Jessica Janina Hornbach

The effect of performance-based pay systems on job satisfaction

and stress

Business Administration

Master’s Thesis 30 ECTS

Term: Spring 2013 Supervisor: Sven Siverbo

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Acknowledgment

This Master’s thesis constitutes the final part of my studies in Management at Karlstad University and has been written during the spring semester 2013.

First and foremost, I would like to thank my supervisor, Sven Siverbo, for his great support and commitment throughout the thesis. He has been a source of inspiration and his ideas and critical comments have influenced the quality of this paper substantially. Thank you!

Second, I would like to express my gratitude to Carolina Masip for her assistance in translating the questionnaire to Swedish.

A special thanks goes to all people who participated in the survey and to all the companies in Stockholm and Karlstad who allowed me to distribute the questionnaire to their employees. Without them the research project would not have been possible.

Last, but not least, I would like to thank my family in Switzerland and Spain and my fiancé, Kiko Fernández Reyes, for their great support and encouragement throughout the thesis. You have always been there for me and I am lucky to have you in my life! Thank you!

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Abstract

Previous investigations regarding the health- and wellbeing-related outcomes of performance-based pay systems have been scarce and ambiguous so far. Considering the huge economic and organizational impact of stress-related health problems, it is important to further investigate this relation, including the impact of different variables that can help to explain the variation in the relationship between performance-based pay and job strain.

The main purpose of this study is to challenge the research gap and to understand the effect of organizational justice and job control on the relation between performance-based pay and job satisfaction and stress.

A quantitative research method in form of a survey is applied. To test the structural model and its hypotheses, the study uses an approach to partial least squares path modeling (PLS).

The main results have shown that organizational justice moderates the relation between performance-based pay and stress. Moreover, performance-based pay increases job satisfaction when employees perceive high job control. It is furthermore revealed that gender, family responsibilities, experience and the type of performance evaluation can have an impact on the relationship as well.

The study has contributed to fill the research gap above and has provided new, theoretical insight. Managers are recommended to provide organizational justice and to ensure high autonomy for employees. Instead of applying “one size fits all” solutions, managers should take demographic, organizational and situational factors into account when designing the compensation scheme.

Keywords: Performance-based pay, stress, job satisfaction, organizational justice, job control

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Table of content

List of figures ......................................................................................... IX

List of tables........................................................................................... IX

List of abbreviations ................................................................................X

1. Background and problem discussion................................................. 1

2. Aim of the paper .................................................................................5

3. Theoretical background and hypotheses development .....................6 3.1. Performance-based pay, stress, job satisfaction and the appraisal process

...............................................................................................................................6 3.2. Organizational justice ........................................................................................8

3.2.1. Distributive justice ...........................................................................................9 3.2.2. Procedural justice........................................................................................... 10 3.2.3. Interactional justice........................................................................................ 11

3.3. Job control ....................................................................................................... 14 3.4. Stress and job satisfaction.............................................................................. 15 3.5. Ad-hoc moderating variables ........................................................................ 17

4. Methodology..................................................................................... 18 4.1. Research strategy ............................................................................................. 18 4.2. Research design ............................................................................................... 19 4.3. Data collection................................................................................................. 19 4.4. Variable measurement .................................................................................... 21 4.5. Data analysis..................................................................................................... 23 4.6. Trustworthiness and limitations.................................................................... 25

5. Results .............................................................................................. 28 5.1. Demographics.................................................................................................. 28 5.2. The direct effects of the model..................................................................... 30 5.3. The moderation effect of organizational justice......................................... 31 5.4. The moderation effects of job control ........................................................ 33 5.5. The moderation effect of ad-hoc variables ................................................. 34

6. Discussion ........................................................................................ 38 6.1. Performance-based-pay, organizational justice and job satisfaction....... 38 6.2. Performance-based pay, organizational justice and stress ........................ 40 6.3. Performance-based pay, job control and job satisfaction and stress ...... 41 6.4. Stress and job satisfaction.............................................................................. 42 6.5. Ad-hoc variables.............................................................................................. 43

7. Final reflection and conclusion ........................................................ 44

References.............................................................................................. XI

Appendix............................................................................................ XVII Appendix 1: The questionnaire .......................................................................... XVII Appendix 2: Questionnaire coding....................................................................... XX

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Appendix 3: The measurement model..............................................................XXII Appendix 4: Further results of the structural model .................................... XXIII

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List of figures

Figure 1: Theoretical Model (structural model).................................................... 16 Figure 2: Frequency demographics for gender and age ...................................... 28 Figure 3: Distribution of industries ........................................................................ 29 Figure 4: The degree of performance-based pay.................................................. 30 Figure 5: Distribution of different pay systems.................................................... 30

List of tables

Table 1: Overview of reliability and validity scores ............................................. 26 Table 2: Correlations of latent variables ................................................................ 26 Table 3: The direct effects of the model ............................................................... 31 Table 4: Moderation effect of distributive justice (PBPS - Job Satisfaction)... 31 Table 5: Moderation effect of organizational justice (PBPS - Stress) ............... 32 Table 6: Moderation effect of distributive justice (PBPS – Stress) ................... 32 Table 7: Moderation effect of procedural justice (PBPS – Stress) .................... 33 Table 8: Moderation effect of job control (PBPS - Job Satisfaction) ............... 33 Table 9: Moderation effect of type of performance evaluation (PBPS – Job

Satisfaction)........................................................................................................ 35 Table 10: Moderation effect of years of experience (PBPS – Stress)................ 35 Table 11: Moderation effect of family responsibilities (PBPS – Job

Satisfaction)........................................................................................................ 36 Table 12: Moderation effect of marital status (PBPS – Job Satisfaction)......... 36 Table 13: Three-way interaction between family responsibilities and gender

(PBPS – Stress).................................................................................................. 37 Table 14: Moderation effect of gender (PBPS – Job Satisfaction) .................... 37 Table 15: The factor loadings of the latent constructs...................................XXII Table 16: Cross-loadings between the latent variables ...................................XXII Table 17: Moderation effect of organizational justice (PBPS – Job Satisfaction)

...................................................................................................................... XXIII Table 18: Moderation effect of procedural justice (PBPS – Job Satisfaction)

...................................................................................................................... XXIII Table 19: Moderation effect of interactional justice (PBPS – Job Satisfaction)

...................................................................................................................... XXIII Table 20: Moderation effect of interactional justice (PBPS – Stress) .........XXIV Table 21: Moderation effect of job control (PBPS – Stress)........................XXIV

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List of abbreviations

AVE Average Variance Extracted

IBM International Business Machines Corporation

IT Information Technology

PLS Partial Least Squares

PSS Perceived Stress Scale

SPSS Statistical Package for the Social Sciences

US United States

WHO World Health Organization

*Please note that further abbreviations appearing in tables and figures are explained in appendix 2.

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1. Background and problem discussion

Intense global competition, turbulent business environments, frequent changes in customer needs and the increasing pressure to enhance productivity have reinforced companies to redesign their compensation scheme from purely fixed and job-based remuneration towards more variable and performance-related compensation (Henemen et al. 2000, Lawler 2000; cited in Ismail et al. 2011, p.171; Madhani 2009). In this context, the goal of applying performance-based pay systems serves not only to optimize employees’ performance and to control labor costs, but also to increase employees’ commitment to organizational effectiveness by aligning the interests of the company with those of employees (Yeh et al. 2009; Madhani 2009).

The concept of performance-based pay schemes is based on the principles of agency theory. The employee, called agent, is assumed to be opportunistic and self-serving in his behavior and therefore needs to be constantly supervised and controlled by the principal, the manager of a company (Madhani 2009). In order to motivate employees to work in the best interest of the organization and to pursue the company’s goals, the principal commonly applies incentives and performance-based pay plans, including commissions and bonuses. The overall aim of those pay schemes is therefore to track and control the performance of employees and to ensure that their behavior is pro-organizational (Davis et al. 1997; Madhani 2009).

As performance-based pay systems aim at enhancing motivation and ultimately performance and productivity of employees, their effective design plays a significant role for the overall success of an organization (Madhani 2009). While the effects of performance-based pay systems on productivity and performance-related outcomes have already been studied to a large extent, research about their impact on employee health and wellbeing, including stress, anxiety and job satisfaction, has got less attention so far (Ganster et al. 2011).

Considering that stress-related health problems, such as burnouts and depressions, as well as low wellbeing in form of job dissatisfaction, can cause long-term absenteeism from work and frequent turnovers (Ganster & Schaubroeck 1991; Cooper et al. 2001), it is in the interest of the contemporary business world to investigate the impact of certain work

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characteristics, such as performance-based pay systems, on stress and job satisfaction in more detail. The World Health Organization (WHO; cited in Smith 2012, p.1) has declared stress as the “health epidemic of the 21st century”, as stress-related outcomes such as high turnovers, lower productivity, absenteeism from work as well as missed deadlines and errors cost US businesses up to $ 300 billion a year (Smith 2012; Maxon 1999) compared to $ 50-90 billion a year approximately 35 years ago (Ivancevich & Matteson 1980; cited in Ganster & Schaubroeck 1991, p.235). Furthermore, stress-induced illnesses are the reason for over 70 percent of all visits to family doctors’ offices in today’s society (Smith 2012). Apart from stress, other aspects of wellbeing, such as low job satisfaction, can have severe impacts on organizational success and employee behavior as well: Reduced morale, apathy and unwillingness to go to work can decrease performance and productivity (Artz 2008). Moreover, low job satisfaction is assumed to be an antecedent of low organizational commitment, which in turn increases employees’ propensity to leave the job (Brown & Peterson 1993). Taking all facts into account, it is surprising that despite the huge economic and organizational impact of stress and job satisfaction, the health- and wellbeing-related outcomes of performance-based pay systems have been widely neglected in former research so far (Ganster et al. 2011).

Organizational behavior theorists and psychologists assume that performance-based pay systems can indeed influence job satisfaction and stress levels of employees, however, the impact of this relationship is still unclear and ambiguous (Ganster et al. 2011; Artz 2008).

