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PERSONNEL PSYCHOLOGY 1987.40 MANAGERIAL SALARY-RAISE DECISIONS: A POLICY- CAPTURING APPROACH PETER D. S H E E R Institute of Labor and Industrial Relations University of Illinois at Urbana-Champaign DONALD P. SCHWAB, HERBERT G. HENEMAN 111 Graduate School of Business and Industrial Relations Research Institute University of Wisconsin-Madison Using policy-capturing and direct-ranking methodologies, managers made salary-raise decisions for 104 hypothetical employees. These employees were experimentally varied on five manipulated characteristics: (1) per- formance level, (2) performance consistency, (3) tenure, (4) current salary, and (5) external job offer. The main effects of these five characteristics accounted for an average of 77% of the variance in the managers’ raise decisions. On the other hand, the interactions accounted for virtually no variance. Substantial individual differences were found among managers in the weights they attached to the five characteristics, even though all of the managers were from the same organization. Substantial differences were also observed in the relative importance of the five characteristics as determined by policy capturing and direct ranking. Future research and administrative practice implications are suggested, especially those regarding individual differences in attribute weights among managers. A recent survey conducted by the Bureau of National Affairs (1982) found that a majority of occupational groups, save plant and service em- ployees, were covered by some form of merit pay system. Thus, salary increases for many employees are likely to depend, in part, on a judgment that a supervisor makes about their “merit” or contribution to the organi- zation. What types of factors do supervisors consider when making those judgments? The answer to this question is important from a scientific perspective since dominant motivational theories view behavior (e.g., performance) as contingent on rewards (e.g., pay increases) associated with that behavior (e.g., Campbell & Pritchard, 1976; Dyer & Schwab, 1982). The answer is also of applied interest since organizations implement merit pay systems largely with the intent of stimulating high employee performance. The authors are, respectively, Assistant Professor, Donald C. Slichter Research Professor, and Professor in their respective institutions. This paper is a partial summary of the first author’s dissertation under the direction of the second and thud authors. We thank two anonymous reviewers for their comments on an earlier draft of this paper. COPYRIGHT @ 1987 PERSONNEL PSYCHOLDGY, INC. 27

MANAGERIAL SALARY-RAISE DECISIONS: A POLICY- CAPTURING APPROACH

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PERSONNEL PSYCHOLOGY 1987.40

MANAGERIAL SALARY-RAISE DECISIONS: A POLICY- CAPTURING APPROACH

PETER D. S H E E R Institute of Labor and Industrial Relations

University of Illinois at Urbana-Champaign

DONALD P. SCHWAB, HERBERT G. HENEMAN 111 Graduate School of Business and Industrial Relations Research Institute

University of Wisconsin-Madison

Using policy-capturing and direct-ranking methodologies, managers made salary-raise decisions for 104 hypothetical employees. These employees were experimentally varied on five manipulated characteristics: (1) per- formance level, (2) performance consistency, (3) tenure, (4) current salary, and (5) external job offer. The main effects of these five characteristics accounted for an average of 77% of the variance in the managers’ raise decisions. On the other hand, the interactions accounted for virtually no variance. Substantial individual differences were found among managers in the weights they attached to the five characteristics, even though all of the managers were from the same organization. Substantial differences were also observed in the relative importance of the five characteristics as determined by policy capturing and direct ranking. Future research and administrative practice implications are suggested, especially those regarding individual differences in attribute weights among managers.

A recent survey conducted by the Bureau of National Affairs (1982) found that a majority of occupational groups, save plant and service em- ployees, were covered by some form of merit pay system. Thus, salary increases for many employees are likely to depend, in part, on a judgment that a supervisor makes about their “merit” or contribution to the organi- zation. What types of factors do supervisors consider when making those judgments?

The answer to this question is important from a scientific perspective since dominant motivational theories view behavior (e.g., performance) as contingent on rewards (e.g., pay increases) associated with that behavior (e.g., Campbell & Pritchard, 1976; Dyer & Schwab, 1982). The answer is also of applied interest since organizations implement merit pay systems largely with the intent of stimulating high employee performance.

