IC, 2011 – 7(2): 213-235 - Online ISSN: 1697-9818 - Print ISSN: 2014-3214
http://dx.doi.org/10.3926/ic.2011.v7n2.p213-235
Interactional justice as a mediator of the relationship between
pay for performance and job satisfaction
Azman Ismail, Azizul Hakim Mashkuri, Ahmad Zaidi Sulaiman, Wong Kee Hock
National Defence University of Malaysia (Malaysia)
azisma08@gmail.com, azizulhm@gmail.com, zaidi@upnm.edu.my,
jeekyelene@upnm.edu.my
Received July, 2010
Accepted June, 2011
Abstract
Purpose: This study was conducted to examine the effect of pay for
performance and interactional justice on job satisfaction.
Design/methodology/approach: A survey method was used to collect
107 usable questionnaires from employees who work in the US subsidiary
manufacturing firm operating in a silicon valley in East Malaysia, Malaysia.
Findings: The outcomes showed two important findings: first, relationship
between interactional justice and adequacy of pay significantly correlated
with job satisfaction. Second, relationship between interactional justice and
participation in pay systems significantly correlated with job satisfaction.
Statistically, this result confirms that interactional justice does act as a
mediating variable in the pay for performance models of the studied
organization.
Originality/value: Most previous research tested a direct effect of pay for
performance on job satisfaction. Unlike such research approach, this study
discovers that interactional justice has strengthened the effect of pay for
performance on job satisfaction in a compensation system framework.
Keywords: pay for performance, interactional justice, job satisfaction
Jel Codes: L20
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1. Introduction
Compensation is a broad construct that may be defined from language and
organizational perspectives. In terms of language, it is often defined as salary and
wage,
remuneration,
reward
and/or
pay
system.
These
terms
are
used
interchangeably in organizations, but their meanings suggest to the same thing
(Bergmann & Scarpello, 2002; Milkovich & Newman, 2010). In an organizational
context, compensation is viewed as an important human resource management
issue (Ismail & Zakaria, 2009; Lawler, 2000) that may be defined as an employer
designs and administers various types of pay systems for rewarding its employees
who work in different and/or similar job groups (Anthony, Perrewe & Kacmar,
1996; Henderson, 2009; Ismail, Guatleng, Cheekiong, Ibrahim, Ajis & Dollah,
2009). Traditionally, most employers design compensation system based on
internal organizational variables whereby the type, level and/amount of pay are
allocated to employees based on job structure. This perspective emphasizes on
pays based on tenure, length of service, seniority, and/or membership and service
(Anthony et al., 2002; Florin, Hallock & Webber, 2010; Milkovich & Newman,
2010). This compensation practice is often related to Taylorist’s product where it is
seen as suitable for manufacturing-based industries operating in stable and
predictable business conditions and focus on organizational tactical objectives as a
direction (Anthony et al., 1996; Henderson, 2009; Ismail et al., 2009).
In an era of globalization, many organizations have shifted the paradigms of
compensation system from a traditional job based pay to organizational strategy
and culture. Under this perspective, compensation system is designed based on
external organizational variables whereby the fluctuation of pay types, levels
and/amounts are allocated to employees based on merits, knowledge, skills and/or
performance (Lawler, 1995; 2000; Ismail & Zakaria, 2009; Milkovich & Newman,
2010). Although the rules for distributing pays based on performance and job are
different, they may be used as complementary to attract, retain and motivate
competent employees to support organizational and human resource management’s
strategies and goals (Anthony et al., 1996; Lawler, 1995, 2000).
Pay for performance has two major types: pay for group performance (team based
pay and gain-sharing) and pay for individual performance (e.g., merit pay, lump
sum bonus, promotion based incentives and variable pay) (Henderson, 2009;
Milkovich & Newman, 2010). However these pay systems have different types, they
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use the similar criterion to allocate pays, which is when an employer rewards
additional pays to basic pay in order to meet high performers’ needs and
expectations (Chang & Hahn, 2006; Lawler, Ledford & Chang, 1993; Lee, Law &
Bobko, 1999; Wei & Rowley, 2009). Under this pay system, the rules for
distributing rewards, the fluctuations of pay levels and structures are now
contingent upon the level of performances, skills, knowledge and/or competency
exhibited by the employees and not the nature of their job structure (AmuedoDorantes & Mach, 2003; Appelbaum & Mackenzie, 1996; Ismail & Zakaria, 2009;
Lee et al., 1999). If management can properly implement this pay system this will
strongly attract, retain and motivate employees to achieve the major objectives of
the organizational pay system: efficiency (i.e., improving performance, quality,
customers, and labor costs), equity (i.e., fair pay treatment for employees through
recognition of employee contributions and employees’ needs) and compliance with
laws and regulations (Gomez-Mejia & Balkin, 1992a, 1992b; Milkovich & Newman,
2010). Hence, it may motivate employees to sustain and increase organizational
competitiveness in a global marketplace (Appelbaum & Mackenzie, 1996; Lawler,
2000).
