Effect of Manager’s Role in Performance Based Pay on Employee Outcomes

Azman, I.; Mohammad Fuad, Z.; Aimi, A.; Hasan Al-Banna, M.; Rashidi, A.

doi:10.7187/GJAT652014.04.02

Authors

Azman, I. Faculty of Economics & Management, Universiti Kebangsaan Malaysia
Mohammad Fuad, Z. Faculty of Economics & Management, Universiti Kebangsaan Malaysia
Aimi, A. Institut Islam Hadhari, Universiti Kebangsaan Malaysia
Hasan Al-Banna, M. Faculty of Defence Management and Studies, Universiti Pertahanan Nasional Malaysia
Rashidi, A. Centre of Modern Language and Human Sciences, Universiti Malaysia Pahang

DOI:

https://doi.org/10.7187/GJAT652014.04.02

Keywords:

C o m p e n s a t i o n, Pay Communication, Performance Appraisal, Job Satisfaction, Organizational Commitment

Abstract

According to the recent literature pertaining on Islamic based organizational compensation, performance based pay consists of two essential features: communication and performance appraisal. Recent studies in this field highlights that the ability of managers to appropriately communicate pay information and appraise employee performance may have a significant impact on employee outcomes, especially job satisfaction and organizational commitment. Therefore, this study was undertaken to assess the relationship between manager’s role in performance based pay and employee outcomes using self-administered questionnaires collected from employees at a district council in Peninsular Malaysia. The outcomes of the SmartPLS path model analysis showed that pay communication does not act as an important determinant of job satisfaction, but performance appraisal does act as an important determinant of job satisfaction. Conversely, pay communication and performance appraisal act as important determinants of organizational commitment. In addition, this study provides discussion, implications and conclusion.

References

A Report by the US Merit Systems Protection Bard Washington DC. (January 2006). Designing An Effective Pay for Performance Compensation System.

Ab. Aziz, Y. (2005). Penilaian Prestasi: Kepentingan dan Permasalahan. 2nd ed. Kuala Lumpur: Utusan Publications & Distributors.

Abernathy, W. B., Dickinson, A., & Lawler III, E. E. (2014). Pay for Performance Compensation Systems. Retrieve from http://debwagner.info/hpttoolkit/pfp_hpt.htm. Retrieved on 14th April 2014.

Ahmad Sunawari, L. (2009). Pengenalan Metodologi Penyelidikan Pengajian Islam. Bangi: Universiti Kebangsaan Malaysia (UKM).

Amuedo-Dorantes, C., & Mach, T. (2003). Performance Pay and Fringe Benefits: Work Incentives or Compensating Wage Differentials?. International Journal of Manpower, 24(6): 673-698.

Appelbaum, S.H., & Mackenzie, L. (1966). Compensation in the Year 2000: Performance Based Pay. Health Manpower Management, 22(3): 31-39.

Barclay, D. W., Higgins C. A., & Thompson, R. (1995). The Partial Least Squares Approach to Causal Modeling: Personal Computer Adoption and Use as Illustration. Technology Studies, 2(2): 285-309

Bartolo K., & Furlonger, B. (2000). Leadership and Job Satisfaction among Aviation Fire Fighters in Australia, Journal of Managerial Psychology, 15(1): 87-97.

Basmeih, S. A. (2007). Tafsir Ar-Rahman: Interpretation of the Meaning of the Qur’an. Putrajaya: Department of Islamic Development Malaysia.

Beardwell, J., & Claydon, T. (2007). Human Resource Management: A Contemporary Approach. Prentice Hall/Financial Times.

Bender, K. A. (2003). Examining Equality between Public and Private Sector Wage Distributions. Economic Enquiry, 41(1): 62-80.

Bergmann, T. J., & Scarpello, V. G. (2002). Compensation Decision Making. South-Western Thomson Learning, United States.

Bernard, H. R., & Ryan, G. W. (2010). Analyzing Qualitative Data: Systematic Approaches. Thousand Oaks, SAGE Publications, Inc, California, USA.

Bies, R. J., & Moag, J. (1986). Interactional Justice: Communication Criteria of Fairness. In Lewicki, R.J., Sheppard, B.H. & Bazerman, M.H. (eds.), Research on Negotiations in Organizations. JAI Press, London.