The authors are, respectively, Assistant Professor, Donald C. Slichter Research Professor, and Professor in their respective institutions. This paper is a partial summary of the first author’s dissertation under the direction of the second and thud authors. We thank two anonymous reviewers for their comments on an earlier draft of this paper.

COPYRIGHT @ 1987 PERSONNEL PSYCHOLDGY, INC.

27

28 PERSONNEL PSYCHOLOGY

Background

Previous research addressing decisions on the allocation of monetary raises has used one of three methodologies. Most numerous have been experimental studies manipulating characteristics of (a) allocatees-their performance, for example, (b) the organization-its policies regarding merit increases, for example, and (c) the external environment-the availability of outside job offers, for example (e.g., Bass 1968; Birnbaum, 1983; Fossum & Fitch, 1985; Freedman, 1978; Goodman, 1975; Landau & Leventhal, 1976; Leventhal, Michaels, & Sanford, 1972; Peters & Atkin, 1980). While these studies generally exhibit high levels of internal validity, they typically use college students as subjects and, hence, have dubious external validity. They are also characterized by the use of between-subject designs that leave unaddressed questions of potential individual differences in the importance attached to the various characteristics that are manipulated.

A second type of research has involved field studies conducted on actual salary raises obtained by managerial employees (Heneman, 1973; Medoff & Abraham, 1980, 1981). In contrast to the experimental studies, these in- vestigations have examined actual organizational decisions. Unfortunately, these studies tend to be primarily inductive in nature and to lack the de- sign power for strong causal inference. They share with the experimental between-subject designs an inability to address questions of individual dif- ferences in making decisions about reward allocation.

through direct questioning of supervisors. In most of these, however, su- pervisors were asked about salary-level (not salary-raise) decisions --or the salary referer.t was left unclear (e.g., Belcher & Atchison, 1970; Lawler, 1966). Since the field studies have found that salary levels and salary increases are not fully determined by the same variables, only the Dyer, Schwab, and Theriault (1976) study is directly germane here. Their study shares with field studies the aura of external validity-since “real” deci- sion makers were involved. Again, however, individual differences were ignored, and questions can be raised about whether subjects had suffi- cient self-insight to articulate their decision-making models (e.g., Slovic & Lichtenstein, 1971).

Finally, there have been a few studies addressing salary decisions

Present Study

The present study was designed to investigate some issues about pay- raise decisions suggested by prior research, while also addressing some of the methodological limitations of that research. Methodologically, we attempted to maintain the high internal validity of the experimental studies and, at the same time, use actual managers to enhance external validity.

PETER D. SHERER ET AL. 29

In addition, through use of a policy-capturing methodology, we attempted to obtain information about whether individual managers differed in the importance they attached to the experimentally manipulated characteristics. Policy capturing has been used previously to investigate how employees or job applicants respond to pay differentials (e.g., Krausz, 1978; Rynes, Schwab, & Heneman, 1983; Zedeck, 1977) but has not been used to assess managerial pay-raise decisions. Finally, we asked respondents for their direct rankings of the importance of the characteristics in order to assess whether their self-explicated policies (rankings) conformed to their actual policies (as inferred from policy capturing).

Substantively, we addressed several hypotheses suggested by theory and prior research. In consistence with the logic of merit pay systems and with the findings of all three types of studies noted above, we hypothesized that recommended salary increases would be positively related to performance levels. In addition, however, we sought to study whether characteristics of the external environment or of the organization moderate or attenuate the impact of performance on salary raises-as the experimental literature suggests. To represent an external environmental characteristic, we manip- ulated information about whether or not the allocatee had an outside job offer; to represent an organizational characteristic, we manipulated infor- mation about the historical consistency of the allocatee’s performance as measured by the organization. Possessing an outside job offer was hypoth- esized to have a positive main effect on the salary-increase decision. In addition, both outside job offer and performance consistency were expected to interact with the employee’s current level of performance. Specifically, we hypothesized that high performance in combination with an outside job offer would yield higher salary recommendations than either main effect alone. Further, we hypothesized that performance would have greater ef- fects (both positive and negative) when prior performance was consistent rather than inconsistent. This hypothesis was based on the notion that the decision maker would be willing to place greater emphasis on the results of a stable (in a reliability sense) performance measure than on the results of an unstable performance measure.