Recent studies about compensation management based on a direct effects model
highlights that the ability of management to properly implement pay for
performance may positively affect job satisfaction (Bhakta & Nagy, 2005;
McCausland, Pouliakas & Theodossiou, 2005). Many scholars like Fay and
Thompson (2001), Lee et al. (1999), and Ismail, Hock and Sulaiman (2007) state
that pay for performance has two salient features: participation in pay systems and
adequacy of pay. According to a high performing human resource practice,
participation in pay systems is often seen as an employer who encourages
employees in different hierarchical levels and categories to discuss and share
information-processing, decision-making, and/or problem-solving activities related
to pay systems (Belcher & Atchison, 1987; Ismail et al., 2007). Most organizations
practice two major participation styles: participation in pay design (e.g., start-up
stages of pay system) and participation in pay administration (e.g., operation
stages of pay system) (Belfield & Marsden, 2003; Kim, 1996, 1999; Lee et al.,
1999). Participation in the design of pay systems refers to employees who are
given more opportunity to provide ideas in establishing pay systems to achieve the
major goals of its system, stakeholders needs and/or organizational strategy
(Gomez-Mejia & Balkin, 1992a, 1992b; Lawler et al., 1993).
Participation in the administration of pay systems refers to employee participation
in both input and output. Participation in input means employees provide
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suggestions
to
determine
the
enterprise’s
goals,
resources,
and
methods.
Participation in output means employees are permitted to share the organization’s
rewards in profitability and/or the achievement of productivity objectives (CoyleShapiro, Morrow, Richardson & Dunn, 2002; Kim, 1996, 1999). For example, a prosocial
organisational
behavior literature highlights that
making constructive
suggestions in pay for performance system (e.g., merit pay and gain-sharing plans)
will encourage employees to be honest in making personal contributions, this may
lead to improved job satisfaction (Giacobbe-Miller et al., 1998; Lawler, 1995; Mani,
2002).
Many scholars often interpret adequacy of pay from cultural, organizational and
individual perspectives. In terms of cultural perspective, an individualistic culture
perceives adequacy of pay as equity (e.g., equitable or inequitable pay) whereas a
collective culture perceives adequacy of pay as equality, pay for the length of
service or seniority and pay for individuals’ needs (Giacobbe-Miller, Miller &
Victorov, 1998; Money & Graham, 1999). In an organization view, adequacy of pay
is often defined as the type, level and/or amount of pay which is provided by an
employer to its employee who work in different job groups based on the
organizational
policy
and
procedures
(Anthony,
Perrewe
&
Kacmar,
1996;
Henderson, 2009). From an individual perspective, adequacy of pay is often viewed
based on a social comparison theory, which posits that an individual perceives the
adequacy of the type, level and/or amount of pay based on a comparison between
what he/she receives and what he/she expects. An individual will perceive the type,
level and/or amount of pay as adequate if he/she views that the pays are provided
equitable with his/her contribution (e.g., ability to perform job, merit, skills and/or
performance) (Adams, 1963, 1965; Skarlicki & Folger, 1997; Sweeney & McFarlin,
1993).
Surprisingly, a thorough review of such relationships based on an indirect effects
model reveals that effect of pay for performance characteristics of job satisfaction is
indirectly affected by feelings of interactional justice (Ismail & Zakaria, 2009;
Pettijohn, Pettijohn & d’Amico, 2001). According to organizational behavior
scholars, such as Greenberg (2003), McShane and Von Glinow (2006) and Skarlicki
and
Folger
(1997)
define
interactional
justice
as
an
important
aspect
of
organizational justice theories, which states that an individual is often sensitive to
the quality of interpersonal treatment that they receive from their managers during
the enactment of organizational procedures. If an individual perceives that decision
makers (e.g., manager or supervisor) practice fair treatments (e.g., shows respect
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and accountable) in performance appraisal systems, this will invoke employees’
feelings of interactional justice.