Blau, F. D., & Kahn, L. M. (2003). Understanding International Differences in the Gender Pay Group. American Economic Review, 21(1): 106-145.

Chang, E., & Hahn, J. (2006). Does Pay-for- Performance Enhance Perceived Distributive Justice for Collectivistics Employees?. Personnel Review, 35(4): 397-412.

Chapra, M. U. (1983). Islamic Work Ethics. An-Nahdah, 3(4): October-December.

Chaudhry, M. S. (2003). Fundamental of Islamic Economic System. Lahore, Pakistan.

Chin, W. W. (1998). The Partial Least Squares Approach to Structural Equation Modeling. In Marcoulides, G. A. (ed.), Modern Methods for Business Research. Mahwah, Lawrence Erlbaum Associates, New Jersey, USA, 295-358.

Chin. W. W. (2001). PLS-Graph User’s Guide: Version 3.0. Houstan, TX: Soft Modelling.

Cresswell, J. W. (2014). Research Design: Qualitative, Quantitative and Mixed Methods Approaches. SAGE Publications, London.

Daft, R. L. (2012). New Era of Management. South-Western Cengage Learning, China.

Delves, D., Gundy P., & Wisper, L. (2014). Performance-Based Compensation for Executives and Employees: Getting the Balance Right. Strategy at Work (20th December 2013), 1-4. Retrieve from https://www.towerswatson.com/en-IE/Insights/Newsletters/Global/strategy-atwork/2013/viewpointsqa-performance-based-compensation-forexecutives-and-employees-gettingthe-balanceright. Assessed on 14th April, 2014.

Dogbe, O. D. (2011). Performance Based Pay as a Motivational Tool for Achieving Organisational Performance: An Exploratory Case Study. International Journal of Business and Management, l6(12): December: 272.

Feinstein, A. H. (2002). A Study of Relationships between Job Satisfaction and Organizational Commitment among Restaurant Employees, Journal of Managerial Psychology, 23(7): 33-57.

Fitzgerald, L. R. (2000). Culture and Compensation. In Berger, L.A. & Berger, D.R. (eds.), The Compensation Handbook: A State of-the-Art Guide to Compensation Strategy and Design. The McGraw-Hill, New York, USA.

Flannery, T. P., Hofrichter, D. A. & Platten, P. E. (1996). People, Performance and Pay: Dynamic Compensation for Changing Organizations. The Hay Group, New York, USA.

Fornell, C. G. & Larcker, D. F. (1981). Evaluating Structural Equation Models with Unobservable Variables and Measurement Error. Journal of Marketing Research, 18(1): 39-50.

Garib Singh, S. K. (2009). A Study on Employee Participation in Decision Making. UNITAR E-Journal, 5(1): 20-38.

Gomez-Mejia L. R. & Balkin, D. B. (1992a). Compensation, Organizational Strategy and Firm Performance. South Western Publishing Co., Cincinnati, Ohio, USA.

Gomez-Mejia L. R. & Balkin, D. B. (1992b). The Determinants of Faculty Pay: An Agency Theory Perspective. Academy of Management Journal, 35(5): 921-955.

Greenberg, J. (1996). The Quest for Justice on the Job: Essays and Experiments. Thousand Oaks, SAGE, California, USA.

Greenberg, J. (2003). Creating Unfairness by Mandating Fair Procedures: The Hidden Words of a Pay for-Performance Plan. Human Resource Management Review, 13: 41-57.

Hackett, R. D., Bycio, P., & Hansdorf, P. A. (1994). Further Assessment of Meyer and Allen’s (1999): Three Component Model of Organizational Commitment. Journal Applied Psychology, 79(1): 15-23.

Hackett, T. J., & Mcdermott, D. G. (1999). Seven Steps to Successful Performance-Based Rewards. HR Focus - Performance Management. Retrieve from http://www.dgm.com/informationcenter/articles/seven-stepsto-successful-performance-based-rewards/. Assessed on 14th April, 2014.

Hafer, J. C., & Martin, T. N. (2006). Job Involvement or Affective Commitment: A Sensitivity Analysis Study of Apathetic Employee Mobility. Journal of Behavioral & Applied Management, 8(1): 1-19.

Hair, J. F., Anderson, R. E., Tatham R. L. & Black, W. C. (2006). Multivariate Data Analysis. Prentice Hall International, Inc., New Jersey, USA.

