The impact of negative compensation shocks on individual performance

This study examines the impact of negative compensation shocks on individual performance over time. To do so, performance data over a two year time period were obtained for individuals who remained with their organization after experiencing a reduction in compensation. Using both equity theory and the unfolding model of turnover as theoretical perspectives, the study examines whether the magnitude of the shock matters, whether the individual's pay level affects their reaction to a negative shock, and whether or not the impact of a negative compensation shock dissipates over time. Additionally, this study proposes an extension to the unfolding model of turnover by suggesting that a logical outcome in response to a negative shock may be to stay with an organization but to reduce one's performance in response to a dissatisfying situation. Based on equity theory, it was predicted that individuals would decrease their performance (inputs) in response to a decrease in compensation (outputs). To examine these questions, the study used an interrupted time series with a nonequivalent no-treatment control group method of design. Data on 292 individuals were analyzed. The findings were contrary to expectations in that negative compensations shocks caused performance to increase rather than decrease. The contradictory findings may be due to the fact that pay was highly linked to individual performance for the individuals participating in this study. Some of the study's findings do show consistency with expectations. First, the results show that in response to a negative compensation shock, individuals at high pay levels change their performance less than individuals at lower pay levels. Thus, high pay seems to be an insulating factor as it relates to negative compensation shocks. Second, the effects of negative compensation shocks on performance tend to dissipate time. Third, the study shows that the magnitude of the shock matters such that the larger the shock, the larger the resulting performance impact. The practical implications of these findings provide important new insights into contingencies that may affect the outcomes of pay for performance programs, particularly in the case of individuals whose performance in tightly linked to their compensation.