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   2011, Vol. 43 Issue (10) : 1198-1210     DOI:
The Effects of Pay System Frame and Performance Appraisal on Individual’s Acceptance of Pay for Performance Plan
HE Wei;LONG Li-Rong
School of Management, Huazhong University of Science and Technology, Wuhan, 430074, China
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Abstract  The compensation system of pay for performance has been widely applied by organizations as a mean to attract, motivate and sustain employees in modern business society. In theoretical field, too much attention has been drawn to the incentive effects of PFP on both individual and organizational performance while only a little work were conducted to explore the antecedents of employees’ reaction and acceptance of the PFP plan. Considered the risky context of PFP plan, this study initially examined two different pay system frame effects on individual’ acceptance of PFP plan in perspective of behavioral decision theory. More specifically, we hypothesized that an individual may have an anticipated income frame in which a gain/loss frame is formed when actual income level is more/less than his anticipated income level respectively. Also, two different payment modes of base + performance pay and total – performance pay may lead an individual to form the positive and negative payment frame respectively. In situation of the loss frame in anticipated income and the negative frame in payment mode, individuals may more likely to accept the risky PFP plan according to rules of framing effect. Finally, the moderating effects of performance appraisal mode (open-goal and closed-goal) on above relationships were explored as well.
A scenario experiment was used to test the hypotheses with a 2×2 between-subjects design, depicting two payment modes of positive/negative frame and two performance appraisal modes of open- and closed- goal. 304 undergraduates from business and economic related majors were recruited and randomly assigned to each one of the four scenarios. In consideration of that the dependant variable, whether choose a PFP plan or a fixed pay plan, is a dummy variable, we implemented logistic regression to test hypotheses with controlling risk aversion, confidence of performance, self-efficacy, and other demographic attributes.
The results of our study revealed that individuals were more likely to choose the risky PFP plan over the fixed pay plan when they are in situations of the loss frame of income anticipation and the negative payment mode, supporting the main pay system frame effects hypothesized in this study. Also, those two pay system frame effects on individuals’ acceptance of PFP plan were much weaker when an open-goal oriented performance appraisal system was applied. These findings extended extant research of behavioral decision to organizational compensation management and enriched the existed studies in area of employees’ compensation attitudes by introducing a new theoretical perspective as well. The practical implications of this study for organization change of performance pay were discussed.
Keywords pay for performance      risky choice      framing effect      performance appraisal     
Corresponding Authors: LONG Li-Rong   
Issue Date: 30 October 2011
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HE Wei
LONG Li-Rong
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HE Wei,LONG Li-Rong. The Effects of Pay System Frame and Performance Appraisal on Individual’s Acceptance of Pay for Performance Plan[J]. , 2011, 43(10): 1198-1210.
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