The dissertation aims to tackle one of the most pressing questions facing the merit pay system researchers and practitioners: Why do merit pay raises have such a small effect on employees' satisfaction, commitment and job performance? My approach to the study of this question is to develop explanatory frameworks from two perspectives: cognitive perspective and social perspective.
From the cognitive perspective, I develop a framework based on the experimental results of cumulative prospect theory to explain the small effects of merit raises on employee reactions. First, I predict that merit pay raise sizes will be positively related to subjective magnitude of the raise, pay raise happiness, pay-level satisfaction, and performance intentions, and negatively related to turnover intentions. These are the employee reactions that this dissertation focuses on. Cumulative prospect theory indicates that individuals assess economic outcomes by perceiving the outcomes as losses or gains relative to reference points such as individuals' initial expectations. The empirical finding of the theory implies a twofold pattern of how individuals react to under- and over-met expectations: loss aversion when confidence in expectations is low and a reduction of loss aversion or even loss seeking when confidence in expectations is high. Applying the arguments to merit pay contexts, I predict that when expectation confidence is low, raise expectations will positively moderate the relation between pay raises and reactions, because losses loom larger than gains; by contrast, when expectation confidence is high, the positive moderation effect of raise expectations will be reduced or reversed.
From the social perspective, applying social comparison theory to merit pay raise contexts, I argue that individuals' interpretation of upward and downward social comparisons (i.e. downward contrast, upward identification, upward contrast and downward identification) mediates the relation between merit raise sizes and individuals' merit raise reactions. Furthermore, self-esteem moderates this mediation relationship. Specifically, following the plasticity theory, I predict that the indirect effect of merit raises on employee reactions via the interpretation of social comparisons is stronger (weaker) for low (high) self-esteem individuals.
The three-way longitudinal data for this study were collected from the non-faculty employees of a large mid-west university in the United States. Empirical results of the dataset largely support the hypotheses. The implications of research for theory and practice are addressed for cognitive and social perspectives respectively, and the comparison between the two approaches is discussed.