Within a compensation management
framework, many scholars think that
participation in pay systems, adequacy of pay, interactional justice and job
satisfaction are distinct constructs, but highly interrelated. For example, the ability
of managers to use fair treatments in determining the type, level and/or amount of
pay based on performance ratings and appreciating employees’ constructive
suggestions in pay for performance plans will strongly invoke employees’ feelings of
interactional justice. As a result, it may lead to an increased job satisfaction (Bies,
Shapiro & Cummings, 1988; Greenberg, 1996, 2003; Tang & Sarsfield-Baldwin,
1996; Skarlicki & Folger, 1997). Although the nature of this relationship has been
studied, little is known about the mediating role of interactional justice in pay for
performance literature (Ismail & Nurzawani, 2009; Pettijohn et al., 2001). Many
scholars reveal that interactional justice is less emphasized because previous
studies have over emphasized on a segmented approach and the direct-effect
model in analyzing pay for performance and job satisfaction relationships, as well
as given less attention on the significance of interactional justice feelings in
developing pay for performance models. Consequently, findings from these studies
have not captured the views of employees’ feelings of interactional justice in
explaining
the
effectiveness
of
pay
for
performance
models
in
dynamic
organizations (Hundley & Runde, 2008; Ismail & Zakaria, 2000, Money & Graham,
1999; Pettijohn et al, 2001). Therefore, it motivates the researchers to explore the
issue.
This study has four major objectives: first, to measure the relationship between
participation in pay systems and job satisfaction. Second, to measure the
relationship between adequacy of pay and job satisfaction. Third, to measure the
mediating effect of interactional justice in the relationship between participation in
pay systems and job satisfaction. Fourth, to measure the mediating effect of
interactional justice in the relationship between adequacy of pay and job
satisfaction.
2. Hypotheses
Theoretical and empirical evidences have been employed to support two types of
relationships: 1) relationship between pay for performance and job satisfaction;
and 2) relationship between pay for performance, interactional justice and job
satisfaction.
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Relationship between pay for performance and job satisfaction
Previous studies used a direct effects model to examine the type of pay system
using different samples, such as 1200 employees from twenty six department
(Katzell, Thompson & Guzzo, 1992), 118 MBA voluntary students from a
Midwestern university (Bhakta & Nagy, 2005), and 9,831 different individuals in
United Kingdom (McCausland, Pouliakas & Theodossiou, 2005). These studies found
that the ability of managers to properly design and administer pay for performance
plans (i.e., participation in pay systems and adequacy of pay) had increased job
satisfaction in the organizations (Bhakta & Nagy, 2005; Katzell, Thompson & Guzzo,
1992;
McCausland, Pouliakas & Theodossiou, 2005). Therefore,
it
can
be
hypothesized that:
H1: There is a positive relationship between participation in pay systems and job
satisfaction
H2: There is a positive relationship between adequacy of pay and job satisfaction
Relationship between participation in pay systems, interactional justice
and job satisfaction
Further studies about pay administration were implemented using different
samples, such as 115 sales people (Pettijohn, Pettijohn & d’Amico, 2001), 2466
employees (Bradley, Petrescu & Simmons, 2004), and 132 employees in Malaysian
GIATMARA centers (Ismail & Zakaria, 2009). Findings from these studies reported
that the willingness of managers to allow employee participation in making
decisions about pay rates and levels (e.g., open discussion, better explanations,
and opportunity to bargain) had increased employees’ feelings of interactional
justice. Consequently, it could lead to an increased job satisfaction in the
organizations (Bradley, Petrescu & Simmons, 2004; Ismail & Zakaria, 2009;
Pettijohn, Pettijohn & d’Amico, 2001).
Relationship between adequacy of pay, interactional justice and job
satisfaction
Recent studies used an indirect effects model to investigate pay differentials and
found that effect of pay for performance on job satisfaction is indirectly affected by
interactional justice. For example, recent studies about pay distribution were
conducted using different samples, such as employees of 150 mid-Atlantic
insurance companies (Schappe, 1998), U.S. group (153 sales representatives and
146 sales managers) and Japanese group (175 of sales representatives and 93
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sales managers) (Money & Graham, 1999), 132 employees in Malaysian GIATMARA
centers (Ismail & Zakaria, 2009). Outcomes of this study showed that the ability of
managers to appropriately provide the levels of pay based on merit had increased
employees’ feelings of interactional justice about the pay systems. As a result, it
could lead to an enhanced job satisfaction in the organizations (Ismail & Zakaria,
2009; Money & Graham, 1999; Schapped, 1998).
