Implications for Performance Pay and Employee Commitment

Research by Turnley, W. et al ,. (2003) suggests that psychological contract fulfillment results in increased employee performance both in terms of in-role and citizenship behavior. Likewise, psychological contract breach is associated with poorer employee performance. Thus, this research further supports the idea that the outcomes of psychological contract breach are likely to extend beyond the hurt feelings, sense of betrayal, and poor job attitudes experienced by employees who perceive that their organizations have not lived up to their commitments (Turnley & Feldman, 1999a). Indeed, because employee contributions to the organization are likely to decrease, psychological contract breach may have a negative impact on organizational performance in the long run. This research yields only limited support for the idea that attributions play an important role in determining employees’ responses to psychological contract breach.

Specifically, when breaches concern pay, there is at least some evidence that employees’ attributions matter. Thus, when organizations cannot meet employee expectations regarding compensation, it may be desirable for the organization to effectively communicate the reasons for the discrepancy (especially if there is a legitimate reason for the organization’s failure to honor its commitments). Such communication could serve to mitigate against employees decreasing their commitment to the organization and their efforts on its behalf. However, the attributions that employees made regarding why breach occurred on the relationship dimension had less of an impact on their behavior. To the extent that these results are generalizable, it represents bad news for

organizations. In effect, such a finding suggests that employees typically respond negatively to psychological contract breach, even in those instances when they do not believe the organization intentionally reneged on its commitments.

The psychological can be categorised into 2 types the relational psychological contract, which indicates long term exchanges that maintain employer employee relationships (e.g. obligations about personal support and meaningful jobs and the transactional psychological contract which refers to specific monetisable exchanges over a limited period of time (e.g. obligation about high pay and merit pay which includes PRP). (Kratz, Robinson & Rousseau, 1994). To some extent the relationship between employer and employees can be seen to as transactional due to the provision of wages, but the introduction of performance related pay into the reward package could potentially turn the relationship between employee and employer to a transactional psychological contract as the relationship now based on bought commitment rather than enduring commitment which is gained through a relational contract.

The Research by Turnley, W. et al, (2003) suggests that psychological contract fulfillment results in increased employee performance both in terms of in-role and citizenship behavior. Likewise, psychological contract breach is associated with poorer employee performance. This suggests that in event of a breach of the psychological contract by the employers, the employee’s performance would reduce thereby affecting the PRP scheme in operation in the organisation and leading little or no performance payout. This indicates that performance pay schemes have a direct link between the switch from a relational to a transactional psychological contract due to the move from enduring commitment to bought commitment.

2.9 Reward and Culture

Louis (1980) defines culture as a set of understanding or meanings shared by a group of people. The meanings are largely tacit among members, are clearly relevant to a particular group and are distinctive to the group. These meanings are passed onto new group members. Also Williams et al., (1993) explains that culture is a commonly held and relatively stable beliefs, attitudes and values that exist within an organisation. Hofstede (1991) defined culture as ‘the software of the mind’. He helps us think about cultures impact on the ways in which ‘collective mental programming’ distinguishes a category of people from another.

Culture and not nature according to Michael Foucault govern human societies. The accumulated set of common experiences, beliefs and values that members of groups of people call on to address the challenges they encounter in the world all consist of their cultural influences. This is very important in designing and applying employee reward strategies. Organisations need to take into consideration the cultural similarities and differences between employees, differences arising from race, ethnic and tribal origins (IPD Guide on International Reward, 1999).

A very important challenge for firms is the impact of culture on rewards, as there is profound impact of dominant cultural influences resulting from the transference of western reward practices into the African culture. Consideration must be given to ‘the range of business transitions that are breaking up national reward systems’ (Sparrow, 1999). Sparrow (1999) also states that he believes that approaches and attitudes towards the drive for flexibility in employment relationships and work organisations are strongly influenced by the national culture of any country.

Table 9: Four Dimensions of Culture in Relation to Reward and Recognition

Cultural Factors Rewards/Recognition Issues

Power Distance: the extent to which people accept an unequal distribution of power and authority.

Tolerance of inequality

Range of income differentials

Masculinity: the degree to which the dominant values of society favour heroism, assertiveness and material achievement or lean towards relationships, caring, nurturing and intrinsic rewards.

Potential for competition between individuals and business units

Performance link

Individualism: the extent to which peoples self- image is as a detached individual or as a member of the social institution to which they belong (family, work group, organisation)

Feasibility of group rewards

Uncertainty avoidance: the degree to which people feel at ease with , or threatened by , ambiguity and uncertainty

Income predictability importance Standards of performance

Ease of pay performance separation

Source: Adapted from Hofstede (1991) & IPD Guide on International Reward (1999).

A number of models have been developed to assist the process of sensing cultural differences. One of the oldest and well known is that developed by Geert Hofstede. Bento and Ferreira (1992) extended Hofstede’s work in terms of the impact and effect on rewards of different cultural assumptions and preferences (IPD Guide on International Reward, 1999).

According to research carried out by Hofstede in 1991 about the analysis of national cultural differences he found that Asian and African countries had high power distance values low power distance was found to be a feature of the USA, the UK and its former colonies. He also found that nearly all wealthy countries except Singapore and Hong Kong scored highly on individualism while nearly all poor countries were found to be collectivist in nature.

A shocking find by Hofstede (1991) was that there was a mixture of poor and rich countries when the values of short-termism and long-termism were measured. He found that the USA, Pakistan, Zimbabwe, Nigeria, UK, Canada and the Philippines tended to be more short-termist in planning when compared to the Netherlands which was the most long-termist, China, Brazil, South Korea, Taiwan and Switzerland (Brown, A. 1998).

Many commentators have questioned whether there is a ‘single best culture’ that will bring success to all commercial organisations. There are some general features of organisational culture that are likely to be associated with organisational success in the view of Kotter and Heskett (1992), a culture in which there is a strong consensus that

1) Large stakeholders be valued

2) Leadership at all levels is important to success

3) Engages in practices that fit a sensible strategy for the organisations context will enhance economic performance.

One of the most widely cited hypothesis is that a strong culture enables an organisation to achieve excellent performance. Deal and Kennedy (1982:15) have argued that: ‘the impact of a strong culture on productivity is amazing. In extreme we estimate that a company can gain as much as one or two hours of productive work per employee per day’. It is not always spelled out how a strong culture leads to exceptional organisational performance by commentators but there are three key arguments:

1. Goal alignment is facilitated by a strong organisational culture. The idea behind this is that all staff share the same basic assumptions they can agree on not just on what goals to pursue but also on the means by which they should be achieved.

2. A strong culture leads to high levels of employee motivation. There are 2 arguments here that. It has been suggested that there is something intrinsically appealing about strong cultures that encourage people to identify with them and secondly strong culture organisations incorporate practices which make working for them rewarding.

3. A strong culture organisation is better able to learn from its past. The suggestion here is that an organisation which is able to reflect on its development and draw on a stock of knowledge encoded in stories, rules of thumb is likely to perform better than competitors who are unable to learn from its past successes and failures (Adapted from Brown, D. 1998).

Other commentators have argued that it is wrong to concentrate on organisational culture when considering performance as particular industry sectors have their own set of cultures that need to be studied in order for a complete picture for organisational

effectiveness to be revealed. Also other groups put a lot of emphasise on national culture, and attempts have been made to explain the rise of South Asian economies and the decline of the British economy by reference to their national culture differences. It can also be noted that culture itself does not provide a direct explanation for organisational performance, as there is an indication of a complex and dynamic relationship between organisational culture, industry sector culture, national culture, organisational structure and performance (Brown, 1998; Whipp et al., 1989)