Experimental studies conducted by Levi as well as Timio and Gentili (1972, 1976; cited in Ganster et al. 2011, p.226) have revealed that the application of piece-rate payments increases participants’ level of adrenaline, a hormone that is released under conditions of stress. Moreover, several non-experimental field studies and surveys largely came to the same conclusion, namely that stress is increased through performance-based pay systems (Brisson et al. 1989; cited in Ganster et al. 2011, p.228). However, other studies led to the opposite result. In this context, Howard and Dougherty as well as Stordeur et al. (2004, 2001; cited in Ganster et al. 2011, p.230) identified lower levels of stress in combination with performance-based salaries when supervisors applied a contingent reward leadership style and when distributive fairness was high. Nevertheless, researchers have not been able so far to systematically identify the underlying reasons for why performance-based pay triggers either

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low or high stress responses. Since universalistic relationships could not be confirmed for all studies, researchers have suggested that the impact of performance-based pay is probably dependent on certain contingencies, such as job characteristics and working conditions (Ganster et al. 2011). In this regard, researchers have been eager to test the impact of different moderating variables on this relationship, such as monotony, constant and close monitoring, self-efficacy, workload and co-worker support, but results are quite ambiguous and little conclusive evidence has been generated so far (Ganster et al. 2011).

The same knowledge gap has been identified for the effect of performance-based pay on job satisfaction. While in certain situations variable pay schemes have led to a positive impact on job satisfaction, in others they have caused the opposite effect. However, the underlying reasons for those ambiguities still need to be investigated more thoroughly. In this context, Drago et al. (1992; cited in Artz 2008, p.319) observed that pay based on individual performance was positively related to job satisfaction. On the other hand, McCausland et al. (2005; cited in Artz, p.319) and Cornelissen et al. (2011) revealed that performance-related pay had a negative impact on job satisfaction with lower-paid and risk-averse employees.

Even though researchers have started to investigate the underlying reasons for the ambiguous impacts of performance-based pay on job satisfaction and stress, more research is necessary regarding potential moderator variables. Lawson et al. (2009) as well as Spell and Arnold (2007) have argued that both job control as well as organizational justice need to be taken into consideration when developing strategies to make working conditions more satisfying and less stressful for employees.

Organizational justice has been identified as the “new psycho-social predictor of health” (Elovainio et al. 2004; cited in Lawson et al. 2009, p.223), as the different dimensions of organizational justice have been revealed to be positively related to higher job satisfaction and lower stress levels (Tan & Lau 2012; Greenberg 2004; Ismail et al. 2011). However, research regarding organizational justice has only been published since 2000, so that more research is necessary in order to get a more complex and detailed understanding of the dimension of this variable (Lawson et al. 2009). It is important to mention that there is a significant knowledge and research gap about the moderating effect of organizational justice on the relation between performance-based pay and job strain.

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Apart from organizational justice, job control plays an important role in the stress and health literature as well. In this regard, researchers have argued that job control is likely to mitigate the negative effects of stress-causing factors such as performance-based pay systems (Wall et al. 1996; Ganster et al. 2011). However, research about the impact of job control has been scarce so far and knowledge has remained inconclusive (Ganster et al. 2011). Consequently, more research is necessary regarding the effect, in particular the moderation effect, of job control on the relation between performance-based pay and job strain.

It has become evident that there is a substantial research gap regarding the causal effect that performance-based pay can have on stress and job satisfaction. Furthermore, the potential impacts of different moderating variables, including job control and organizational fairness, have not been thoroughly studied so far, despite the importance of different job characteristics and working conditions in influencing stress reactions and wellbeing of employees.

It can be argued that the outlined research problem has both theoretical and practical implications at the same time. On the one hand, the research problem reflects a substantial theoretical knowledge gap that deserves being addressed by academic research in order to get a better understanding of the interaction effect between performance-based pay and job strain. Hence, research on this topic can contribute to more theoretical expertise in this field. On the other hand, the research problem has highly practical significance because well-founded knowledge about the impact of performance-based pay on wellbeing and health of employees can help managers to more effectively design compensation schemes and to create less stressful and more satisfying workplaces (Lawson et al. 2009). Consequently, more research on this topic can help to mitigate the huge economic and organizational impact of health- and wellbeing-related outcomes of performance-based pay systems in future.

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2. Aim of the paper

The aim of this paper is to challenge the above-mentioned research gap and to understand how organizational justice and job control can affect the impact of performance-based pay systems on stress and job satisfaction of employees.

Based on the results of the study, the subsequent aim is to derive managerial implications for the design of the compensation scheme and its underlying procedures.

Both organizational justice and job control have been explicitly chosen for this study due to their highly practical relevance for the discussion of managerial implications. Organizational justice and job control are both related to the internal procedures and work processes surrounding a compensation scheme. In contrast to more employee-specific moderating variables such as self-efficacy and risk aversion, managers can easily influence and change the way how processes and procedures are applied in organizations and therefore have the opportunity to actively mitigate the stress-causing effects of certain working conditions. Hence, both organizational justice and job control have a very high relevance for deriving managerial implications.

A more subordinate aim of this study is to investigate if the health- and wellbeing- related outcomes of performance-based pay systems, namely stress and job satisfaction, are interrelated as well, or in other words, if employees who reported high stress levels also reported lower job satisfaction.

The next chapter will present relevant literature and theories in order to develop the theoretical model and hypotheses for the study. Subsequently, a method discussion will follow, including a detailed description of the applied research strategy and design, information about variable measurement, data collection and analysis as well as trustworthiness and limitations of the study. Afterwards, empirical results will be presented and their theoretical and practical implications will be discussed in more detail. The paper will end with a final reflection, including the derivation of managerial implications, the contribution of the paper and suggestions for further research.

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3. Theoretical background and hypotheses development

The outlined research problem will be addressed from the point of view of behavioral and organizational psychology as well as organizational behavior theories, including the cognitive appraisal theory of Lazarus and Folkman, Locke’s value appraisal theory, expectancy and equity theory as well as Spector’s control theory.

3.1. Performance-based pay, stress, job satisfaction and the appraisal process

Performance-based pay schemes are defined as person-based pay systems that tie at least part of the compensation to an employee’s performance. This means that the amount of pay is no longer dependent on the nature of the job itself, but fluctuates based on the level of performance achieved by the employees (Bender 2003, Amuedo-Dorantes & Mach 2003; cited in Ismail et al. 2011, p.171).

As mentioned before, performance-based pay can cause both functional and dysfunctional effects on job satisfaction and stress. In this context, variable pay systems can contribute to higher job satisfaction and wellbeing due to potentially higher earnings and effort-pay fairness (Booth & Frank 1999; Parent 1999, Brown & Sessions 2003; cited in Artz 2008, p.316; Green & Heywood 2008). Moreover, performance-based pay systems are often connected to increased productivity and participative decision-making (Baurer 2004, Lazear 2000; cited in Artz 2008, p.316). Therefore, it can be expected that the performance level of employees and their degree of involvement within the performance-based pay system can indirectly affect their level of job satisfaction. Especially high-performing employees who feel involved and see that their performance has contributed to higher levels of productivity within the company are likely to be more satisfied with their job as a result of increased confidence, pride, sense of belonging and self-esteem (Baurer 2004, Lazear 2000; cited in Artz 2008, p.316).

On the other hand, individual economic outcomes based on performance are among the most significant stress factors in the workplace (Brief & Atieh 1987; cited in Ganster et al. 2011, p.223). So, taking into consideration that at least part of the compensation is tied to a variable component, performance-based pay systems are likely to decrease employee wellbeing due to higher earnings risk and income insecurity associated with the variability of the pay

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(Lazear 2000; cited in Artz 2008, p.316; Green & Heywood 2008). Furthermore, performance-based pay is often coupled with work intensification and increased efforts (Booth & Frank 1999; Green & Heywood), which can have a potentially negative impact on job satisfaction and stress (Artz 2008; Greenberg 2004).

The question of whether performance-based pay has a positive or a negative impact on stress and job satisfaction depends on how the individual employee appraises the variable pay structure and the underlying procedures leading to the outcome (Folkman & Lazarus 1990; cited in Ganster et al. 2011; Locke 1969).

In this context, Locke (1969) argues that job satisfaction is an emotional reaction resulting from a value judgment, where an employee evaluates a certain aspect of his job, for instance, the salary, working hours or the relation to his supervisor, by comparing those perceptions to what he expects, desires and values in a job. The resulting assessment of the relationship (or discrepancy) between the employee’s perception and his ideal value then determines the employee’s level of job satisfaction (Locke 1969; Furnham 2005). Based on those assumptions, Locke (1969, p.316) defines job satisfaction as “a pleasurable emotional state resulting from the appraisal of one’s job as achieving or facilitating the achievement of one’s job value.” Analogously, he defines job dissatisfaction as “an unpleasurable emotional state resulting from the appraisal of one’s job as frustrating or blocking the attainment of one’s job values or as entailing disvalues” (Locke 1969, p.316). Consequently, based on the outlined research problem, it can be assumed that performance-based pay systems can increase job satisfaction when an employee perceives that his pay and/or the underlying organizational procedures leading to it are in accordance with what he is expecting them to be. On the other hand, if there is a discrepancy, performance-based pay systems can cause negative emotional reactions. In this context, Wilson et al. (2004) as well as Burney et al. (2009) argue that employees’ perception regarding different aspects of the workplace, such as compensation schemes, can be an indicator of subsequent employee behavior, which is why it is important to consider the phenomenon of perception in this study.

Lazarus and Folkman (1984, p.19) define stress as “a particular relationship between the person and the environment that is appraised by the person as taxing or exceeding his or her resources and endangering his or her well-being.” In this regard, the cognitive appraisal theory of psychologist Richard S.

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Lazarus assumes that the level of stress is determined by how people cognitively appraise a certain situation as having an impact on them (Greenberg 2004). Ganster et al. (2011) argue that performance-based pay systems are likely to trigger such appraisal processes due to the variability of the salary and the associated income insecurity and unpredictability. The appraisal process takes place in two steps (Lazarus & Folkman 1984): In the primary appraisal a person evaluates the extent to which he or she is harmed by a situation. If no harm is identified the situation does not lead to a stress reaction. However, if harm is encountered, a second appraisal takes place, where the individual appraises the extent to which he or she can avoid or at least reduce the harm. If individuals have the opportunity to rectify the situation, stress reactions can be buffered. However, if this is not the case, the individual is likely to feel helpless and powerless in doing something about his or her situation and in turn will experience considerable stress (Greenberg 2004; Lazarus & Folkman 1984). Consequently, performance-based pay systems can lead to stress reactions when people feel harmed by the compensation scheme and when they feel powerless to influence the procedures and outcomes of it.