The empirical studies are consistent with the notion of interactional justice theories,
namely Adams’ (1963, 1965) equity theory, Leventhal’s (1976) self-interest model,
Lind and Tyler’s (1988) group value model, and Folger, Konovsky and Cropanzano’s
(1992) due-process appraisal system. For example, Adams’ (1963, 1965) equity
theory explicitly posits that when employees perceive the interaction between
output and input ratio as equitable this may lead to increased positive employee
outcomes. Conversely, when employees perceive the interaction between output
and input ratio is not equitable this may cause negative employee outcomes
(Adams’, 1963, 1965; Allen & White, 2002; Sweeney & McFarlin, 1993). Besides
that, Leventhal’s (1976) self-interest model suggest six justice rules in making
decisions: decisions based on accurate information, apply consistent allocation
procedures, do correct decisions, suppress bias, practice moral and ethical
standards in decision-making and ensure allocation process meet recipients’
expectation and needs.
Moreover, Lind and Tyler’s (1988) group value model suggest three types of
relational judgments about authorities: standing or status recognition (e.g.,
assessments of politeness, treatment with dignity, and respect individuals’ rights
and entitlements), neutrality (e.g., decision-making procedures are unbiased,
honest and decision based on evidence), and trust (e.g., motives of the decisionmaker are fair and reasonable or otherwise). Further, Folger et al. (1992) dueprocess appraisal system suggest three justice characteristics; adequate notice
(e.g., explanation, discussion and feedback about performance criteria), fair
hearing (e.g., informing performance assessments and their procedures through a
formal review session) and judgment based on evidence (e.g., applying consistent
performance criteria and honesty and fairness principles, as well as providing better
explanations about performance ratings and reward allocations). If these justice
decisions are properly done by managers, this may determine the adequacy of pays
and respect employees’ views in the process of distributing the type, level and/or
amount of pay based on performance ratings. These practices will strongly invoke
employees’ feelings of interactional justice, where this may lead to higher job
satisfaction (Money & Graham, 1999; Pettijohn et al., 2001).
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The literature has been used as foundation to develop a conceptual framework for
this study as shown in Figure 1.
Figure 1: Conceptual Framework
Based on the framework, it can be hypothesized that:
H3: Interactional justice positively mediates the effect of participation in pay
systems on job satisfaction
H4: Interactional justice positively mediates the effect of adequacy of pay on job
satisfaction
3. Methodology
Research design
This study used a cross-sectional research design that allowed the researchers to
integrate compensation management literature, the in-depth interview, the pilot
study and the actual survey as a main procedure to gather data. Using such
methods may gather accurate data, decrease bias and increase quality of data
being collected. The use of such methods may gather accurate and less biased data
(Cresswell, 1998; Sekaran, 2003). The US subsidiary manufacturing firm is
established and operated its business in a free trade zone in East Malaysia,
Malaysia. At initial stage, this firm was established to focus on customized
semiconductor packaging and hard disk drives. Currently, it almost dominates the
electronic export and the largest airfreight exporter in Malaysia. In order to sustain
and support the organizational competitiveness, a pay for performance system has
been implemented to cope with dynamic organizational changes.
At the initial stage of data collection, the in-depth interviews were conducted
involving seven supporting staff and HR executives who have working experiences
more than ten years in the organizations. They are selected based on purposive
sampling where they have good knowledge and experiences in compensation
management. The information gathered from the interviews shows that the
organization’s compensation and benefits packages have been designed by USA
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consultants to attract, retain and motivate employees to support the organization’s
strategy and goals. Performance based pay has been implemented at all levels in the
organization. In this pay system, performance appraisal, achieving the job targets
set up by supervisors and cost saving have been used to assess employee
performance. Based on these assessments, high performers will be provided
additional rewards in terms of merit increment, discretionary bonus and spot
bonus.
The main features of this pay system are pay adequacy and pay participation. In
terms of adequacy of pay, percentages of merit increment and discretionary bonus
are given based on different performance levels. An average merit increment from
basic salary for non-executive employees is four percent. Meanwhile, an average
merit increment from basic salary for executives is eight percent. With respect to
pay participation, employees’ views are sought to suggest the various types of pay
(e.g., spot bonus, incentive program and pay preferences) while attending
meetings organized by the management of this organization. Majority employees
perceive that the ability of HR managers to properly determine the type, level
and/or amount of pay according to performance, and appreciate employee
participation in the process of allocating pay systems have increased employees’
perceptions of procedural justice. Consequently, it may lead to increased job
satisfaction. Even though the nature of this relationship is interesting, little
empirical research is done in this country (Ismail & Zakaria, 2009).
Information gathered from the interviews was transcribed, categorized and
compared with the relevant pay for performance literature. Next, the triangulated
outcomes were used as a guideline to develop the content of the survey
questionnaire for a pilot study. Thus, a pilot study was done by discussing the
importance, relevance, clarity and suitability of questionnaires with 30 employees.
Their
opinions
were
sought
to
verify
the
content
and
format
of
survey
questionnaires for an actual study. Back translation techniques were used to
translate the survey questionnaires into English and Malay languages in order to
increase the validity and reliability of research findings (Cresswell, 1998; Sekaran,
2000).
