How does variable pay relate to pay satisfaction among Canadian workers?

Abstract

PurposeThis study aims to determine the effect of individual and group variable pay plans on pay satisfaction among Canadian workers from six occupational groups.Design/methodology/approachTheoretical foundations rest on the discrepancy model of pay satisfaction and equity theory. Canadian national data from the Workplace and Employee Survey (WES) were used to test the hypotheses.FindingsThe results show that individual and group variable pay plans act differently on workers’ pay satisfaction. For individual pay plans, being eligible for a variable pay plan, and thereby having one's performance rewarded, has no effect on pay satisfaction. Workers on variable pay plans are more satisfied with their pay only when they receive performance‐dependent payouts. In short, they want to be rewarded not only for performance but also for effort. For group pay plans, not receiving payouts has no negative effect on pay satisfaction. In contrast, receiving payouts creates pay dissatisfaction. Individual and group plans have a distinct effect on pay satisfaction by occupational group.Practical implicationsManagers can make informed decisions regarding the adoption of variable pay plans and their implementation.Originality/valueThis study sheds light on the link between variable pay and pay satisfaction. It improves our understanding of the mechanism by which variable pay affects pay satisfaction: the effort – performance – pay link (i.e. risk and perceived fairness of the allocation).