As previous research has revealed, the relationship between performance-based pay and job strain is not universalistic. In this context, it can be argued that the appraisal process is influenced by different work aspects and procedures that might moderate the effect of performance-based pay on job satisfaction and stress. As mentioned before, organizational justice and job control are two variables that are likely to have an impact on the outlined relationship. Both variables are discussed in more detail in the following sections.

3.2. Organizational justice

According to Daniel Webster (1845; cited in Greenberg 2004, p.352), justice is “the greatest interest of man on earth”. The truthfulness of this statement is reflected in the growing research evidence, proving that injustices are significantly linked to adverse health and wellbeing-related outcomes, such as stress, depressions and reduced job satisfaction (Kivimaki et al. 2004, Ylipaavalniemi et al. 2005; cited in Lawson et al. 2009, p.223). This means that people who feel that they have been treated unfairly in their jobs experience considerable, negative emotions. If those negative emotions become prevalent, employees are likely to engage in damaging, anti-organizational behavior such

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as thefts, wastes and vandalism and might ultimately even leave the job (Greenberg 2004). However, the question whether perceived injustices related to performance-based pay systems actually lead to stress reactions and reduced job satisfaction is a complex matter and, as mentioned above, depends on how the employee appraises the pay scheme and the procedures surrounding it.

According to Greenberg (1990; cited in Lawson et al. 2009, p.224), organizational justice describes “people’s perception of fairness in organizations” and exists on three different levels: Distributive, procedural and interactional justice. The impact of all three dimensions on the relation between performance-based pay systems and job strain will be illustrated in the following:

3.2.1. Distr ibut ive just i c e

Distributive justice is based on equity and expectancy theory and refers to people’s notion of how fairly resources are distributed within the organization (Greenberg 2004), or in other words, how fairly people perceive they have been paid in comparison to other people around them and compared to the efforts they have put into the work (Greenberg 1986, Adams 1965; cited in Burney et al. 2009; p.309).

According to Adams (1965; cited in Furnham 2005, p.294-295), the pioneer in equity theory, people tend to engage in social comparisons with other co-workers based on two criteria: Input and outcome. In this context, employees tend to evaluate how much efforts they have put into their work compared to their colleagues, and how much outcome they have received in comparison (Furnham 2005). The equity phenomenon plays a key role in performance-based pay systems, especially in situations where the variable component of the salary is dependent on group performance. When an employee perceives he has put more efforts into the work than his colleagues, but the whole group has received the same amount of performance-based pay, this can lead to a perception of distributive injustice. On the other hand, performance-based pay systems based on individual performance are likely to create higher levels of distributive fairness due to the fact that the outcome is a more adequate reflection of the individual efforts invested (Drago et al. 1992; cited in Artz 2008, p.319).

It can be argued that performance-based pay and the assumption above are strongly connected to the effort-pay fairness dimension of expectancy theory,

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which suggests that one’s effort will result in performance and that performance will be rewarded accordingly (Furnham 2005). Based on this assumption, performance-based pay can increase the perception of distributive justice because employees are paid according to their performance and therefore perceive higher effort-pay fairness. However, as mentioned above, not all efforts necessarily result in performance and fair rewarding. People who feel that they have been underpaid compared to their colleagues or compared to the efforts they have put into the work, tend to experience higher levels of emotional exhaustion and anger, which in turn can lead to higher levels of stress and job dissatisfaction (Greenberg 2004; Heywood & Wei 2006; cited in Ismail et al. 2011, p.172; Spell & Arnold 2007). This assumption can be linked to Locke’s (1969) value appraisal theory which suggests that a discrepancy between what an employee expects to get paid and what he actually gets paid can lead to a perception of distributive unfairness, which in turn can decrease the level of job satisfaction. It can be argued that such a discrepancy in distributive justice can be the trigger for experiencing stress and discomfort, especially in situations where income insecurities based on performance-based pay systems are perceived as threatening employees’ livelihood and family responsibilities (Ganster et al 2011; Green & Heywood 2008).

3.2.2. Procedural jus t i c e

Based on the assumptions mentioned above, distributive injustice in combination with performance-based payments can be evaluated as potentially stress-causing and can therefore trigger a cognitive appraisal process as defined by Lazarus and Folkman (1984). In this context, Greenberg (2004) argues that the degree to which an employee perceives the performance-based pay system and distributive injustices as stressing and harmful depends on his or her appraisal of the procedures used to determine the pay outcome as well as all other procedures surrounding the pay system itself, such as performance evaluation and goal setting (Burney et al. 2009). Procedural fairness can therefore be defined as the degree to which employees perceive those organizational procedures as fair (Greenberg 2004).

In the course of the first appraisal of Lazarus’ cognitive appraisal theory, an employee who feels that his performance has been underpaid, is likely to make an evaluation of the extent to which he or she is potentially harmed by the compensation scheme (Lazarus & Folkman 1984). In this regard, the employee will evaluate the fairness of the organizational procedures related to

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it, including the degree to which pay decisions have been made based on accurate, consistent and bias-free information and rules as well as the degree to which employees were able to express their opinions and views in goal setting procedures and performance evaluations and to appeal errors of judgment on part of supervisors (Greenberg 2004; Burney et al. 2009).

Former studies have shown that when employees perceive that their payment has been based on accurate information and that they have had a fair chance to express their views during the evaluation or goal setting procedures, stress reactions from distributive injustice or other dissatisfactions from the compensation scheme can be buffered (Pettijohn et al. 2011; cited in Ismail et al. 2011; Tang & Sarfield-Baldwin 1996; cited in Tan & Lau 2012, p.59). This phenomenon is called the “fair process effect” (Greenberg & Folger 1983; cited in Lawson et al. 2009, p.224).

However, when employees perceive unfair payments and unfair procedures surrounding the compensation scheme, they are likely to get a feeling of unease regarding their labor situation. A supervisor who makes decisions based on favoritism for instance, may be a signal for concern and can cause considerable stress (Greenberg 2004). The impact of procedural justice can also be explained through the value appraisal theory of Locke (1969). In this context, a discrepancy between what an employee values as fair procedure and how the organization actually implements procedures based on the employee’s perception can increase the level of job dissatisfaction. Based on Artz (2008) and Greenberg (2004), one can argue that performance-based pay constitutes a sensitive topic due to the fact that high levels of risk and unpredictability put the security of employee’s income at stake. In such a situation, the perception of procedural unfairness in form of denied participation in goal setting, the absence of fair hearing or the use of biased information can cause considerable stress reactions and job dissatisfaction among employees because they will feel helpless, alienated and at the mercy of those procedures that ultimately determine their income (Furnham 2005; Folger et al. 1992, McClausland et al. 2005; cited in Ismail et al. 2011, p.172).

3.2.3. Interac t ional jus t i c e

As mentioned before, the perception of distributive and procedural injustice can trigger considerable stress reactions (Greenberg 2004). Based on the second appraisal of Lazarus and Folkman’s (1984) cognitive appraisal theory, an employee who feels harmed by distributive and procedural injustices of

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performance-based pay systems will judge his or her opportunity to rectify or at least reduce the harm encountered. In this regard, the employee will seek more information in order to understand the underlying organizational procedures that appear threatening. Therefore, the employee will turn to those organizational authority figures who are directly concerned with the compensation scheme, such as the immediate supervisor (Greenberg 2004; Lazarus & Folkman 1984). The perceived fairness of this encounter is defined as interactional justice and is comprised of informational and interpersonal justice (Lawson et al. 2009). Whereas interpersonal justice refers to the degree to which employees are treated with respect and politeness during the interaction with the supervisor, informational justice refers to the extent to which employees receive open, accurate and timely information and explanations regarding decision-making processes, outcomes and procedures (Ismail et al. 2011; Lawson et al. 2009; Colquitt 2001).

Greenberg (2004) and Ismail et al. (2011) argue that employees who feel that they have been treated with respect and consideration during a performance evaluation procedure and who perceive that their supervisor has provided them with detailed information and explanations concerning how the pay was determined and why, perceive lower levels of stress and higher job satisfaction. The reason is that employees feel that they are valuable members of the organization who are worthy of getting detailed information and feedback. Furthermore, open information-sharing creates a feeling of trust in employees, which in turn lowers anxiety feelings related to income insecurities and procedural unfairness (Greenberg 2004). Thus, interactional fairness can buffer the stress-causing effect of performance-based pay systems, including distributive and procedural injustices. This is in accordance with previous research results mentioned by Ismail et al. (2011).

However, when employees perceive that pay decisions have been made without explanations or when important information regarding appraisal or goal setting procedures have been withhold, employees are likely to experience considerable stress and lower job satisfaction. This is also the case when employees feel that supervisors have treated them with little respect and dignity by making inappropriate or unpleasant remarks (Greenberg 2004). In this case, employees will realize that their supervisor is not going to reduce their unease and will in turn feel unable and helpless to rectify the situation and the procedures that put their income at stake. Withholding information and explanations will increase feelings of anxiety and concern related to

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distributive and procedural injustice and employees will experience considerable stress (Greenberg 2004). The impact of interactional justice can also be demonstrated through the value appraisal theory of Locke (1969). In this context, a discrepancy between how employees expect to be treated by supervisors during interactions related to the performance-based pay system and how they are actually treated based on their perception can decrease the level of job satisfaction.

The relationship between performance-based pay, organizational justice and job strain is based on the Justice Salience Hierarch of Greenberg (2004) and can be summarized as follows: The extent to which a performance-based pay system contributes to higher or lower levels of stress and job satisfaction depends on 1) the degree to which employees perceive that they have been fairly rewarded compared to their colleagues and efforts invested (distributive justice), 2) the degree to which the procedures surrounding the performance-based pay system, including participation in decision-making and application of rules, are evaluated as fair and accurate (procedural justice) and 3) the degree to which employees feel fairly treated by superiors and have timely and accurate explanations and information about procedures, which in turn can help them to avoid or reduce harmful aspects of performance-based pay systems (interactional justice) (Greenberg 2004; Colquitt 2001).

Based on those assumptions, the relationship between performance-based pay and job satisfaction and stress can be expected to be contingent on organizational justice as follows:

H1(a) Performance-based pay systems increase job satisfaction, when employees perceive high organizational justice, and decrease job satisfaction, when employees perceive low organizational justice.

H1(b) Performance-based pay systems decrease stress, when employees perceive high organizational justice, and increase stress, when employees perceive low organizational justice.

Apart from organizational justice, the phenomenon of job control has been suggested to play a significant role in influencing the relationship between performance-based pay systems and job strain. The impact of this variable will be illustrated in more detail in the following chapter.