Measures
The survey questionnaire used in this study had 4 sections. Firstly, participation in
pay systems was measured
using
5 items that
were adapted
from
pay
administration literature (Greenberg, 2003; Milkovich & Newman, 2010; Pettijohn,
et al., 2001). Secondly, adequacy of pay was measured using 5 items that were
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adapted from pay distribution literature (Gomez-Mejia & Balkin, 1992a, 1992b;
Kim, 1996, 1999; Milkovich & Newman, 2007). Thirdly, interactional justice was
measured using 8 items that were modified from organizational justice literature
(Adams, 1963, 1965; Allen & White, 2002; Cohen-Charash & Spector, 2001;
Greenberg, 2003; Money & Graham, 1999; Pettijohn et al., 2001; Skarlicki &
Folger, 1997). Finally, job satisfaction was measured using 8 items that were
modified from job satisfaction literature (Oldham, Hackman & Stepina, 1978; Warr,
Cook & Wall, 1979). All items used in the questionnaires were measured using a 7item
scale
ranging
from
“strongly
disagree/dissatisfied”
(1)
to
“strongly
agree/satisfied” (7). Demographic variables were used as controlling variables
because this study focused on employee attitudes.
Unit of analysis and sampling
Participants
in
this
study
consisted
of
employees
of
the
US
subsidiary
manufacturing firm operating in a free trade zone in East Malaysia, Malaysia. The
researchers had obtained an official approval to conduct the study from the head of
the target organization and also received advice from him about the procedures of
conducting the survey in his organization. Next, the survey questionnaires were
randomly distributed to 250 employees in the organization. Of the total number,
132 usable questionnaires were returned to the researchers, yielding 52.8 percent
of the response rate. The number of this sample exceeds the minimum sample of
30 participants as required by probability sampling technique, showing that it may
be analyzed using inferential statistics (Sekaran, 2003).
Data analysis
A Statistical Package for Social Science (SPSS) version 16.0 was used to analyze
the data. Firstly, exploratory factor analysis was used to assess the validity and
reliability of measurement scales (Hair et al., 1998). Secondly, Pearson correlation
analysis and descriptive statistics were conducted to determine the collinear
problem, further confirm the validity and reliability of constructs (Tabachnick et al.,
2001; Yaacob, 2008). Finally, multiple regression analysis was recommended to
assess the magnitude and direction of each independent variable, and vary the
mediating variable in the relationship between many independent variables and one
dependent variable (Foster, Stine & Waterman, 1998). Baron and Kenny (1986)
suggest that to test mediating effect in the hypothesized model, the researcher
should estimate the three following regression equations: firstly, regressing the
mediating variable on the dependent variable. Secondly, regressing the dependent
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variable on the independent variable. Thirdly, regressing the dependent variable on
both the independent variable and on the mediating variable.
Based on this procedure, a mediating variable can be easily considered when it
meets three conditions: first, the independent variable should be significantly
correlated with the mediating variable. Second, the independent variable and the
mediating variable should also be significantly correlated with the dependent
variable. Third, the mediating variable should be significantly correlated with the
dependent variable. If this condition is properly implemented, a previously
significant effect of independent variable should be reduced to non-significance or
reduced in terms of effect size after the inclusion of mediator variable into the
analysis (Wong, Hui & Law, 1995). In this regression analysis, standardized
coefficients (standardized beta) were used for all analyses (Jaccard, Turrisi & Wan,
1990).
4. Results
Respondents’ characteristics
Table 1 shows that majority respondents were males (75%), ages between 21 to
29 years old (74.8%), diploma holders (30.8%), working experiences less than one
year (15%), and monthly salary between RM1000 to 2000 (54.2%).