Harvey-Bearis, O. (2003). Performance-Based Rewards For Teachers: A Literature Review. Workshop of Participating Countries on OECD’s Activity Attracting Developing and Retaining Effective Teachers. Athens, Greece.

Henderson, R. I. (2009). Compensation Management in a Knowledge Based-World. Prentice-Hall, New Jersey, USA.

Heneman H. G. & Milanowski, A. T. (1999). Teachers’ Attitudes about Teacher Bonuses under School Based Performance Award Programs. Journal of Personnel Evaluation in Education, 12(4): 327-341.

Henemen, R. L., Ledford G. E., & Gresham, M. T. (2000). The Changing Nature of Work and Its Effects on Compensation Design and Delivery. In Rynes, S. & Gerhat, B. (eds.), Compensation in Organizations: Current Research and Practice. Jossey-Bass, San Francisco, 195-240.

Henseler, J., Ringle C. M., & Sinkovics, R. R. (2009). The Use of Partial Least Squares Path Modeling in International Marketing. Advances in International Marketing, 20: 277-320.

Hewitt Associates. (1991). Total Compensation Management: Reward Management Strategies for the 1990s. Blackwell, Oxford, United Kingdom.

Ismail, A., Anuar, A., & Abdin, F. (2013). Administrator’s Role in Performance Pay System as a Determinant of Job Satisfaction. Proceeding of The 1st International Conference on Human Capital and Knowledge Management, Universiti Teknologi Malaysia (UTM), Kuala Lumpur, 3-4th December.

Ismail, A., Hock, W. K. & Muhammed, S. (2007). Relationship between Performance Based Reward Features and Job Satisfaction: Does Interactional Justice Act as a Mediating Role?. Kota Samarahan, Sarawak: Universiti Malaysia Sarawak (UNIMAS).

Jeyasutharsan, U., & Rajasekar, N. (2013). Linkage between Performance-Based Pay and Organizational Performance: An Empirical Study. International Journal of Commerce, Business and Management (IJCBM), 2 (6), December: 400-406. Kamus Dewan. (2005). 4th ed. Kuala Lumpur:Dewan Bahasa dan Pustaka.

Kelley, C. (1999). The Motivational Impact of School-Based Performance Awards. Journal of Personnel Evaluation in Education, 12(4): 309-326.

Kelley, C., Heneman, H., & Milanowski, A. (2002). Teacher Motivation and School-Based Performance Rewards. Education Administration Quarterly, 38(3): 372-401.

Kim, D. O. (1996). Factors Influencing Organizational Performance in Gainsharing Programs. Industrial Relations, 35(2): 227-244.

Kim, D. O. (1999). Determinants of the Survival of Gain Sharing Programs. Industrial and Labor Relations Review, 53(1): 21-38.

Krejcie, R. V., & Morgan, D. W. (1970). Determining Sample Size For Research Activities. Educational and Psychological Measurement, 30: 607-610.

Lawler, E. E. (1971). Pay and Organizational Effectiveness: A Psychological View. McGraw-Hill, New York, USA.

Lawler, E. E. (1995). The New Pay: A Strategic Approach. Compensation & Benefits Review, 27(4): 14-22.

Lawler, E. E. (2000). Rewarding Excellence: Pay Strategies for the New Economy. Jossey-Bass, California, USA.

Lee, C., Law, K. S., & Bobko, P. (1999). The Importance of Justice Perceptions on Pay Effectiveness: A Two-Year Study of a Skill-Based Pay Plan. Journal of Management, 25(6): 851-873.

Locke, E. (1976). The Nature and Causes of Job Satisfaction, in M.D. Dunnette (ed.). Handbook of Industrial and Organizational Psychology. Chicago: Rand McNally, 1297-1349.

Mahoney, T.A. (1992). Multiple Pay Contingencies: Strategic Design of Compensation, in G. Salaman (ed.) Human Resource Strategies. SAGE, London.

Mansor, J. & Nor Ghani, M. N. (2005). Tenaga Buruh dan Upah dalam Islam: Satu Pandangan Alternatif. Islamiyyat, 27(1): 67-79.

Maume, D. J. (2006). Gender Differences in Taking Vacation Time, Work and Occupations, 33(May): 161-190.