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3.3. Job control

Former research has shown that a lack of control over certain dimensions of the job, such as autonomy in deciding one’s work schedule and procedures or the opportunity to participate in job-relevant decision-making, is correlated to lower job satisfaction and higher levels of stress, anxiety and depression (Wall et al. 1996; Jackson et al. 1993; Tetrick & LaRocco 1987; Spector 1986). Simultaneously, a high level of job control has been recognized as significant in mitigating the negative effects of stress-causing factors in the workplace and in increasing job satisfaction due to higher self-determination (Wall et al. 1996; Ganster et al. 2011; Lawson et al. 2009).

As mentioned before, performance-based pay systems can create feelings of anxiety and pressure on the one hand, and feelings of challenge and fulfillment on the other hand. However, the extent to which performance-based pay systems ultimately cause either functional or dysfunctional effects in form of stress and job satisfaction, depends on the degree to which employees appraise such a system as either a challenge or a threat (Lazarus & Folkman 1984; Ganster et al. 2011). Based on the first appraisal of Lazarus and Folkman’s (1984) cognitive appraisal theory, employees evaluate the extent to which they are harmed by certain procedures of the performance-based compensation scheme. In this context, Spector (1998; cited in Furnham 2005, p.359) has evaluated the impact of job control as important in moderating the relationship between an environmental stress factor and an emotional reaction. It is important to mention that the perception of control has to be “over the stress factor itself” or something that is related to it (Spector 1998; cited in Furnham 2005, p.359).

Based on this assumption, Spector’s control theory (1998; cited in Furnham 2005, p. 359) suggests that employees who perceive high levels of control over their performance metrics are more satisfied and perceive less stress than employees who have little control. In this context, having considerable autonomy in scheduling one’s work (time control) and in deciding the procedures to be used in carrying out the work (method control) can provide employees with higher self-determination regarding their level of performance, which in turn determines the amount of pay they receive (Jackson et al. 1993; Wall et al. 1995; Wall et al. 1996). Consequently, having process and decision control can mitigate employees’ feeling of anxiety and stress associated with the variability of the pay because employees feel more in control over their outcomes as a result of having direct input into the process (Spell & Arnold

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2007). Apart from the assumption that employees with high job control appraise the performance-based pay system as less stressful, they are also likely to perceive higher levels of job satisfaction (Wall et al. 1996; Lawson et al. 2009). The reason is that employees who feel that they can influence their performance metrics by deciding on how to carry out their work are more likely to evaluate the performance-based pay system as a challenge, or in other words, as an opportunity to optimize their earnings (Ganster et al. 2011; Artz 2008). Furthermore, the impact on job satisfaction can be illustrated using Locke’s (1969) value appraisal theory. In this context, employees who value having high control over their work can be assumed to be more satisfied with performance-based pay systems when the organization allows them to be more autonomous in carrying out the work.

On the other hand, it can be argued that not having control over certain performance metrics that ultimately decide the amount of pay one receives from the job can lead to considerable stress and low job satisfaction (Spell & Arnold 2007; Ganster et al. 2011). In this regard, employees who are not granted the freedom of decision autonomy will feel helpless and unable to proactively affect their outcomes. Considering that in performance-based pay systems a considerable part of the overall pay can be based entirely on employees’ performance, the denial of autonomy can decrease the psychological well-being of employees in form of anxiety, stress and lower job satisfaction (Spell & Arnold 2007; Ganster et al. 2011), especially when employees perceive lower job control as they desire (Locke 1969). Based on those assumptions, the relationship between performance-based pay and job satisfaction and stress can be expected to be contingent on job control as follows:

H2(a) Performance-based pay systems increase job satisfaction, when employees perceive high job control, and decrease job satisfaction, when employees perceive low job control.

H2(b) Performance-based pay systems decrease stress, when employees perceive high job control, and increase stress, when employees perceive low job control.

3.4. Stress and job satisfaction

Previous research on a possible interrelation between stress and job satisfaction has been quite ambiguous so far. Even though researchers such as Wall et al. (1996) have found evidence that job satisfaction and stress are

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interrelated, the causal direction of this relationship has not been clearly determined yet.

However, based on the existing literature, most researchers support the idea that job satisfaction is influenced by the level of stress, and not the other way around. Wolpin et al. (1991) conducted a longitudinal study and came to the conclusion that occupational stress was associated with higher levels of burnout and in turn with lower job satisfaction, but the same correlation could not be confirmed for the reverse case. Furthermore, Ramanathan (1991) found evidence that stress was negatively correlated to job satisfaction, and suggested that effectively applied stress management programs could contribute to improved job satisfaction. Those findings implied that organizations should address internal sources of stress systematically in order to be able to deal successfully with job dissatisfaction among employees. In addition to that, Furnham (2005) as well as Decker and Borgen (1993) argued that the ability to tolerate stress or rather the stress coping ability of each individual could lower the propensity to experience stress and in turn had a positive impact on job satisfaction.

Due to the fact that previous research results overly indicate that job satisfaction is affected by stress, the following hypothesis has been derived:

H3 High levels of stress are related to low job satisfaction. Analogously, low levels of stress are related to high job satisfaction.

Taking all assumptions and hypotheses into account, the following theoretical model can be displayed:

Figure 1: Theoretical Model (structural model)

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3.5. Ad-hoc moderating variables

Apart from organizational justice and job control, there are additional factors that might have an influence on the relationship between performance-based pay systems and stress and job satisfaction. Those factors, including gender, family responsibilities, the level of experience in the present job as well as the type of performance evaluation have been considered as potentially interesting supplements to the study, as they can serve to get a better understanding of the demographic and work-related background of those employees who are positively or negatively affected by performance-based pay systems. It is important to mention that those moderating variables do not form part of the model itself and that theory has not been investigated to a sufficiently high extent to derive specific hypotheses. Instead, the influence of those factors will be dealt with in an exploratory way and only assumptions can be made regarding the possible influence of those moderators. In this context, it can be expected that employees with many years of experience are less likely to be affected by the stress-causing characteristics of performance-based pay systems. Furthermore, it can be assumed that employees with family responsibilities, especially women and single parents, are more prone to evaluate performance-based pay as threatening due to the associated income insecurity (Green & Heywood 2008). Finally, as argued above, the type of performance evaluation is likely to affect employees’ level of stress and job satisfaction, whereby individual performance evaluation can be expected to be more satisfying and less stressful for employees working under performance-based pay systems (Drago et al. 1992; cited in Artz 2008, p.319).

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4. Methodology

This chapter contains information about the applied research methodology, including information about the research strategy and design, data collection, variable measurement, data analysis and an evaluation of the trustworthiness of the study.

4.1. Research strategy

In order to test the theoretical framework and hypotheses in an empirical setting, a quantitative research strategy has been applied. Bryman & Bell (2011, p.26) define quantitative research as a strategy that “emphasizes quantification in the collection and analysis of data” rather than the spoken or written word, and that provides objective, well-founded scientific knowledge based on positivism.

The reason for using a quantitative rather than a qualitative research strategy is that the theoretical model of the study is based on deductive theory, meaning that the effect of performance-based pay systems on stress and job satisfaction has already been explored to a certain degree in previous investigations. As a result, the above mentioned hypotheses could be derived from already existing knowledge in the relevant research fields, which makes an exploratory and inductive approach based on qualitative research obsolete for this study (Bryman & Bell 2011). In this context, a quantitative research strategy is more suitable since data collection and analysis aim for testing rather than generating theory.

Another reason for the application of a quantitative research strategy is its high potential for statistical generalizability compared to qualitative research (Bryman & Bell 2011). Since research results will be used to derive managerial implications for a less stressful and more satisfying design of compensation schemes and their underlying organizational procedures, it is important to get generalizable results that can be applied in different empirical settings later on. Consequently, the study has to focus on the breadth rather than the depths of data material, which is best achieved with a quantitative research strategy as suggested by Bryman and Bell (2011).

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4.2. Research design

Concerning the research design, the literature suggests five different approaches, including experimental, cross-sectional, longitudinal, case study and comparative design (Bryman & Bell 2011).

Taking into consideration the research aim, the cross-sectional approach has been evaluated as being the most suitable choice for this study. In this context, a cross-sectional design comprises the investigation of a variety of cases and limits data collection to a specific point in time. Furthermore, quantifiable data is collected with the aim to find associations between two or more than two variables (Bryman & Bell 2011). Considering that the study aims at deriving managerial implications that are applicable across different business settings, it is important to include a variety of cases in the study, that is, a widespread sample of employees proceeding from different areas of employment and industries. In this regard, the investigation of more than one case can establish a higher degree of variation among the variables and can therefore lead to better results when searching for correlations compared to a case study design. Since the timeframe of the thesis is restricted to 20 weeks, data collection had to be adapted to a limited time schedule, which makes the alternative of a cross-sectional design more appropriate for this investigation than a longitudinal design. Furthermore, the study aims at investigating psychologically perceived stress of employees which is connected to self-reporting of experiences and feelings. This is best achieved through a cross-sectional approach, compared to experiments, which are generally used for studying physical stress reactions (Ganster et al. 2011).

4.3. Data collection

Within the cross-sectional research design, a survey research method has been chosen, whereby data has been collected through questionnaires (Bryman & Bell 2011). The reason for using self-completion questionnaires instead of structured interviews is that questionnaires are more time-efficient and can reach a wider range of participants. Moreover, respondents are more likely to honestly answer delicate questions regarding the evaluation of supervisors or organizational procedures in questionnaires (Bryman & Bell 2011).

The sample for the collection of data was comprised of employees with fixed salaries, employees with both fixed and variable pay structures and employees with entirely variable salaries. The reason for using an index ranging from

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purely fixed to purely variable pay was to ensure that the level of stress and job satisfaction could be ascribed to the variation in the pay system, or in other words, to find evidence that performance-based pay was responsible for changes in the dependent variables. A sample size of at least 100 respondents was evaluated as necessary to gain tenable results (Lee et al. 2011). Based on this assumption, the final number of observations, amounting to 193 cases, can be evaluated as satisfactory.