Gender (%)
Male
Female
Age (%)
< 20 years
21 - 29 years
30 - 39 years
> 40 years
75
32
5.6
74.8
17.8
10.6
Education (%)
Degree
Diploma
Higher School Certificate
Malaysia Certificate of Education
Others
Length of Service (%)
< 1 year
2 - 5 years
11-15 years
> 16 year
9.3
30.8
11.2
35.5
13.1
15.0
5.3
1.9
4.7
Salary* (%)
< RM1000 year
35.5
RM1000 - 2000
54.2
RM2001 - 3000
10.3
> RM3000
5.6
* RM=Malaysian Ringgit
Table 1: Respondents’ characteristics (N=107)
Validity and reliability analysis
Table 2 and Table 3 show the results of validity and reliability of the measurement
scales. A factor analysis with direct oblimin rotation was done for four variables
with 21 items. Next, the Kaiser-Mayer-Olkin Test (KMO) which is a measure of
sampling adequacy was conducted for each variable and the results indicated that it
was acceptable. Relying on Hair et al., (2006) and Nunally and Bernstein’s (1994)
guideline, these statistical analyses showed that (1) all research variables exceeded
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the acceptable standard of Kaiser-Meyer-Olkin’s value of 0.6, (2) all research
variables were significant in Bartlett’s test of sphericity, (3) all research variables
had eigenvalues larger than 1, (4) the items for each research variable exceeded
factor loadings of 0.40 (Hair, Anderson, Tatham & Black, 1998), and (5) all
research variables exceeded the acceptable standard of reliability analysis of 0.70
(Nunally & Bernstein, 1994). These statistical results showed that the measurement
scales used in this study met the acceptable standard of validity and reliability
analyses as shown in Table 2 and Table 3.
Variable
Item
Participation
in
Pay Systems
Adequacy of
Pay
Interactional
Justice
Job
Satisfaction
1. I am given the opportunity to voice out my opinion on
the design of pay for performancesystem
2. My supervisor obtains my opinion before making any
change for the pay for performancesystem.
3. I am given the opportunity to make suggestion in the
process of determining reward allocation.
1. I receive merit increment or bonus when I have
achieved the target set by supervisor.
2. The amount of reward is relative with my contribution.
3. I receive bonus when I have achieve the target set by
supervisor.
1. My supervisor has fairly rewarded me when I consider
the responsibilities I have.
2.My supervisor has fairly rewarded me when I take into
account the performance rating I achieve.
3.My supervisor has fairly rewarded me when I consider
the amount of effort that I have put forth.
4.My supervisor has fairly rewarded me when I consider
the contribution of my job.
5.My supervisor has fairly rewarded me when I consider
the work that I have done well.
6.My supervisor makes sure that all employee concerns are
heard before reward decisions are made.
7.To make reward decisions, my supervisor collects
accurate and complete information from us.
8.My supervisor clarifies reward decisions and provides
additional information when requested by employees.
1.The amount of pay and fringe benefits I receive.
2.The recognition you get for good work.
3.The people I talk to and work with on my job.
4.The physical working conditions.
5.The way your organisation is managed.
6.The amount of responsibility you are given
7.Your job security
Component
2
3
1
4
.81
.85
.92
.71
.69
.71
.69
.91
.91
.68
.84
.61
.60
.66
.80
.70
.74
.82
.77
.73
.81
Table 2: Variables, measurement items and components of factor analysis
Variable
Participation
in Pay
Systems
Adequacy of
Pay
Interactional
justice
Job
satisfaction
Item
Factor
Loadings
KMO
Bartlett’s Test
of Sphericity
3
.81 to .92
.74
155.74
2.38
79.41
.87
3
.69 to .71
.71
181.09
2.43
81.09
.88
8
.60 to .91
.91
741.15
5.65
70.67
.94
7
.70 to .82
.87
470.91
4.64
66.21
.91
Eigenvalue
Variance
Explained
Table 3: Factor loadings and reliability coefficients of the instruments
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Cronbach’s
Alpha
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Analysis of the constructs
Table 4 shows the results of Pearson correlation analysis and descriptive statistics.
The means for all variables are from 3.0 to 3.2, signifying that the level of
participation in pay systems, adequacy of pay, interactional justice, and job
satisfaction are ranging from moderately high (3.0) to highest level (7). The
correlation coefficients for the relationship between the independent variable (i.e.,
participation in pay systems and adequacy of pay) and the mediating variable (i.e.,
interactional justice), and the relationship between the dependent variable (i.e., job
satisfaction) were less than 0.90, indicating the data were not affected by serious
collinearity problem (Hair et al., 1998). Thus, these statistical results provide
further evidence of validity and reliability for measurement scales used in this
research (Hair et al., 1998; Nunally & Bernstein, 1994).
Variables
1. Participation in Pay
Systems
2. Adequacy of Pay
3. Interactional
Justice
4. Job Satisfaction
Pearson Correlation (r)
1
2
3
4
Mean
Standard
Deviation
3.3
1.72
1
4.3
1.68
.54**
1
4.0
1.46
.62
**
**
1
4.2
1.58
.51**
.57**
.66**
.70
1
Note: Significant at **p<0.01, Reliability estimation are shown diagonally (value 1)
Table 4: Descriptive statistics and Pearson correlation analysis
Results of testing hypothesis 1 and hypothesis 2
As described in Table 4, the results of Pearson correlation analysis showed two
important findings: first, participation in pay systems significantly correlated with
job satisfaction (r=51, p<0.01), therefore H1 was supported. Second, adequacy of
pay significantly correlated with job satisfaction (r=.57, p<0.01), therefore H2 was
supported. Statistically, these results demonstrate that participation in pay systems
and adequacy of pay have been important determinants of job satisfaction in the
studied organization.
