1988) have all been found to explain variance in pay satisfaction. Although several articles emphasize the importance of determining the impact of global pay satisfaction on outcome variables (Blau, 1994; Heneman, 1985; Shaprio Wahba, 1978), very few have explored the question empirically. Using a sample of 2000 middle managers, Miceli, Jung, Near Greenberger (1991) found global pay satisfaction related positively to global job satisfaction (r = .28), lack of job search (r = .23), and intent to stay until retirement (r = .26). Motowildo (1983), using a sample of 89 salespeople, analyzed the relationship of pay level satisfaction and withdrawal behavior. He found that pay satisfactions relationship with turnover is indirect through turnover intent, and that relationship between quantity of pay and turnover intention is mediated by pay satisfaction. Pay satisfaction explains an additional 15.9% of the variance in turnover intention after age, tenure, general satisfaction, pay, and pay expectation have been entered in the regression equation. Althoug h positively correlated with termination (r = .23, à Ã‚  Global pay satisfaction research has advanced the understanding of pays importance in organizations in significant ways. First and foremost, the shift in focus from objective pay to the affective reaction to pay provides an important intervening variable between pay and outcomes. Secondly, the theoretical underpinnings of this research stream, equity theory (Adams, 1963) and its close derivative, discrepancy theory (Lawler, 1971), expand on the theories used in pay research to provide a process by which pay satisfaction is determined. Finally, these theories offer suggestions regarding the effect of pay satisfaction on outcomes (Adams, 1963; Campbell Pritchard, 1976; Lawler, 1971). What this stream of research does not explain is which of these possible behaviors will be chosen. Two other concepts in equity and discrepancy theory are left unexplored if pay satisfaction is conceptualized as a unidimensional construct. First, equity theory allows the comparison of other variables such as recognition, time-off, and benefits when determining whether or not the individual is treated fairly. A unidimensional conceptualization of pay satisfaction focuses solely on pay; arguably pay level (Heneman, 1985). Secondly, discrepancy theory borrows the concept of valence from expectancy theory (Vroom, 1964) to explain differing reactions to the same inequitable situation. To determine pay satisfactions domain and nature, researchers needed to explore the possibility that pay satisfaction may include other dimensions that will impact outcomes differentially. This need led to the creation of a multidimensional approach of pay satisfaction. MULTIDIMENSIONAL PAY SATISFACTION Soon after Locke (1969) hypothesized that pay was a facet of job satisfaction that warranted singular attention, he suggested that pay satisfaction might be a multidimensional construct. The first to explicitly explore this possibility were Heneman Schwab (1979). They suggested that pay satisfaction consists of four related, but distinct dimensions, and developed the Pay Satisfaction Questionnaire (PSQ) to test the hypothesis (Heneman Schwab, 1985). Their model has received considerable attention but is not universally accepted. The basis the models is the administrative independence concept, which builds upon discrepancy theory. ADMINISTRATIVE INDEPENDENCE The premise of the administrative independence concept is similar to that of equity and discrepancy theories (Heneman, 1985). An individual makes comparison with referent others based on what the individual offers an organization and what he or she receives in return (Adams, 1963; Lawler, 1971; Heneman Schwab, 1979). According to the administrative independence concept, it is how these outcomes are administered, not simply whether or not the individual receives a certain amount of compensation, that has consequences in an organizational setting (Heneman Schwab, 1979). While discrepancy theory focuses on a unidimensional conceptualization of pay, administrative independence suggests pay is multidimensional and divided into two categories: direct compensation, consisting of salary, wages, and raises, and indirect compensation consisting of benefits such as time off, health insurance, and retirement plans (Heneman, 1985). One must distinguish between the different components of pay be cause the components have different determinants and consequences (Judge, 1993). To look at the components as a single construct compromises attempts to explain pay satisfaction and its influences (Ironson, Smith, Brannick, Gibson, Paul, 1989). An individual may be satisfied with one component of his or her pay while being dissatisfied with another. Administrative independences extension of discrepancy theory is the basis for subsequent multidimensional models of pay satisfaction. MODIFIED DISCREPANCY MODEL Heneman and Schwab (1979) expanded upon the discrepancy model (Lawler, 1971) by suggesting that pay can be broken into four distinct categories: pay level, pay structure, pay system, and pay form. Heneman and Schwab (1979) defined these dimensions as follows (pp. 1-2): Pay level is the average of several wages or salaries in the organization. The average may be based on individual pay rates for a single position or on pay averages for a number of positions. Pay structure is the hierarchy of pay rates or levels among jobs in an organization. Pay system is the method the organization uses to