Two other variables were studied because both were of theoretical inter- est and had yielded seemingly counterintuitive or countertheoretical results in prior research. The first of these was job experience. According to hu- man capital theory (Becker, 1975), experience represents a human capital variable and, hence, ought to be positively related to salary increases. Field studies, however, have found organizational and labor market experience to be negatively related to salary increases, and Dyer et al. (1976) found length of service to be ranked ninth in importance out of nine character- istics studied. We thus varied length of service to see what impact this variable might have when experimentally manipulated.

30 PERSONNEL PSYCHOLOGY

The final variable manipulated was current salary level. Field studies have found that percentage-raise increases are negatively related to current salary levels (Medoff & Abraham, 1980, 1981), a finding also obtained in Bimbaum’s (1983) experimental study. We sought to determine whether this finding would be replicated in the present study.

Method

Sample and Procedure

Cooperation for the study was obtained from a 357-bed private hospital located in a medium-size city in the upper midwest. Participants were supervisory personnel who regularly made salary-raise recommendations as a part of their ordinary responsibilities. Each participating supervisor was asked to read a packet of materials containing specific information about an organization, information on the data available for making salary- raise recommendations, and a practice case. The five independent variables were operationalized as follows:

1. Performance. Performance had two levels, average and superior. On a scale from 0 to 20, average performance equaled 10 or 11; superior performance equaled 15 or 16. Participants were told that current perfor- mance ratings were based on performance appraisals done by supervisors at six-month intervals and that there were no performance ratings below seven.

2. Tenure. Tenure had two levels, low and high. Low tenure equaled 1.0, 1.5, or 2.0 years on the job. High tenure equaled 6.0, 6.5, or 17 years on the job.

3. Current Salary. Current salary had three levels, low, medium, and high. The levels or salaries corresponding to low, medium, and high were $22,018, $24,000, and $25,920, respectively, and each hypothetical em- ployee described was assigned one of these three possible salaries. Subjects were told that the rate range for current salaries was $20,000 to $28,800- this 44% rate range is typical of actual organization ranges (Henderson, 1985, p. 400).

4. Pedormance Consistency. Performance consistency had two lev- els, varied (low consistency) and stable (high consistency). Participants were told that supervisors evaluated the pattern of performance at one-year intervals.

5. Job Offer. Job offer from another company had two levels: an employee did or did not have an outside job offer that exceeded the current salary.

PETER D. SHERER ET AL. 31

Data on the five independent variables were summarized in “employee descriptions” of hypothetical employees. An example of an employee de- scription was:

Employee has been on the job for 6 years. Employee’s current performance is rated 16. Performance has been varied. Employee has an outside job offer. Employee’s current salary is $25,920.

The experimental design crossed and balanced the five independent variables and, thus, required 48 employee descriptions. Eight employee descriptions were added. These descriptions were unrelated to the actual manipulation and experimental design; they were included to provide a more complete range of variables in an attempt to add realism and reduce the redundancy of the levels in the manipulated employee descriptions. In addition to these eight “dummy descriptions,” a replicate, or duplicate, of each of the 48 descriptions was made. These duplicates permitted an esti- mation of intrarater reliability of a subject’s responses (see, e.g., Hoffman, Slovic, & Rorer, 1968) and provided more degrees of freedom, thus fa- cilitating tests of significance for interaction terms. Thus, in total, there were 104 employee descriptions, or two sets of 48 plus the eight dummy descriptions for each of the participants (6 males, 5 females).

The 96 employee descriptions and the eight dummy employee descrip- tions were ordered randomly, subject to the constraint that contiguous de- scriptions not have the same levels on the first two variables (tenure and performance). This modification was done in an attempt to ensure that par- ticipants make absolute or separate (as opposed to comparative) judgments on the employee descriptions.

After having read a description, the participant was asked to make a recommendation regarding a salary increase between 0 and 10% with the question: “What salary raise in dollars would you recommend for this employee?” Participants were each given a sheet containing the dollar increments and the new salary levels corresponding to 1% through 10% raises for each of the three manipulated salary levels to aid them in their responses.

