LOWERING FLOORS AND RAISING CEILINGS: A LONGITUDINAL ASSESSMENT OF THE EFFECTS OF AN EARNINGS-AT-RISK PLAN ON PAY SATISFACTION

The attitudes of 101 bank employees were measured before and after the implementation of an earnings-at-risk (EAR) incentive pay plan which reduced base pay and increased employee risk and uncertainty with respect to total pay. Pay outcome satisfaction and pay process satisfaction both declined significantly over time, but the decrease in pay outcome satisfaction was the greater of the two. An examination of pay satisfaction antecedents at both points in time revealed relatively stable across-time relationships and provided information about some of the reasons for the changes. Perceived reward-to-effort ratio, which declined significantly over time, influenced both dimensions of pay satisfaction at both points in time. Perceived understanding of the pay system, which also declined over time, had a somewhat greater influence on pay process satisfaction than on pay outcome satisfaction, particularly at Time 2. In contrast to actual pay levels, changes in incentive and base pay amounts added more explained variance to the pay outcome satisfaction regression model. The study points out the potential for negative employee reactions to EAR incentive plans, and indicates that managers must ensure that employees understand these systems and feel that EAR plans will reward them equitably for their efforts.