The self-completion questionnaire was distributed in two different ways in order to collect data on a wide-spread national and international level. In this context, the questionnaire was either handed out personally as a printed hard copy or was made available to participants via a link leading to an online questionnaire form created with “Google Drive Forms”. The data collection process took place during three weeks, from 22.03. to 14.04.2013. During this time, the questionnaire was distributed in Karlstad and Stockholm to those companies whose workforce was assumed to work under some kind of variable pay system, such as car dealerships and real estate companies. Furthermore, professional contacts, friends and family members in Sweden, Germany, Switzerland and Spain contributed to a multiple distribution of the questionnaire by forwarding the form to a wide range of participants with fixed and variable pay systems proceeding from various areas of employment, including tourism and logistic firms, health care and educational institutions, IT companies, retail, banking and insurance companies. In addition to that, the questionnaire was distributed online via social networks, including Facebook, Twitter and LinkedIn in order to maximize the spectrum of respondents with different pay systems and employment areas.

Taking into consideration the international dimension of the data collection process, the questionnaire has been translated from English to the three local languages Swedish, Spanish and German in order to increase the response rate of participants. Due to the fact that the research topic is somewhat sensitive, a confidentiality clause has been included in the questionnaire to guarantee participants and companies full anonymity of their responses. As suggested by Bryman and Bell (2011), the questionnaire has furthermore been pre-tested in every language before distribution in order to ensure that all questions were understandable and to receive an estimation of the completion time. The latter information was finally included in the questionnaire in order to increase the response rate of participants (see appendix 1).

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4.4. Variable measurement

Apart from the degree of performance-based pay, all variables of the model have been measured using existing constructs developed by previous researchers. Since all subscales of the constructs were reflective in nature, it was possible to omit those items that were considered irrelevant for the aim of the study, without endangering the “conceptual domain of the constructs” (Coltman et al. 2008, p.1252). In some cases items were furthermore dropped due to low reliability scores in previous research papers or due to a potential lack of discriminant validity between the constructs (Lewis-Beck et al. 2004). Moreover, items were measured on a 7-point Likert scale instead of a 5-point Likert scale as originally used in previous research papers in order to maximize the variation between responses.

In order to measure the “degree of performance-based pay”, respondents were asked to categorize on a 11-point scale from 0 to 100 percent the degree to which their yearly income was variable, or rather based on their individual or group performance. Additionally, respondents classified their pay scheme based on six categories, including “fixed salary”, “time-based pay”, “piece-rate pay”, “commission-based pay” and “bonus pay” with a fixed salary base as well as “others” in order to collect information about the different pay systems of respondents (Yeh et al. 2009).

In the present study, the term “job satisfaction” refers to the overall degree of job satisfaction rather than the satisfaction with specific aspects of the job itself. In this context, five items were used to measure job satisfaction, whereby two items proceeded from the General Job Satisfaction Scale of Hackman and Oldham’s (1974) Job Diagnostic Survey and three items from Brayfield and Rothe’s (1951) Index of Overall Job Satisfaction. Both constructs have shown to predict respondents’ attitudes towards their jobs, including turnover intention and enthusiasm. Respondents answered on a 7-point Likert scale ranging from 1 (totally disagree) to 7 (totally agree). For the sake of optimizing the length of the questionnaire and in turn to increase the response rate, the remaining items of Hackman and Oldham’s (1974) job satisfaction scale (one item) and Brayfield and Rothe’s (1951) job satisfaction index (15 items) have been deliberately omitted because they were either evaluated as interchangeable with already selected items or were considered irrelevant for the research aim.

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The second dependent variable of this study is the level of “stress” experienced by employees. It is important to mention that this variable refers to the level of psychological stress perceived by employees, not the physical stress reaction that can be measured in laboratories. In this context, the Perceived Stress Scale (PSS) developed by Cohen et al. (1983, p.387) was applied, which measures the degree to which participants have evaluated their life as stressful, “unpredictable, uncontrollable and overloading” during the last month. Due to the fact that the PSS refers to ordinary life situations, some items had to be linguistically adapted to a more job-related context. In order to measure perceived stress, four items of the reduced 10-item PSS version (PSS-10) have been used in this study (Cole 1999; Remor 2006). A fifth item has been added from the more complex 14-item Perceived Stress Scale (PSS-14) (Cohen et al. 1983) because its inclusion was considered important for the completeness of the stress construct. For the sake of discriminant validity, six items of the PSS-10 have been deliberately omitted because they were too strongly connected to the job control construct explained below. Respondents answered on a 7-point Likert scale ranging from 1 (never) to 7 (always).

The variable “organizational justice” is a formative second-order construct, comprised of three subscales, namely “distributive”, “procedural” and “interactional justice”. It is important to mention that the subscales themselves are reflective in nature, allowing the omission of items without endangering the stability of the construct. The three dimensions of organizational justice were measured using a 14-item scale combined of Colquitt’s (2001) and Moorman’s (1991; cited in Miller et al. 2012, p.270) justice scales. In this regard, four, and respectively five, items were applied from Colquitt’s (2001) justice scale in order to measure distributive and procedural justice, whereby two items were omitted for the sake of optimizing the length of the questionnaire. Moreover, the dimension of interactional justice was comprised of a 5-item scale, whereby two items proceeded from Colquitt’s (2001) informational justice scale and three items from Moorman’s (1991; cited in Miller et al. 2012, p.270) interactional justice scale. Again, for the sake of increasing the response rate, six interchangeable items were deleted. Respondents answered on a 7-point Likert scale from 1 (to a very low extent) to 7 (to a very high extent). In order to create a comprehensive measure of organizational justice that also reflects the theoretical connections between the three dimensions of organizational justice based on the theoretical framework developed above, it was necessary to convert the formative second-order construct into a continuous one-dimensional construct, ranging from 1 (low

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organizational justice) to 4 (high organizational justice). A value amounting to 1 implied that employees scored low on all three dimensions of organizational justice, while a value of 2 suggested that participants scored high on interactional justice, but low on the other two dimensions. A value amounting to 3 implied that employees perceived low distributive justice, but high procedural justice, whereas a value of 4 indicated that participants scored high on distributive justice irrespective of the other two dimensions. The computation of this new variable was realized with the IBM SPSS Statistics program (version 21).

“Job control” is a multidimensional variable including different dimensions of job control, such as autonomy, participation and the opportunity to use different skills (decision latitude) (Karasek & Theorell 1990; cited in Spell & Arnold 2007). In this study, job control is understood in terms of autonomy, as the dimension of participation has already been measured within the procedural justice component mentioned above. The decision latitude dimension has been deliberately omitted in this study because it is assumed to be less concerned with job control itself and therefore might bias the validity of the job control measure substantially (Wall et al. 1996). Job control in terms of autonomy was therefore measured using the time and method control scale of Jackson et al.’s (1993) Five-Factor-Oblique-Model, whereby three items proceeded from the time control scale and two items from the method control scale. The remaining five items were deleted due to unacceptably low reliability scores (Cronbach’s Alpha <0.65) measured in previous studies (Wall et al. 1995; Gliem & Gliem 2003). Respondents answered on a 7-point Likert scale ranging from 1 (never) to 7 (always).

Finally, the ad-hoc variables were measured using only one item for each variable. The items were developed for the purpose of this study and did not proceed from previous constructs.

4.5. Data analysis

In order to analyze data and to test the hypotheses, the statistic program SmartPLS (version 2.0 M3 Beta) was applied (Ringle et al. 2005). SmartPLS is a tool for partial least squares path modeling (PLS) and is often used for complex models with many latent variables (Vinzi et al. 2010). One of the reasons for choosing PLS for this study was its high effectiveness in analyzing small data sets and the possibility to test a set of hypothesized relationships simultaneously. Moreover, PLS has the advantage that the measurement

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model and the structural model can be assessed at the same time, making the conventional two-step approach of factor and path analysis obsolete (Lee et al. 2011).

In the first step of the analysis, the comprehensive measurement model was evaluated, including reliability and validity of the constructs as well as cross-loadings. In this process, two items of the stress construct were omitted due to low factor loadings. The results are presented in the next chapter of the paper.

Subsequently, the structural model was assessed, including the direct effects of the model as well as the moderation effects of job control, organizational justice and ultimately the ad-hoc variables. The direct effects were analyzed by running the PLS algorithm and bootstrapping function (200 bootstraps) in order to estimate the path coefficients and t-values. The significance of the t-values was evaluated by determining the respective p-values.

In order to analyze moderation effects in PLS, the most appropriate method is a two-stage approach, or in other words, a hierarchical multiple regression analysis, especially when the moderating variables are continuous in nature (Champoux & Peters 1987; Henseler & Chin 2010). Within the frame of this process, the main effects of the model were run using the PLS algorithm in order to estimate the latent variable scores. In a second step, the model was run again, however this time with the latent variable scores and the interaction terms (exogenous variable x respective moderating variable) (Henseler & Chin 2010). The magnitude of the moderation effect was then assessed by determining the increment in R2 associated with the addition of the interaction term to the model (Champoux & Peters 1987). This assessment was done by calculating the f-value for the hierarchical multiple regressions. Unexpectedly, the two-stage approach did not yield any significant results for the moderating effect of organizational justice and job control. Consequently, it was decided to conduct a more detailed analysis of the data material.

For this purpose, Henseler (2012) suggests the evaluation of a moderating effect through PLS-based group comparison (subgroup or multi-group analysis). However, before a multi-group analysis can be conducted, the moderating variables have to be categorized into high and low grouping values. For non-categorical variables, as used in this paper, this process is called dichotomization (Henseler & Fassott 2010; cited in Vinzi et al. 2010, p.720) and has been conducted with IBM SPSS Statistics (version 21). Within the frame of this process, values above the median were assigned a high

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grouping value (here: 1) and those values below the median a low grouping value (here: 0). For those moderating variables with more than one item, such as job control, it was necessary to first determine the mean across the items for each observation before the median split could be conducted. In the case of organizational justice, categories were determined based on theory, resulting in category 1 and 2 being assigned a low value and categories 3 and 4 a high value. Based on Henseler (2012), the multi-group analysis takes place in two steps: First, the sample was divided into two subsamples according to the grouping values. In a second step, the PLS algorithm and bootstrapping function (200 bootstraps) were run for each subsample separately in order to determine the path coefficients, standard errors and t-values. Finally, based on Chin and Keil (2000; cited in Henseler 2012, p.496) an unpaired samples t-test was conducted in order to evaluate whether there was a significant difference between the subgroups. This test was made available by Gaskin’s (2012) Stats Tools Package. In order to determine the significance level of the t-values, the respective p-values (one-tailed) were calculated. The reason for using the one-tailed instead of the two-tailed p-value for the analysis was the fact that the directions of the relationships have been clearly hypothesized beforehand. The multi-group analysis was conducted for the main moderating variables, namely job control and organizational justice, the ad-hoc variables as well as the three dimensions of organizational justice separately.

