Exploring the Links between Performance Appraisals and Pay Satisfaction

Abstract

Pay satisfaction is a key goal of an organization’s reward system because it affects employee behaviors and organizational outcomes, such as job satisfaction, turnover, absenteeism, work stoppages, and employee performance. Given limited resources and a finite ability to increase pay, how can organizations increase employee satisfaction with their compensation? This article examines the effects of performance appraisals on pay satisfaction. Using a sample of more than 15,000 employees, we found that pay satisfaction is the highest when performance pay is tied to the employee’s performance and the lowest when there are no performance appraisals in organizations, even if there is performance pay. Implications for management are discussed.