Against the current backdrop of increasing globalisation of companies and their reward practices, a recent study examined the extent of international cultural differences between France and the US in preferences for redistributive versus performance-based compensation systems. The study found that Americans had a greater preference for individual performance pay while French participants preferred redistributive pay. The researchers argue that this is at least in part due to differing beliefs about equity.
Key Topics: Culture; Compensation systems; Compensation inequality; Just-world beliefs; Redistribution
Title of Reviewed Article: Performance pay or redistribution? Cultural differences in just-world beliefs and preferences for wage inequality
Researchers: Douglas H. Frank (The Catholic University of America), Klaus Wertenbroch (INSEAD Europe Campus), and William W. Maddux (INSEAD Europe Campus).
Publication: Organizational Behavior and Human Decision Processes, 2015, Vol. 130, pp. 160–170.
Setting the Scene
As commerce continues to become more globalized, international companies are increasingly being forced to consider the best approach to employee reward management for a diverse employee population, and whether one system for all is appropriate. Wal-Mart’s failure in Germany, for example, has partly been attributed to its resistance to German wage setting practices (Knorr & Arndt, 2003), while other companies have faltered when expanding internationally when assuming there were no cultural differences in receptiveness to certain reward systems (Hastings, 1999).
Generally, countries differ in how resources are distributed and allocated to individuals, and what is expected and accepted, with many of these norms the result of differing historical social structures (e.g. Gelfand et al., 2011). For example, US CEO compensation is typically significantly higher as a ratio of average employee pay than European counterparts (Plender, 2012), while general income inequality is much higher in the US than across Western Europe (Central Intelligence Agency, 2012).
This study posits that cultural differences in the preference for performance pay versus redistributive pay systems are at least partially a result of cultural differences in “just-world beliefs” (JWBs, e.g., Furnham, 1993), which relate to a person’s beliefs about the fairness of the world, where people mostly get what they deserve, and people control their own outcomes (Lerner, 1980), and as such, cultures with generally high JWBs are more likely to have individuals that would view individual performance pay as desirable over redistributive pay (e.g. Eugster et al., 2011).
The researchers put forward a number of research questions for review:
Hypothesis 1 – “Individual differences in just-world beliefs predict differences in individuals’ own preferences for performance pay versus redistributive pay.”
Hypothesis 2a - “Aggregated differences in just-world beliefs at the level of national culture predict preferences for performance pay versus redistributive pay.”
Hypothesis 2b – “Just-world beliefs mediate national culture-level differences in preferences for performance pay versus redistributive pay.”
Hypothesis 3 – “Experimentally priming JWBs will replicate observed national culture-level differences in preferences for performance pay versus redistributive pay.”
How the research was conducted
The researchers conducted three studies in which participants performed an individual problem-solving task and then specified whether they preferred to be compensated based on individual or collective group performance.
Study 1 used 78 culturally diverse professional MBA participants from 30 countries attending a large international business school in France to test whether JWBs predicted the pay preferences of participants (Hypothesis 1). JWBs were measured using a subset of Rubin and Peplau’s (1975) just-world belief scale.
Study 2 used 102 French citizenship and 142 American citizenship undergraduate participants to test Hypothesis 2a and 2b i.e. the specific cultural differences in compensation preferences that are mediated by JWBs. JWBs were measured as per Study 1.
Study 3 was designed to better understand the casual relationship between JWBs and compensation preferences (Hypothesis 3) and used 112 American citizenship undergraduate participants from a large North-eastern U.S. university. This study used a priming procedure to manipulate JWBs and examine their effect on preferences and also used the same participant tasks as Study 2. Participants were assigned to either a ‘just-world prime’ or ‘control prime’ condition.
Key Research Findings
The results of Study 1 indicated that there is a relationship between individual JWB scores of a culturally diverse participant group and compensation system preference, and as such Hypothesis 1 was supported. Participants from European cultures were found to be more likely to prefer redistributive compensation. Also, as expected, Study 1 found that task performance positively correlated with a participant’s choice of individual performance-based pay.
Results of Study 2 showed that American participants had a significantly greater preference than French participants for individual performance-based compensation systems, a difference that was mediated by JWB variations. Americans had significantly greater JWB scores than their French counterparts. Americans were also found to prefer a higher proportion of variable rather than fixed compensation. The results of Study 2 give support to both Hypotheses 2a and 2b.
Consistent with Study 2, Study 3 found participants with greater JWBs preferred an individual performance based compensation system, thus supporting Hypothesis 3.
Study 1 and 2 provided support for the idea that cultural differences in JWBs help to explain people’s preferences for performance-based versus redistributive compensation systems. While these two studies found correlations, the findings of Study 3 help to establish the casual nature of JWBs in the determination of people’s preferences for compensation system.
The findings of Study 1, that across a culturally diverse group those with greater JWBs have a greater preference for individual performance compensation systems gives weight to the idea that compensation system preference is more than purely driven by an individual’s own performance expectations (Lazear, 2000), but rather is more complex and multifaceted.
Study 2 highlights the difference in compensation system preference in France and the US, and the results demonstrate that the presence of varying JWBs represents a mechanism that is partially responsible for cultural differences in compensation system preferences. The further experimental manipulation of JWBs in Study 3 allowed for the determination that JWBs at least partly explain cultural differences in compensation system preferences.
Organizational and Reward Implications
This study broadens our understanding of the nuanced relationship between culture and compensation preferences and the findings add to prior research on individual beliefs about equity and monetary distribution (e.g. Bénabou & Tirole, 2006). Companies, for their part, should be mindful of such differences in developing compensation practices, as to assume that one size fits all would likely yield inefficient and possibly counterproductive outcomes.
This study, as with many like it on cultural differences, suggests that when it comes to compensation practices there is a potential trade-off between compensation system efficiency and compensation system consistency. Many companies prefer a globally consistent approach, but as this study demonstrates, they should at the very least acknowledge that this ‘compensation system imperialism’ is not the preferred, or most efficient system for all cultures.
This study adds to the expanding and valuable research on cultural reward preferences. Further research on the questions examined in this study across additional cultural groups would be immensely valuable. It would also be interesting for future studies to examine whether preferences for a type of compensation system change from the typical cultural preference if individuals are exposed to a different compensation system over time.
Source Article: Frank, D. H., Wertenbroch, K., & Maddux, W. W. (2015). Performance pay or redistribution? Cultural differences in just-world beliefs and preferences for wage inequality. Organizational Behavior and Human Decision Processes, 130, 160-170.
Published by: Elsevier Inc.
For further details and access to the full journal article Click Here (subscription or payment may be required).
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Lazear, E. P. (2000). The power of incentives. American Economic Review, 90(2), 410–414.
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