After respondents had made recommendations for all 104 descriptions, they were asked to rank the five salary-increase attributes in terms of the importance they thought they had given them in the salary-increase deci- sions. The result was a direct or explicit ranking of attributes’ importance for each respondent.

Analyses

Two dependent variables were used in this study. The dollar salary increase that participants recommended served as one criterion variable.

32 PERSONNEL PSYCHOLOGY

In addition, the percent salary increase, calculated as the recommended increase divided by the prior salary level, served as a second criterion. These two criteria are not necessarily perfectly correlated since the same dollar increase could translate into three different percentage increases due to the existence of three prior salary levels. In fact, dollar and percentage salary increase correlated on average, r = .96.

A preliminary analysis was performed to estimate the intrarater relia- bilities of participant responses. This was done by calculating for each par- ticipant the correlation between the raises (both dollar raise and percentage rate) given in the 48 initial descriptions and those given in the correspond- ing replicate descriptions. These reliabilities provided information on two related concerns. First, they indicated the stability or consistency of par- ticipant responses in making judgments and, hence, suggested whether the same decision model was employed throughout the exercise. Second, in- trarater reliability indirectly provided information on whether salary recom- mendations were independent of one another (an assumption of the policy- capturing procedure). High . intrarater reliability suggests that judgments were independent since identical descriptions were never adjacent-ach was adjacent to dissimilar descriptions through the exercise.

Multiple regression was employed to “capture” the salary-increase pol- icy of the respondents. To do this, the five independent variables were coded using orthogonal contrasts (Cohen & Cohen, 1975). Each dependent variable was then regressed on these five main-effect variables and their ten possible interaction-effect variables for each participant. There were thus 22 regression equations (2 for each participant) used for policy capturing. The sign and the size of the resulting standardized regression coefficients respectively indicate the direction of the effects and the importance of the variables in raise decisions.

The correspondence between results obtained from the policy-capturing procedure above and the direct rankings was obtained through two steps. First, the standardized regression coefficients for the five main effects were rank ordered by size. For each participant, these ranks were then correlated with the direct rankings they had provided, using Spearman’s rank-order procedure (Siegel, 1956).

Results

An initial analysis investigated the intrarater reliability of the respon- dents’ decisions. The average intrarater correlation was f = .77 for dollar salary increase and f = .78 for percent salary increase. These intrarater reliabilities are comparable to other policy-capturing investigations of this sort (e.g., Rynes, et al., 1983).

PETER D. SHERER ET AL. 33

Policy-capturing results (main effects only) for the dollar salary increase are summarized in Table 1.

TABLE 1

Standardized Regression Coeffrcientsa for At1 Participants: Dollar-Increase Recommendations

Independent Variables Parti- Perfor- Ten- Sal- Perf. Job

cipantb mance ure w consist. offer R2

5 6 7 8 9

10 11

P2

19** 48** 79** 10 80** 06* 62** 27** 90** 08 73** 09 92** -07* 77** -0 1 66** 16** 60** 08 92** 06*

56 03

-08 11 55** 57 07 14* 15* 67 31** 43** -0 1 92 17* 31** -04 59

-03 -08 02 82 21** 04 -01 57 28** 03 -0 1 93 11* 36** 03 12 09* 53** 23** 79 29** -00 59** 79 06* -23** 06* 91

03 08 07

aDecimals omitted. bn = 96 for each participant. *p < 05 **p < .O1

It shows the standardized regression coefficients for the five main effects, by participant. In addition, the bottom row of the table shows the average percentage of variance that each main effect accounted for in the recom- mended dollar salary increase.' Thus, for example, performance level was positively related to the recommended dollar salary increase for all respondents, and it accounted for, on average, 56% of the variance. An examination of Table 1 shows that the other independent variables were not as consistently related to dollar salary increase, and they accounted for less average variance in the recommended salary increase.