Apart from SmartPLS, the IBM SPSS Statistics program has been furthermore applied in order to compute frequency tables for descriptive statistics, including the distribution of gender, age, industry and the extent of performance-based pay.

4.6. Trustworthiness and limitations

The trustworthiness in quantitative research is concerned with the reliability and validity of measurement constructs as well as the generalizability of the study (Bryman & Bell 2011).

Before evaluating the measurement model, it was necessary to omit those items that loaded on factors below 0.65. In this context, the items PStrQ3 (loading: 0.5736) and PStrQ5 (loading: 0.1423) of the stress construct were excluded from the model in order to increase the validity of the construct (see appendix 2 and 3). The weights of the three formative indicators in the second-order construct of organizational justice ranged between 0.365 and 0.445. However, as formative indicators are not expected to correlate with one

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another, the traditional validity and reliability measures were not applied for this case.

The degree of internal reliability and convergent and discriminant validity have been determined by computing composite reliability, Average Variance Extracted (AVE) as well as communalities and cross-loadings for all reflective constructs, including the three dimensions of organizational justice. The results are summarized in table 1 and 2, whereby abbreviations are explained in appendix 2:

Table 1: Overview of reliability and validity scores

Table 2: Correlations of latent variables

The level of internal reliability refers to the consistency of the measurement construct (Bryman & Bell 2011) and is demonstrated by a value of composite reliability greater than 0.70 (Hair et al. 2010). Accordingly, all constructs in this study have displayed high levels of internal reliability, ranging from 0.84 to 0.95, proving that all items of the constructs were highly coherent to each other (table 1).

The level of validity is concerned with whether a construct really measures what it intends to measure (Bryman & Bell 2011). The convergent validity is determined by AVE (and communalities) greater than 0.50 as well as factor loadings higher than 0.70 (Oliveira 2012; Hair et al. 2010). Both conditions were fulfilled by the constructs in the model, providing evidence that the respective items converged on the same construct (table 1, appendix 3). The discriminant validity was demonstrated by the fact that the lowest square root of AVE (0.794) was higher than any of the latent construct correlations (table 2) (Fornell & Larcker 1981). Additionally, no cross-loadings between the latent

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variables were detected (see appendix 3). Consequently, both results indicate that discriminant validity was fulfilled.

External validity refers to the question of generalizability and representativeness of the sample (Bryman & Bell 2011). Considering that the sample was not random, but convenient to a large extent, the generalizability of the study is rather limited (Bryman & Bell 2011). Nevertheless, it can be argued that the sample is still somewhat representative, as the study included participants proceeding from many different salary systems, countries, industries and employment areas, thus providing a broad range of variation across the sample.

A further limitation is the circumstance that different personalities and cultural backgrounds can have an additional influence on how performance-based pay systems are perceived by employees, making it almost impossible to derive universal implications about the effect of different pay systems on stress and job satisfaction. Since personality research is rather connected to the field of psychology, this aspect has not been considered in this study.

The use of cross-sectional data constitutes an additional limitation in terms of causality, as data has been collected at only one point in time (Bryman & Bell 2011). However, due to a strong theoretical background it was still possible to draw credible inferences about the causality of relationships.

Another possible limitation of the study is concerned with the translation of the questionnaires. Even though the survey has been pre-tested in every language before distribution, translation biases can always be a potential risk to the validity of a construct. However, based on the results of the measurement model, construct validity did not seem to be a problem in this study.

Finally, the sole reliance on quantitative research methods may constitute a limitation as well. According to Cooper et al. (2001), the application of quantitative research alone may not capture the whole dynamic and complexity of psychological stress reactions. Instead, they argue for a concept called “methodological pluralism”, where quantitative and qualitative methods are combined in order to get a deeper understanding of the stress experience itself as well as the circumstances surrounding it. Consequently, future researchers may complement quantitative research with qualitative research in order to draw even deeper and more insightful conclusions about the perception of stress.

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5. Results

In this chapter, the findings from the statistical analysis of the structural model are presented, including the main effects between performance-based pay, job satisfaction and stress as well as the moderation effects. Furthermore, frequency statistics are displayed in order to provide information about the demographic and work-related background of the respondents.

5.1. Demographics

The researched sample was comprised of 193 observations, whereby 55.4 percent of the respondents were male and 44.6 percent female. Regarding the age distribution, more than half of the respondents were less than 35 years old and even 77.7 percent were younger than 45 years. The age group with the highest response rate (43.5 percent) was category 2 (26-35 years) (figure 2).

Figure 2: Frequency demographics for gender and age

Data was collected from 29 different industries, whereas the majority of respondents proceeded from the tourism (17.6 percent), IT (9.8 percent), health care (9.8 percent), education and research (7.6 percent) as well as car sales sector (11.4 percent) (figure 3).

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Figure 3: Distribution of industries

34.7 percent of the respondents had entirely fixed salaries, whereas 65.5 percent of the respondents had some kind of variable pay system, including time-based pay (9.8 percent), piece-rate pay (4.1 percent) as well as commission- (18.1 percent) and bonus-based pay (18.1 percent), both with a fixed salary base, and other pay systems (18.1 percent). In this context, 10.4 percent of the respondents worked under entirely variable pay systems, whereas 55.1 percent had a fixed salary base with a variable component ranging between 10 and 80 percent (figure 4 and 5).

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Figure 4: The degree of performance-based pay

Figure 5: Distribution of different pay systems

5.2. The direct effects of the model

The results of the direct effects of the model have shown that there is a statistically significant relationship between the degree of performance-based pay and job satisfaction (p<0.01; t-value: 2.6835). The effect is positive, which means that the higher the degree of performance-based pay, the higher the degree of job satisfaction. However, no evidence has been found for a direct effect of performance-based pay on perceived stress of employees (table 3).

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In accordance with hypothesis H3, the data indicates that there is a negative relationship between stress and job satisfaction, meaning that higher levels of stress are related to lower job satisfaction. As this relationship was highly significant for p<0.001 (t-value: 13.3795) (table 3), hypothesis H3 could be confirmed.

Table 3: The direct effects of the model

5.3. The moderation effect of organizational justice

The result of the multi-group analysis has not revealed any evidence for a moderation effect of organizational justice on the relationship between performance-based pay and job satisfaction, as the group difference as well as all individual paths were statistically insignificant (see appendix 4). However, the results for the three individual dimensions of organizational justice have shown that high distributive justice in combination with performance-based pay increases the level of job satisfaction. This path was significant for p<0.01 (t-value: 2.9253) (table 4). Therefore, even though hypothesis H1(a) could not be confirmed for organizational justice, there was statistical evidence for a positive influence of high distributive justice on the relation between variable pay and job satisfaction, meaning that the higher the level of performance-based pay, the higher the level of job satisfaction, when employees perceive high distributive justice.

Table 4: Moderation effect of distributive justice (PBPS - Job Satisfaction)

Furthermore, there was strong evidence for a moderation effect of organizational justice on the relationship between performance-based pay and stress, meaning that the group difference between high and low organizational

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justice was statistically significant (p<0.01; t-value: 2.653). For low organizational justice, the relationship between performance-based pay and stress is positive, which indicates that the higher the degree of performance-based pay, the higher the level of stress, when employees perceive low organizational justice. This relationship was moderately significant for p<0.05 (t-value: 2.3446). For high organizational justice, on the other hand, the relationship between performance-based pay and stress has been proven to be negative, which means that the higher the degree of performance-based pay, the lower the level of stress, when employees perceive high organizational justice. Even though the latter path did not have any statistical influence, the group difference itself has been proven to be significant. Consequently, hypothesis H1(b) could be confirmed entirely (table 5).

Table 5: Moderation effect of organizational justice (PBPS - Stress)

It is interesting that particularly distributive and procedural justice have a separate influence on the perceived stress level of employees when working under performance-based pay systems. Both group differences were moderately significant for p<0.05 (t-values: 2.265 / 2.119), indicating that high levels of distributive and/or procedural justice can lower the stress-causing effects of performance-based pay, whereas low levels of those dimensions can contribute to the increase of perceived stress (table 6 and 7).

Table 6: Moderation effect of distributive justice (PBPS – Stress)

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Table 7: Moderation effect of procedural justice (PBPS – Stress)

5.4. The moderation effects of job control

The results have not provided any statistical evidence for a moderating effect of job control on the relationship between performance-based pay and job satisfaction and stress, as both group differences were statistically insignificant. Nevertheless, the positive path between performance-based pay and job satisfaction for high job control has led to the conclusion that performance-based pay increases the level of job satisfaction, when employees perceive high job control at work. This path was moderately significant for p<0.05 (t-value: 2.1656) (table 8). However, the relation for employees with low job control did not have any statistical influence. Consequently, hypothesis H2(a) could be only partially confirmed for high job control, whereas H2(b) had to be refuted entirely, as neither the group difference nor the individual paths could be proven to be significant (see appendix 4).

Table 8: Moderation effect of job control (PBPS - Job Satisfaction)

In conclusion, the following results have been derived for the structural model and its hypotheses: • H1(a): Performance-based pay systems increase job satisfaction, when employees perceive high

organizational justice, and decrease job satisfaction, when employees perceive low organizational justice.

o Not confirmed

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o But performance-based pay has been shown to increase job satisfaction when employees perceive high distributive justice.

• H1(b): Performance-based pay systems decrease stress, when employees perceive high organizational justice, and increase stress, when employees perceive low organizational justice

o Confirmed entirely o Particularly distributive and procedural justice have a moderating effect

on the relationship between performance-based pay and stress.

• H2(a): Performance-based pay systems increase job satisfaction, when employees perceive high job control, and decrease job satisfaction, when employees perceive low job control.

o Partially confirmed o Performance-based pay increases job satisfaction when job control is

high, but not the other way around.