McCausland, W. D., Pouliakas, K., & Theodossiou, I. (2005). Some are Punished and Some are Rewarded: A Study of the Impact of Performance Pay on Job Satisfaction. International Journal of Manpower, 26(7/8): 636-659.

McShane, S.L., & Von Glinow, M. A. (2005). Organizational Behavior. McGraw-Hill/Irwin, New York, USA.

Milkovich, G. & Wigdor, A. (1991). Pay for Performance. National Academy Press, Washington, DC, USA.

Milkovich, G.T., Newman, J.M. & Gerhart. B. (2014). Compensation. McGraw-Hill/Irwin, New York, USA.

Mondy, R.W. & Mondy, J.B. (2014). Human Resource Management. 13th ed. Pearson, Boston, Massachusetts, USA.

Money, R.B.R., & Graham, J.L. (1999). Salesperson Performance, Pay and Job Satisfaction: Test of a Model Using Data Collected in the United States and Japan. Journal of International Business Studies, 30: 149-172.

Mowday, R.T., Steers R.M. & Porter, L.W. (1979). The Measurement of Organizational Commitment, Journal Vocational Behavior, 14: 224-247.

Muhammad Nasri, M.H. & Ab. Aziz, Y. (2005). Pengurusan Sumber Manusia dari Perspektif Islam. Prentice Hall-Pearson Malaysia Sdn. Bhd., Selangor, Malaysia.

Muhammed, A. (2013). Minimum Wage: A Muslim Perspective. Islamic Management and Business Journal, 5(11): 78-79.

Noe, R. J., Hollenbeck, H., Gerhart, B. & Wright, P. M. (2014). Fundamentals of Human Resource Management. McGraw-Hill International Edition, Singapore.

Nunally J. C., & Bernstein, I.H. (1994). Psychometric Theory. McGraw- Hill, New York, USA.

Oshagbemi, T. (2000a). Correlates of Pay Satisfaction in Higher Education. International Journal of Educational Management, 14(1): 31-39.

Oshagbemi, T. (2000b). Satisfaction With Coworkers’ Behavior. Employee Relations, 22(1): 88-106.

Pettijohn, C. E., Pettijohn L. S., & d’Amico, M. (2001). Charateristics of Performance Appraisals and Their Impact on Sales Force Satisfaction. Human Resource Development Quarterly, 12(2): 127-146.

Report by the US Merit Systems Protection Bard. (January 2006). Designing An Effective Pay for Performance Compensation System. Washington DC.

Ringle, C.M. Wende, S., & Will, A. (2010). Finite Mixture Partial Least Squares Analysis: Methodology and Numerical Examples. In Virzi, V.E., Chin, W.W., Henseler, J. & Wang, H. (eds.), Handbook of Partial Least Squares: Concepts, Methods and Applications in Marketing and Related Fields. Springer, Berlin,195-218.

Sabeen, Z., & Mehbob, A. A. (2008). Perceived Fairness of and Satisfaction with Employee Performance Appraisal and Its Impact on Overall Job Satisfaction. The Business Review, 10(2): 185-192.

Sekaran, U., & Bougie, R. (2013). Research Methods for Business: A Skill-Building Approach. New York: John Wiley & Sons, Inc.

Solmon, L. C., & Podgursky, M. (1995). The Pros and Cons of Performance-Based Compensation. Milken Family Foundation.

Surtahman Kastin, H., & Abd. Ghafar, I. (2001). Tenaga Buruh dan Upah Dalam Islam. Islamiyyat, 22: 3-12.

Vroom, V.H. (1964). Work and Motivation. San Francisco, CA: Jossey-Bass.

Warr, P. B., Cook, J., & Wall, T. D. (1979). Scales for the Measurement of Some Work Attitudes and Aspects of Psychological Well- Being. Journal of Occupational Psychology, 52: 129-148.

Wetzels, M., Odekerken-Schroder, G., & Van Oppen, C. (2009). Using PLS Path Modeling for Assessing Hierchical Construct Models: Guidance and Empirical Illustration. Managament Informantion System (MIS) Quarterly, 33(1): 177-195.

Wilton, N. (2010). An Introduction to Human Resource Management. SAGE Publications Ltd.

Yang, Z. (2009). A Study of Corporate Reputation’s Influence on Customer Loyalty Based on PLS-SEM Model. International Business Research, 2(3): 28-35.