Identifying the Relative Importance of Pay Referents: An Empirical Illustration

Abstract

According to motivation theories, remuneration managers have to understand which pay referents their firm's employees are comparing their pay with in order to keep the employees satisfied with their pay level. This study argues that despite the importance of information on pay referent selection in designing the pay structure, two of the most common methods used to identify the relative importance of pay referents are methodologically or practically deficient. The direct approach asks employees to identify their pay referents and it is difficult to draw conclusions regarding the relative importance of these pay referents. The inferential approach asks employees to evaluate their pay satisfaction when compared to various pay referents, and remuneration managers then face the risk that employees will become critical about their present pay situation. A new approach is proposed and illustrated empirically using data from 105 tellers of an Australian bank. Respondents were asked to evaluate their pay satisfaction given a set of randomly generated pay level figures about themselves and various pay referents. The illustration shows that this approach would be helpful for remuneration managers in understanding the common pay referents used by employees in their firm. Limitations of the present study and future research directions are discussed.