• H2(b): Performance-based pay systems decrease stress, when employees perceive high job control, and increase stress, when employees perceive low job control.

o Not confirmed

• H3: High levels of stress are related to low job satisfaction. Analogously, low levels of stress are related to high job satisfaction.

o Confirmed entirely

5.5. The moderation effect of ad-hoc variables

The result of the explorative analysis has revealed that the type of performance evaluation has a moderating effect on the relation between performance-based pay and job satisfaction, meaning that the group difference between individual and group performance evaluation was statistically significant (p<0.05, t-value: 2.023). For individual performance evaluation, the relationship between performance-based pay and job satisfaction is positive, which indicates that performance-based pay increases the level of job satisfaction when employees’ performance is evaluated based on individual achievements. This path was highly significant for p<0.001 (t-value: 3.4144). For group performance evaluation, on the other hand, the path was negative, meaning that performance-based pay decreases job satisfaction for employees whose performance is evaluated based on group performance. Even though this latter path did not have any statistical influence, the group difference was indeed significant. Consequently, it can be concluded that performance-based pay systems are more satisfying for people whose performance is evaluated based on individual merits than for people who are evaluated based on group performance (table 9).

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Table 9: Moderation effect of type of performance evaluation (PBPS – Job Satisfaction)

Furthermore, there is evidence for a moderation effect of tenure on the relationship between performance-based pay and stress, as the group difference between samples of high and low experience was moderately significant (p<0.05; t-value: 1.780). In this context, the path for high job experience has been shown to be negative and statistically significant for p<0.05 (t-value: 1.706), indicating that performance-based pay is less stressful for employees with high job experience. On the other hand, the path for low experience has been revealed to be positive, which means that performance-based pay systems are more stressful when employees are less experienced. Even though the latter path could not be confirmed statistically, there is still a significant group difference between high and low experience, proving that employees with many years of experience (more than six years) are less prone to perceive performance-based pay systems as stressful than employees with fewer years of experience (table 10).

Table 10: Moderation effect of years of experience (PBPS – Stress)

Regarding family responsibilities, the data has revealed some interesting results: In general, performance-based pay systems seem to be more satisfying for employees without underage children than for people who have some kind of family responsibility. The group difference was statistically significant for p<0.05 (t-value: 1.995). While the path between performance-based pay and job satisfaction was significant for respondents without underage children,

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confirming a positive relation between the variables (p<0.001; t-value: 3.5007), the path for respondents with underage children could not be statistically confirmed. Nevertheless, the significant group difference proves that employees without children, whose income is dependent on performance, are more prone to experience high job satisfaction (table 11) than their counterparts.

Table 11: Moderation effect of family responsibilities (PBPS – Job Satisfaction)

Furthermore, the results have shown that performance-based pay systems increase job satisfaction for single (or divorced) employees (p<0.05; t-value: 2.0342). However, the contrary could not be confirmed for married people or people in a relationship, as the t- and p-values did not indicate any significant influence, neither for the individual path nor the group difference (table 12). Consequently, it was not possible to confirm a moderation effect, but the effect of being single (or divorced) on the relation between performance-based pay and job satisfaction is equally valid.

Table 12: Moderation effect of marital status (PBPS – Job Satisfaction)

When testing for a three-way interaction between family responsibilities and gender, the data revealed that variable pay systems increase stress for female employees with underage children. This relationship was statistically significant for p<0.05 (t-value: 2.2995). For male employees, on the other hand, there was no statistical evidence for a negative relationship between performance-based pay, family responsibilities and stress (table 13). Nevertheless, males seemed to

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be positively influenced by performance-based pay systems in general, as the level of job satisfaction for males increased with the degree of performance-based pay (table 14). Again, as the contrary could not be confirmed for female employees, no moderation effect of gender on the relation between performance-based pay and job satisfaction could be derived. However, both partially confirmed relationships are equally valid and significant.

Table 13: Three-way interaction between family responsibilities and gender (PBPS – Stress)

Table 14: Moderation effect of gender (PBPS – Job Satisfaction)

In conclusion, the results of the explorative analysis have revealed that the demographic and work-related background of employees, including the applied type of performance evaluation, the extent of experience in the present job as well as family responsibilities can indeed affect the relationship between performance-based pay and job satisfaction and stress.

In the following chapter, the results will be discussed in more detail according to the theoretical framework and conceptual model developed above.

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6. Discussion

The starting point of this paper was the conclusion of previous researchers that performance-based pay systems can have both functional and dysfunctional effects on job satisfaction and stress. The analysis of the main effects of the model has confirmed one of the earlier research results, namely that performance-based pay systems can increase job satisfaction of employees. Based on Green and Heywood (2008), this finding can be explained by a tendency of employees to evaluate performance-based pay systems as a challenge and fulfillment rather than a threat. In this regard, the opportunity of higher earnings is likely to outweigh the potentially negative aspects of variable pay systems, such as work intensification and income insecurities, as mentioned by Booth and Frank (1999) and Artz (2008). However, as previous research has revealed, the relationship between performance-based pay and job strain is unlikely to be universalistic in nature, and can be expected to be contingent on how employees appraise certain work aspects and procedures surrounding the pay system (Lazarus & Folkman 1984; Locke 1969). Consequently, the relationship between performance-based pay and job satisfaction cannot be expected to hold under all circumstances. This statement will be further developed when discussing the effect of the moderating variables. The assumption of a contingency theory can furthermore explain, why the analysis has not revealed any significant, direct relationship between variable pay and stress: The reason is that the relationship is not likely to occur, unless certain conditions are taken into consideration, such as the impact of organizational justice, gender and so forth.

Considering the importance of the contingency approach for deriving comprehensive knowledge about the relation between performance-based pay and job strain, the study has investigated the impact of organizational justice and job control in more detail.

6.1. Performance-based-pay, organizational justice and job satisfaction

Despite previous expectations, the results have not confirmed a moderation effect of organizational justice on the relationship between performance-based pay and job satisfaction. However, it has been revealed that performance-based pay systems have a positive influence on the level of job satisfaction

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when employees perceive high distributive justice. Consequently, it can be argued that distributive justice, compared to the other two dimensions of justice, plays a particularly important role in influencing job satisfaction when variable pay is applied.

Performance-based pay systems increase job satisfaction because employees believe that their outcome has been fairly distributed in comparison to other co-workers and compared to the efforts they have put into the work. This assumption is based on the principle of equity theory developed by Adams (1965; cited in Furnham 2005, p.294-295) and the effort-pay fairness dimension of expectancy theory. Based on Locke’s (1969) value appraisal theory, this implies that the amount of performance-based pay is in accordance with the expectations of the employee, which in turn increases the level of perceived job satisfaction. This result is consistent with previous research findings of Brown and Sessions (2003; cited in Artz 2008, p.316) who argued that variable pay systems contribute to higher job satisfaction due to perceived effort-pay fairness.

In connection to the result above, the findings of the explorative study have furthermore revealed that performance-based pay systems increase job satisfaction when employees are evaluated based on individual performance, and decrease job satisfaction when employees are assessed based on group achievements. A possible explanation for those results can be derived from Adams’ (1965; cited in Furnham 2005, p.294-295) equity theory. In this context, employees who are evaluated and rewarded based on group performance, but perceive a considerable effort-outcome discrepancy in comparison to other co-workers in the group, will be less satisfied as a result of perceived distributive unfairness. On the other hand, when employees’ performance is evaluated and rewarded based on individual merits, job satisfaction will increase because the monetary outcomes are solely dependent on the individual efforts and therefore display high distributive effort-pay fairness. Consequently, the type of performance evaluation seems to be an important aspect to consider when designing the compensation scheme. Furthermore, the impact of different types of performance evaluation on the level of job satisfaction has provided evidence for the contingency assumption made above, namely that the positive, direct relationship between performance-based pay and job satisfaction cannot be expected to hold under all circumstances, but that the relation is dependent on certain contingencies.

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It can be concluded that the positive effect of performance-based pay on job satisfaction is connected to the perception of high distributive justice. In this context, the type of performance evaluation plays a key role in establishing distributive justice within performance-based pay systems, and can therefore contribute to the increase or decrease of job satisfaction in a substantial way.

6.2. Performance-based pay, organizational justice and stress

In accordance with hypothesis H1(b), the data has confirmed that performance-based pay systems increase stress, when employees perceive low organizational justice, and decrease stress, when employees perceive high organizational justice. This finding is consistent with Lazarus and Folkman’s (1984) cognitive appraisal theory and Greenberg’s (2004) Justice Salience Hierarchy.

In this context, performance-based pay systems increase stress because employees do not only evaluate their outcome as potentially unfair (distributive injustice), but also appraise the procedures used to determine the outcome as well as other procedures surrounding the pay system itself, such as performance evaluation and goal setting, as unfair and threatening their livelihood (procedural injustice) (Burney et al. 2008; Lazarus & Folkman 1984). Considering that performance-based pay systems are related to income insecurity, risk and unpredictability, it is evident that the perception of procedural unfairness in form of denied hearing or participation in decision-making causes considerable stress reactions because employees are at the mercy of those procedures that ultimately determine their outcome (Greenberg 2004). When employees, in addition to distributive and procedural injustice, also perceive that their supervisor treats them without consideration or withholds important information or explanations regarding decisions or procedures (interactional injustice), it is implied that employees experience even more stress as they cannot trust their supervisor to reduce their unease about the pay situation (Greenberg 2004).

As expected, performance-based pay systems lead to lower stress reactions when employees perceive high distributive justice in form of fair payments in comparison to other co-workers and compared to the efforts they have put into the work. In such a situation, the performance-based pay system is not evaluated by employees as harmful or threatening their livelihood and therefore does not trigger a cognitive appraisal process as defined by Lazarus and Folkman (1984). Likewise, when employees perceive some kind of

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distributive injustice, but evaluate that their payment has been based on fair procedures, such as evaluation or goal setting procedures (procedural justice), potential stress reactions from distributive injustices are buffered and performance-based pay causes only low or even no stress reaction at all (Pettijohn et al. 2011; cited in Ismail et al. 2011).

It is important to mention that particularly distributive and procedural justice have been shown to moderate the relationship between performance-based pay and stress. This might indicate that distributive and procedural justice have a particularly important role in determining the stress level of employees related to organizational justice. Therefore, it can be argued that those two dimensions should be treated with priority when designing performance-based pay systems.

Interestingly, the analysis of the ad-hoc variables has furthermore revealed that particularly women with underage children are very prone to evaluate performance-based pay systems as stressful. This might be related to the sociological phenomenon that women with children tend to devote a lot of time and efforts to family and household responsibilities (Becker 1985; cited in Green & Heywood 2008, p.713). Consequently, the performance-related variability and unpredictability of the pay is likely to be perceived as endangering the stability of the income and in turn the livelihood and wellbeing of the family.