Results of testing hypothesis 3 and 4
Table 5, Table 6 and Table 7 show the outcomes of multiple regression analysis that
were conducted based on mediating model testing procedure as advocated by
Baron and Kenny (1986). Relying on this procedure, the mediating effect of
interactional justice in the hypothesized model exists when it meets three
conditions: firstly, the independent variable must affect mediating variable in the
first equation. Table 5 shows that pay for performance (i.e., participation in pay
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systems and adequacy of pay) significantly correlated with interactional justice
(ß=.35, p<0.001; ß=.51, p<0.001), signifying that this relationship met the first
mediating model testing requirement.
Independent Variable
Participation in Pay systems
Adequacy of Pay
R Square
Adjusted R Square
R Square Change
F
F ∆ R Square
Mediating Variable
(Interactional Justice)
.35***
.51***
.57
.56
.57
68.42***
68.42***
Note: Significance at *p<0.05;**p<0.01;***p<0.001
Table 5: The results of multiple regression showing the relationship between pay for
performance and interactional justice
Independent Variable
Participation in Pay systems
Adequacy of Pay
R Square
Adjusted R Square
R Square Change
F
F ∆ R Square
Dependent Variable
(Job Satisfaction)
.28**
.42***
.38
.40
.38
31.96***
31.96***
Note: Significance at *p<0.05;**p<0.01;***p<0.001
Table 6: The results of multiple regression showing the relationship between pay for
performance and job satisfaction
Finally, the mediating variable must affect the dependent variable in the third
equation. At the initial stage, an examination of collinearity in Table 7 shows that
the tolerance value for the relationships: between participation in pay systems and
job satisfaction was .59, between adequacy of pay and job satisfaction was .50, and
between interactional justice and job satisfaction was .43. This tolerance value was
more than tolerance value of .20 (as a rule of thumb), indicating the variables were
not affected by multicollinearity problem (Fox, 1991; Tabachnick & Fidell, 2001).
Thus, Table 7 shows that relationship between interactional justice and pay for
performance (i.e., participation in pay systems and adequacy of pay) positively and
significantly correlated with job satisfaction (ß=.46, p<0.001), therefore H3 and H4
were fully supported. This result is consistent with Baron and Kenny’s (1986)
mediating model testing condition where the effect of pay for performance on job
satisfaction was decreased when interactional justice included in the analysis.
Further, it indicates that interactional justice acts as an important mediating
variable in the relationship between pay for performance and job satisfaction.
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Variables
Dependent Variable
(Job Satisfaction)
Step 1
Participation in Pay Systems
Adequacy of Pay
Interactional Justice
R Square
Adjusted R Square
R Square Change
F
F ∆ R Square
.12
.19
.46***
47
.46
.47
30.48***
30.48***
Note: Significance at *p<0.05;**p<0.01;***p<0.001
Table 7: The results of multiple regression showing the relationship between pay for
performance, interactional justice and job satisfaction
5. Discussion and implications
The findings of this study confirm that interactional justice does act as a full
mediating variable in the relationship between pay for performance and job
satisfaction in the pay system models of studied organization. In the organizational
context, managers use compensation policy and rules set up by the stakeholder to
determine the type, level and/or amount of pay for high performers. Employees
perceive that their managers encourage employees who work in different job
groups to participate in the design and administration of pay systems and able to
allocate sufficient rewards based on employee performance. When employees
perceive that they receive adequate pays from their employers and they are
actively involved in the pay systems, this has increased employees’ feelings of
interactional justice. As a result, it may lead to higher job satisfaction in the studied
organization.
The implications of this study can be divided into three categories: theoretical
contribution, robustness of research methodology, and practical contribution. In
terms of theoretical contribution, the findings of this study highlight two major
issues: firstly, relationship between participation in pay systems and interactional
has been an important predictor of job satisfaction. This result is consistent with
studies by Bradley, Petrescu and Simmons (2004), Pettijohn, Pettijohn and d’Amico
(2001), and Ismail and Zakaria (2009). Secondly, relationship between adequacy of
pay and interactional justice has been an important predictor of job satisfaction.
This result is consistent with studies by Schapped (1998), Money and Graham
(1999), and Ismail and Zakaria (2009). In overall, this study has provided a great
potential to understand the influence of feelings of interactional justice in the pay
for performance models of the studied organizations, as well as to support and
extend previous research conducted in most Western countries.