Overall, the main effects shown in Table 1 accounted for an average of 77% of the variance in the decisions about dollar salary increase. The far right-hand column shows, however, that the variance in results across participants was substantial, ranging from a low of 57% to a high of 94%. Moreover, the relative importance of the five independent variables varied substantially among the participants. Table 1 suggests that Participant 5

The policy-capturing results shown in Tables I and 2 are based on the assumption that managers made each raise decision independently of other raise decisions. While the intrarater reliability results support this independence assumption, additional investigation of it was conducted. Specifically, the data were also analyzed via auto regression pro- cedures. Results were essentially the same as those obtained via ordinary least-squares regression. For dollar salary raise, 51 of 55 possible regression coefficients had the same sign and significance level p < .05 in both procedures; the same result was obtained for the percent increase. Because of the strong similarity in results from the two procedures, only the ordinary least-squares regression results are shown in Tables 1 md 2.

34 PERSONNEL PSYCHOLOGY

essentially used only performance in making judrnents about the dollar salary increase to recommend. Participants 9 and 11, on the other hand, apparently used all five independent variables in making their judgments.

There was little support for interaction effects among the independent variables, and hence those results are not shown in Table 1. For example, the Performance x Performance Consistency interaction was statistically significant in 36% of the cases-but in the direction hypothesized only 25% of the time. This interaction accounted for an average of only 1% of the variance in the dollar-increase recommendation. The Performance x Job Offer interaction was statistically significant in 18% of the cases, but in no case was it as hypothesized. This interaction also accounted for an average of only 1% of the variance in the dollar-increase recommendation. The remaining interactions were generally not significant and accounted for minute average percentages of variance.

The results using percent salary increase (Table 2) as the dependent variable closely paralleled those shown in Table 1.

TABLE 2 Standardized Regression Coef/lcientsa for All Participants:

Percent-Increase Recommendations

Independent Variables Parti- Perfor- Ten- Sal- Perf. Job

cipant' mance ure ary consist. offer R2

1 IS** 47** -28** 1 1 53** 62 2 78** lo** -16** 14* 14* 69 3 84** 06 00 45* -0 I 92 4 62** 28 * - 1 I 37** -05 62 5 86** 08 -30* * -08 02 86 6 74** 09 -13 04 -0 1 58 7 96** -07 00 03 -01 93

36* 03 74 :;:** 53** 23** 80 8 77** -01 9 65** 16**

09* -04 00 62** 79 -09** -23** 05 91

10 63** 1 1 92** 06 f 2 57 03 02 08 04

=Decimals omitted. 'n = 96 for each participant. *p < .05 **p < .01

An exception was the independent variable, current salary. In contrast to the eight statistically significant positive main effects for dollar salary increase, current salary was related to the recommended percent salary increase at a statistically significant level p < .05 in five instances, all with a negufive sign.

Results comparing the importance of the five independent variables via policy capturing and direct ranking were as follows. The average (across the 11 participants) rank-order correlation was f = .64 for the dollar salary increase and f = .62 for the percent salary increase.

PETER D. SHERER ET AL. 35

Discussion

The present study was designed to investigate managers’ decisions about salary increases under various conditions: performance level, con- sistency of performance, tenure, prior salary, and existence of an outside job offer. Using a policy-capturing procedure on actual managers in a sin- gle organization, we found that variation in performance levels generally accounted for a large percentage of variance in salary-increase recommen- dations. The other four independent variables were less consistently related to salary-increase decisions and, thus, accounted for a small average per- centage of salary-increase variance.

However, the study was not designed to establish the relative impor- tance of these attributes in some generalized sense. First, as with nearly all social science experimentation, this study employed a fixed-effects de- sign. Since there is evidence that the variance built into treatment levels affects importance weights in policy-capturing studies (e.g., Rynes, et al., 1983), “unfair” comparisons can be created among attributes in terms of their importance to decision makers (e.g., Cooper & Richardson, 1986).

Second, the within-subject analyses showed clear individual differences among managers in attribute importance. For example, outside job offer was nearly as important in accounting for Participant 10’s salary-increase variance as was performance. For Participant 1, both tenure and job offer accounted for more salary-increase variance than did performance. In gen- eral, the two-way interactions, including the two hypothesized, were not strongly related to increase recommendations but, again, showed evidence of substantial differences among individual allocators.