This leads to the conclusion that not only organizational justice, but also gender and family responsibilities have to be taken into consideration when designing performance-based pay systems. As mentioned above, the stress-causing effect of performance-based pay is not universalistic, but depends on the characteristics of certain demographic groups and the level of organizational justice applied in the company.

6.3. Performance-based pay, job control and job satisfaction and stress

The data has furthermore revealed that performance-based pay systems increase job satisfaction when employees perceive high job control. This result displays a valuable contribution to the research gap regarding the effect of job control on the relation between performance-based pay and job strain.

The result is consistent with Spector’s (1998; cited in Furnham 2005, p.359) control theory. In this context, having considerable autonomy in scheduling

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one’s work (time control) and in deciding on the methods to be used in carrying out the work (method control), provides employees with higher self-determination regarding their performance metrics, which constitutes a challenge to optimize their earnings, and in turn increases their level of job satisfaction. This means that employees have a more proactive input into the work process and feel more in control over the performance outcomes that ultimately determine their pay (Jackson et al. 1993; Wall et al. 1995).

Despite this positive contribution, it was not possible to confirm the influence of low job control on the relationship between variable pay and job satisfaction. Similarly, the study did not succeed in providing evidence for the effect of job control on the relationship between performance-based pay and stress, which was hypothesized based on Spector’s (1998; cited in Furnham 2005, p.359) control theory. Based on former research results regarding job control, this failure is however not all surprising: According to Karasek and Theorell as well as Sauter (1990, 1989; cited in Spell & Arnold 2007, p.735), empirical findings regarding the moderation effect of job control have been widely insignificant so far. One of the reasons suggested by Wall et al. (1996) might be the measurement of job control itself, which has been very inconsistent across different studies over the years, causing considerable biases and even the absence of significant results. In the present study, only the concept of autonomy has been taken into consideration, as the second dimension of job control, namely participative decision-making, had already been included in the construct of organizational justice. Consequently, results might have been different if the dimension of participation had been included in the construct of job control instead.

6.4. Stress and job satisfaction

As expected, the results have confirmed the third hypothesis of the study, namely that high levels of stress are related to low job satisfaction. This is in accordance with the results of previous researchers such as Wall et al. (1996), Wolpin et al. (1991) and Ramanathan (1991). Taking into consideration that low job satisfaction can cause high turnover, absenteeism from work and low morale and productivity, it is important for managers to minimize the stress-causing effects of performance-based pay systems as much as possible in order to reduce job dissatisfaction among employees and to avoid negative organizational consequences (Ramanathan 1991).

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6.5. Ad-hoc variables

Apart from the results mentioned above, the findings of the explorative analysis have revealed some additional, interesting facts about the demographic and work-related characteristics of those employees who evaluate variable pay as either stressful or satisfying.

In this context, employees with many years of experience are less prone to experience performance-based pay systems as stressful compared to employees with fewer years of experience. A possible explanation for this result may be the assumption that employees with many years of experience are more likely to be well-established in their job and to have a frequent customer base and complex, professional network. Consequently, highly experienced employees may be less concerned about the income insecurity related to commissions or the variability of the pay in general.

Furthermore, evidence has been provided that males, singles and people without children are, in general, highly satisfied with performance-based pay systems. As mentioned before, this may be related to sociological and psychological phenomena, including males being more result-oriented, competitive and willing to take risks (Furnham 2005), which makes performance-based pay systems more challenging and fulfilling to them. Likewise, singles and people without children are more satisfied with performance-based pay because they do not have to balance their efforts at work with family and household responsibilities (Becker 1985; cited in Green & Heywood 2008, p.713). Consequently, variable pay is evaluated more as an opportunity for higher earnings rather than a threat to the family livelihood.

Again, the results have shown that the relation between performance-based pay and job strain is not universalistic, but is contingent on various organizational and demographic conditions.

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7. Final reflection and conclusion

The main purpose of this study was to understand how organizational justice and job control can affect the impact of performance-based pay systems on job satisfaction and stress. Furthermore, it was to be investigated whether high levels of stress are related to lower job satisfaction.

The study has shown that the structural model, displayed in the theoretical framework, only holds to a certain extent, as not all hypotheses could be confirmed entirely. However, it is evident that the outcome of the study has highly theoretical as well as practical relevance for the contemporary business world and the academic research community.

The evidence that organizational justice moderates the relationship between performance-based pay and stress has not only confirmed the contingency assumption made by previous researchers, but has also contributed to fill the current research gap regarding the impact of potential moderating variables on the relationship between variable pay and job strain. Even though the moderation effect of job control could not be confirmed entirely, the positive impact of high job control on the relation between variable pay and employees’ job satisfaction constitutes a progress in understanding how the concept of control can influence the wellbeing-related outcomes of performance-based pay systems. Moreover, taking into consideration that the direction of the relationship between stress and job satisfaction has been quite ambiguous so far, the confirmation of a negative relationship between the two variables has contributed to a more stable base of empirical evidence and to higher trust into the hypothesized direction of this relationship.

Apart from the structural model, the study has furthermore revealed that different demographic and other workplace-specific conditions have an influence on the relation between performance-based pay and job strain. In this context, the gained knowledge about the influence of gender, family responsibilities as well as the degree of job experience and type of performance evaluation can help researchers to understand the background of employees and why they appraise certain working conditions such as performance-based pay as either a challenge or a threat.

In general, the study has provided comprehensive evidence regarding the causalities of different appraisal outcomes and in turn of different emotional reactions towards performance-based pay systems. According to Ganster et al.

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(2011), this kind of research has not been systematically explored yet, meaning that the study has provided new, valuable insights into the causalities of the functional and dysfunctional effects of performance-based pay.

Further research should address a wider range of moderating variables in order to get a more comprehensive understanding of the positive and negative effects that performance-based pay can have on job satisfaction and stress. For that purpose, researchers might investigate the impact of perceived difficulty and fairness of targets, information asymmetry, the degree of acceptance towards the performance evaluation system as well as the perception of uncertainty of external events. Apart from that, studies might also be applied to specific industries and occupations or even different cultures (north-south, east-west). Moreover, there is a need to explore the impact of job control in a more systematic way. In this context, future researchers should repeat this study with both autonomy and participative decision-making as two dimensions of the job control measure. Finally, for researchers proceeding from the field of business psychology, it would be interesting to investigate the effect of coping abilities and personality types on the relation between performance-based pay and job strain.

Apart from the theoretical and academic importance, the results of the thesis have practical relevance for the business world as well, as managers can use knowledge regarding the impact of demographic and work-related features to create less stressful and more satisfying pay systems, and in turn, to mitigate negative organizational impacts such as high turnovers, low productivity, absenteeism from work and reduced morale. In this context, the aim of the thesis was to derive managerial implications for the design of the compensation scheme and its underlying procedures:

Given the impact of high distributive justice on the relation between variable pay and job satisfaction, it is important for managers to ensure that the performance-based pay system constitutes a fair reflection of the efforts that employees have put into their work. In this regard, the application of individual performance evaluation can be a valuable tool to increase employees’ perception of distributive justice and in turn their level of job satisfaction. Apart from the fair distribution of outcomes, managers should furthermore ensure that the procedures used to determine the outcome of employees as well as all other procedures surrounding the pay system itself, such as goal setting and performance evaluation, are perceived as fair as well. Otherwise employees will experience considerable stress, which in turn can

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jeopardize the productivity of the company. In this context, it is recommended to give employees a voice in important decision-making, to offer them the opportunity to appeal decisions and misjudgments, and to apply procedures based on accurate, bias-free information. Based on the results, managers should furthermore refrain from withholding important information and explanations and instead establish trustful and open relationships with employees in order to create a pay system that is even less stress-inducing. Moreover, the importance of autonomy should not be underestimated either: Granting employees method and time control can make performance-based pay systems more satisfying and challenging. When designing compensation schemes, it is suggested that managers take the demographic and work-related characteristics, such as gender, family responsibilities and the level of experience of the workforce into account. In this context, managers should be very careful with applying performance-based pay systems to a workforce that is mainly comprised of women with children as they are very prone to evaluate variable pay systems as stressful. On the other hand, based on the study results, performance-based pay systems might be a good alternative for a workforce comprised of males, singles or people without family responsibilities as they tend to be in general very satisfied with performance-based pay schemes. In addition to that, the level of experience seems to play a key role in performance-based pay systems as well. In this regard, it is recommended to apply a lower degree of variable pay to employees who are relatively new on the job, as they are more prone to experience performance-based pay as stressful, than employees who are very experienced in their job. Finally, given the interrelation between stress and job satisfaction, it is important for managers to systematically address internal sources of stress in order to reduce job dissatisfaction among employees and to avoid negative organizational consequences (Ramanathan 1991). Based on the assumptions above, this can be achieved by incrementing organizational justice within the company and by adapting the compensation scheme to the demographic characteristics of the workforce. Furthermore, stress management and intervention programs in form of workshops and relaxation training might be helpful to improve the ability of employees to cope with stressful working conditions (Cooper et al. 2001; Furnham 2005).

In conclusion, the study has provided a more comprehensive understanding regarding the impact of different work-related factors such as organizational justice and job control on the relation between performance-based pay and job strain. In addition to that, it has been demonstrated that the demographic

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features of the workforce itself can influence the employees’ emotional reaction towards variable pay systems substantially. In this context, the study has provided valuable, theoretical knowledge and expertise. Nevertheless, it is important to mention that the study has limitations, namely that other aspects, such as different cultural backgrounds and personalities, can additionally bias the way how each and every employee appraises the impact of performance-based pay and organizational procedures on his or her wellbeing. Consequently, the managerial implications mentioned above should be merely considered as valuable “best practice”-recommendations for designing a less stressful and more satisfying compensation scheme, but not, in any case, as universal “one size fits all”-solutions. This indicates that managers should always have in mind that the success of performance-based pay systems is contingent on their adaption to situational, demographic, employee-specific and organizational factors.

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Appendix

Appendix 1: The questionnaire

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Appendix 2: Questionnaire coding

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Appendix 3: The measurement model

Table 15: The factor loadings of the latent constructs

Table 16: Cross-loadings between the latent variables

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Appendix 4: Further results of the structural model

Table 17: Moderation effect of organizational justice (PBPS – Job Satisfaction)

Table 18: Moderation effect of procedural justice (PBPS – Job Satisfaction)

Table 19: Moderation effect of interactional justice (PBPS – Job Satisfaction)

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Table 20: Moderation effect of interactional justice (PBPS – Stress)

Table 21: Moderation effect of job control (PBPS – Stress)