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With respect to the robustness of research methodology, the data gathered from
the survey questionnaire have exceeded a minimum standard of validity and
reliability analyses; this can lead to the production of accurate findings. In terms of
practical contributions, the findings of this study may be used to upgrade the
efficiency of designing and administering pay for performance in organizations. The
improvement efforts can be done in two major aspects: firstly, the extra rewards
for high performers can be perceived more valuable if the type, level and/or
amount of pay are revised according to current national cost of living and
organizational changes. This may help them to give more focus on achieving
organizational goals because they view that extra rewards fulfill their expectations,
standards of living and statuses in society. Secondly, the content and method of
management development programs need to emphasize on creative soft skills
(e.g., stimulate employees’ intellectuals in doing job, respect employees’ voices,
counsel employees to increase their potentials to achieve better career, learn new
problem solving skills approach and share the organizational interests) may
upgrade the ability of managers to practice good interaction styles in managing
compensation system. If organizations heavily consider such suggestions, this will
decrease employees’ misconceptions and misjudgments, as well as increase their
appreciations and understanding about the implementation of performance based
pay. This perception can motivate positive subsequent attitudinal and behavioral
outcomes (e.g., satisfaction, commitment, performance and positive work ethics),
which in turn, lead to sustain and maintain organizational competitiveness in a
global economy.
6. Limitations and directions for future research
The conclusion drawn from the results of this study should consider the following
limitations. Firstly, the data was only taken once during the duration of this study.
Therefore, it did not capture the developmental issues such as intra-individual
change and restrictions of making inference to participants and/or causal
connections between variables of interest. Secondly, this study only examines the
relationship between latent variables and the conclusion drawn from this study does
not specify the relationship between specific indicators for the independent variable,
mediating variable and dependent variable. Thirdly, this study only focused on
particular elements of pay for performance and neglected other important factors
(e.g., communication, pay distribution criteria and management responsibility).
Fourthly, other pay for performance outcomes (e.g., job commitment, job
performance,
job
turnover
and
deviant
behavior)
that
are
significant
for
organizations and employees are not discussed in this study (Ismail & Zakaria,
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2009; Milkovich & Newman, 2010). Fifthly, although a substantial amount of
variance in dependent measures explained by the significant predictors is identified,
there are still a number of unexplainable factors that can be incorporated to identify
the causal relationship among variables and their relative explanatory power
(Tabachnick et al., 2001). Finally, the sample for this study was taken using a
convenient sampling technique in a private business firm. These limitations may
decrease the ability of generalizing the results of this study to other organizational
settings.
The conceptual and methodology limitations of this study need to be considered
when
designing
future
research.
Firstly,
the
organizational
and
personal
characteristics that act as a potential variable and can influence the effectiveness of
pay for performance should be further explored. If organizational and personal
characteristics are used in research, this may provide meaningful perspectives for
understanding the individual differences and similarities that affect attitudinal and
behavioral outcomes. Secondly, the weaknesses of cross sectional research design
may be overcome if longitudinal studies are used to collect data and describe the
patterns of change and the direction and magnitude of causal relationships between
variables of interest. Thirdly, the findings of this study may produce different
results if this study is done in more than one organization. Fourthly, as an
extension of the interactional justice, other theoretical constructs of organizational
justice theory (e.g., distributive justice and procedural justice) needs to be
considered because they have been widely recognized as an important link between
pay for performance and employee outcomes (Bradley, Petrescu & Simmons, 2004;
Ismail & Zakaria, 2009; McCausland, Pouliakas, & Theodossiou, 2005; Pettijohn,
Pettijohn & d’Amico, 2001). The importance of these issues needs to be further
discussed in future studies.
7. Conclusion
This study used a conceptual framework that was developed based on the pay for
performance research literature. The measurement scales used in this study
satisfactorily met the standards of validity and reliability analyses. Outcomes of
multiple regression analysis confirmed that interactional justice fully mediated the
effect of pay for performance (i.e., participation in pay systems and adequacy of
pay) on job satisfaction in the studied organizations. This result has also supported
pay for performance literature mostly published in Western countries. Therefore,
current research and practice within the pay system model needs to consider
perceptions of interactional justice as a critical aspect of the pay systems. This
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study further suggests that HR managers and/or managers should be trained to
practice consistently good treatments while allocating rewards and involving
employees in making reward decisions. The ability of HR managers and/or
managers to practice such treatments will strongly invoke employees’ feelings of
interactional justice, which in turn lead to increased positive attitudinal and
behavioral outcomes. Thus, such positive outcomes may help to maintain and
support organizational strategy and goals.
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