In retrospect, we believe that failure to support the hypothesized Perfor- mance x Performance Consistency interaction is explainable. We expected that participants would view performance consistency (or inconsistency) in reliability-of-measurement terms and place more weight on a measure providing stable results, be they positive or negative. In fact, post hoc discussion with the participants indicated that they viewed it as a reflection of the employee’s true performance over time and, hence, often as another aspect of actual performance (which may explain the unanticipated posi- tive main effect observed in five instances). We have no plausible post hoc explanation for why outside job offer did not interact with performance level, as found by Landau and Leventhal (1976).

One of the more intriguing findings had to do with the generally positive relation between salary level and dollar salary increase but the generally

36 PERSONNEL PSYCHOLOGY

negative relation between salary level and percent salary increase.2 The field studies only report a negative prior salary-percent salary relationship (Medoff & Abraham, 1980, 1981). Birnbaum (1983), however, obtained negative correlations between salary and salary-increase recommendations for both dollar raise and percent increase. These differences in results might be due to the fact that Birnbaum constrained subjects to a fixed- amount raise budget (what one received, another could not), while we did not. Since both budgetary forms are used by organizations, and since the results may well have motivational implications for employees, more systematic research on their decision-making effects is obviously warranted.

Our results are consistent with general reviews of the human judg- ment literature suggesting that decision makers are not particularly astute about the importance they actually attach to attributes when making de- cisions (e.g., Slovic & Lichtenstein, 1971). As with other recent research on personnel decisions (e.g., Zedeck, 1977), we found substantial variance between decision policies, as inferred from the policy-capturing methodol- ogy, and participants’ direct ranking of importance of the five independent variables. This finding is especially surprising since participants here were asked for the latter immediately after providing information about the for- mer. In any event, the results obtained here raise questions about the appropriateness of the direct-ranking methodology as used by Dyer, et al. (1976).

Potentially the most important finding of the present study has to do with individual managerial differences in responding to the attributes ma- nipulated. Regarding recommendations for dollar salary increase, for ex- ample, Table 1 suggests that four participants found length of service to be deserving of salary increases while seven did not. Even more striking, Participants 2, 3, 4, 8, and 9 were all positively influenced by consistent performance, but Participant 11 behaved as if this was a negative factor. Thus, we found that even within a single organization, managers differed in the relative importance they attached to attributes when making salary- increase recommendations.

Caution is again necessary in interpreting these differences. It is pos- sible, for example, that managers differed in their perceptions, not of true attribute importance, but of the relative range of differences in treatment levels. For example, the difference between performance ratings of 10 and 15 may have been perceived as larger by some managers than by others.

It is important to recognize that the negative relationship betweer, salary level and per- cent increase cannot be due to a “ceiling effect” imposed by the position of the current salaries in the rate range relative to the top of the range. That is, we purposely created a circumstance in which the highest current salary ($25,920) could receive the maximum percentage raise (10%) without exceeding the top of the rate range ($28,800).

PETER D. S H E E R ET AL. 37

Consequently, this attribute may have been weighted more heavily by the former than by the latter.

An important alternative explanation for the obtained individual dif- ferences, however, is possible. Specifically, the managers may have truly differed in the attribute weights they used to make salary-increase recom- mendations. If such an interpretation is correct (or even partially correct) in the present study’s context, our findings on individual differences have both applied and research implications. From an applied perspective, it suggests that organizations must communicate to managers not only what should be important in making salary-raise adjustments (e.g., performance), but also what should not be important (e.g., tenure within the organization). This is not to imply that some weighting scheme for salary-raise decisions is inherently superior to another, only that the organization will probably have to communicate its weighting scheme, whatever it is to be.

From a research perspective, this finding suggests a potentially fruitful avenue of investigation. Specifically, it would be helpful to know exactly how organizations might influence managers in terms of salary-increase decision making. A design similar to ours could be used as a before measure, followed by training in organizational salary-increase policies and objectives, and then by an “after” assessment of salary-increase judgments. Such a study would provide information on whether or not administrative attempts to influence salary recommendations have an impact.

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