determine pay raises for individuals which can be computed in terms of the amount of time the employee spends on the job (time-based systems) or for his performance or efficiency (performance-based systems). Performance-based systems include individual and group incentive systems, merit systems, commissions, cost-reduction schemes, and profit sharing. Pay form is the type of pay that is received by the employee. Pay may be viewed as direct remuneration for time worked or performance, or it may be viewed as indirect remuneration in the form of fringe benefits or services. Pay Policies and administration (added on 1985). Based on the conceptual work of Dyer and Theriault (1976) and a subsequent empirical study by Weiner (1980), Heneman (1985) added a fifth dimension, pay policies and administration. In a study using Canadian and American managers, Dyer and Theriault (1976) tested a category of variables previously not included in the study of pay satisfaction: perceptions of pay system administration. Their hypothesis that employees may be dissatisfied with their pay because they do not agree with, or understand, how it is administered is supported by their initial test. Weiner (1980) provided further support for Dyer and Theriaults (1976) hypothesis when it was found that including pay system administration in Lawlers (1971) model explained more variance in absenteeism than did the original discrepancy model. Comparing Figures 2.2 and Figure 2.3 shows that the same mechanism that drives satisfaction in the discrepancy model remains, but there are now comparisons made for each of the dimensions. Heneman (1985) proposes that it is necessary to divide pay satisfaction into these dimensions because the components frequently have separate policies, procedures, and practices (p. 131), because employees may experience a separate satisfaction for each dimension, and because these affective reactions may be related, but unique, feelings. If Heneman (1985) is correct, it is necessary to treat each dimension as a separate construct and to determine the antecedents and consequences of each. EMPIRICAL FINDINGS Most of the work testing the modified discrepancy model focuses on antecedents. Although the point of the model is to treat pay satisfaction as a multidimensional construct, much of the research does not. Studies take one component of the model, usually pay level, and attempt to determine the relationship of that dimension with other variables, or collapse the four dimensions into a summed scale. If researchers only wish to study pay level satisfaction or collapse all of the dimensions into a unidimensional construct, the object of conceptualizing pay satisfaction as multidimensional is lost. One study that attempted to test the discriminant validity of the modified discrepancy models dimensions by relating them to other variables was Judge (1993). He attempted to relate ten antecedents with the four dimensions. Using a LISREL (Joreskog Sorbum, 1999) model, Judge was able to demonstrate that the predictors differentially related to the factors as hypothesized. These differential relationships support the importance of treating the dimensions as related, but distinct, dimensions of pay satisfaction as suggested by the modified discrepancy model. The above study provides support for the modified discrepancy model beyond a factor analysis. If only one dimension is studied, proving differential relationships exist is difficult. Using the modified discrepancy model, two studies explore the relationship between pay satisfaction and outcome variables by collapsing the dimensions into a global factor. Miceli, Near and Schwenk (1991) found pay satisfaction is negatively related to whistle blowing, while Welbourne and Cable (1995) suggest pay satisfaction may be positively related to OCBs. Although these studies use the mechanism specifically designed to measure the multidimensional conceptualization proposed by the modified discrepancy model, the PSQ, collapsing the dimensions provides no information to either prove or disprove the possibility that pay satisfaction is multidimensional and that those dimensions impact outcomes differentially. Several studies have been done since the modified discrepancy model was introduced, but the model is not being used to its full potential to offer insight into how pay satisfaction fits into the overall picture within organizations. More studies need to follow the design of Judge (1993) in order to test the assumptions of the model. Several studies have attempted to validate the factor structure of the PSQ, but only Judge (1993) has used the measure to relate the hypothesized dimensions to a wide variety of antecedents proposed to differentially relate to the four dimensions. To provide further support for the model, a similar study should be undertaken to test the differential relationships pay satisfaction dimensions have on consequences. Despite the failure of researchers to adequately test the model, the modified discrepancy model represents a major advancement in the study of pay satisfaction because it proposes that pay is not a unidimensional construct, but is composed of mult iple related, but unique components and that each has a separate influence on outcomes of interest. The modified discrepancy model also suggests that these dimensions may have differential impact on outcomes. If this is the case, how managers approach compensation policy may be altered based on future research findings. It has been suggested that general pay satisfaction will