The Effects of Merit Pay Increases via Organization-Based Self-Esteem

Although merit pay increase is a pay-for-performance practice that organizations popularly use, its effectiveness has often been questioned. Prior studies have primarily explored merit pay increase outcomes by adopting the idea that merit pay is a form of compensation that makes employees see a conspicuous link between pay and performance. Diverting from this approach, we investigate merit pay increase’s effect on employee satisfaction and motivation using organization-based self-esteem as a key mechanism. We conducted two empirical studies that investigated the interactive indirect effect of merit pay increase and perceived pay dispersion on satisfaction and motivation via organization-based self-esteem. Study 1 analyzed 131 employee observations from two South Korean organizations. Results showed that merit pay positively affects satisfaction and motivation via organization-based self-esteem when perceived pay dispersion is low. In Study 2, 818 employee observations from six Finnish organizations were analyzed, and the findings were comparable to Study 1.