(/IV C. ) Faculty of Cognitive Sciences and Human Development

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Faculty of Cognitive Sciences and Human Development

PERCEPTIONS OF JUSTICE ACT AS A MODERATOR OF THE

RELATIONSHIP

BETWEEN PERFORMANCES

BASED PAY

AND JOB SATISFACTION

Wong Kee Hock

HF

Bachelor of Science with Honours

5549.5

_{(Human Resource Development)}

M63

₂₀₀₆

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P. KHIDMAT MAKLUMAT AKADEMIK UNIMAS

IIIIIIII

_1000144473

_IIIIIIII

_III

_IIIIII

_III

Yusat i hit; mat Makwumat Akaaem, _n UNIVERSITI _MALAYSIA _SARAWAK

94300 Kota Samarahan

PERCEPTIONS

OF JUSTICE ACT AS A MODERATOR

OF THE

RELATIONSHIP

BETWEEN PERFORMANCES

BASED PAY

AND JOB SATISFACTION

By:

WONG KEE HOCK

This project is partial of the requirement fora Bachelor of Science with Honour

(Human Resource Development)

Faculty of Cognitive Sciences and Human Development

UNIVERSITI

MALAYSIA

SARAWAK

2006

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2. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat salinan untuk tujuan pengajian sahaja

3. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat pendigitan untuk membangunkan Pangkalan Data Kandungan Tempatan

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UNIVERSITI MALAYSIA SARAWAK

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1972)

(Mengandungi maldumat Terhad yang telah ditentukan oleh organisasi/badan di mana penyelidikan dijalankan)

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The project entitled "Perceptions of justice as a moderator of the relationship between performances based pay and job satisfaction" was prepared by Wong Kee Hock and

submitted to the Faculty of Cognitive Sciences and Human Development in partial of

the requirement for a Bachelor of Science with Honours (Human Resource Development).

Receive for examination by:

...

(Dr. Azman Bin Ismail) Date: I! fS701

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ACKNOWLEDGEMENT

The completion of this study would not possible without the assistance and guidance of the following people.

First and foremost, I would like to extend my sincere thanks and appreciation to Illy supervisor, Dr. Azman Ismail who had spend his valuable time and constant elTorts in helping me to complete this study.

I'm also thankful to Mr. Dolhardi, the HR representative and Mr. Isaliman from Komag (USA). Sama Jaya Industrial Zone, Kuching, who had spend their time, cooperation and given permission to collect relevant data. Besides. I wish to thanks to the compensation and benefit executive that had provided useful information to accomplish this study.

I wish to thanks to the employees of the Komag (USA). Kuching in completing the questionnaire and my special thanks are also extended to my friends. classmates and lecturers for their support and encouragement. Without their support and encouragement, I would not be able to finish this study.

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1A:. rýý' R, A WAK 94 Ifk' Koul 4atnarahaa

TABLE OF CONTENT

Acknowledgement Content List of Tables List of Figures Abstract Abstrak 1. CHAPTER 1 INTRODUCTION 1.1 Introduction 1

.2 Background of the Study 1.3 Problem Statement

1.4 Research Objectives

1.5 Conceptual Framework

1.6 Research Ifypotheses

1.6.1 Broad Research Hypothesis 1.6.2 Narrow Research Hypothesis 1.7 _{Operational Definition of Terms}

1.7.1 Performance Based Pay

III iv ix X xi xii I I ý 4

5

6 7 7

7

8 8 iv

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1.7.2 Pay Procedure 1.7.3 Pay Distribution 1.7.4 _{Procedural Justice}

8

8 9 1.7.5 _{Distributive Justice} ₉ 1.7.6 Job Satisfaction ₉

1.8 _{The Important of the Research} 10

1.8.1 _{Importance to the theory} 10 1.8.2 _{Importance to the research method} 10 1.8.3 _{Importance to the Human Resource Practitioner} 10

1.9 Limitation 11

1.10 Conclusion 12

2. CHAPTER 2 LITERATURE REVIEW 13

2.1 Introduction

1) 1

13

Conceptual Definition of Performance Based Pay System 14

2.2.1 Pay Procedure

1 ₁₎1

15

Pay Distribution 16

?. 3 Conceptual Definition of Organization Justice 2.3.1 Distributive Justice

17 18 2.3.1.1 _{Equity Theory} 19 2.3.1

.2 Justice Judgment Model 21

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2.3.2 Procedural Justice 22 2.3.2.1 _{Self-Interested Model} ₂₄ 2.3.2.2 _{Group Value Model} ₂₅ 2.4 _{Conceptual Definition of Job satisfaction} ₂₆ 2.5 _{Empirical Evidence Supporting Relationship between Pay} 28

Procedure, Procedural Justice, and Job Satisfaction

2.6 _{Empirical Evidence Supporting the Relationship between} 30 Pay Distribution. Distributive justice, and Job Satisfaction

2.7 _Conclusion 32

3. CHAPTER 3 METHODOLOGY

3.1 Introduction 3

.2 Research Design

3.3 _{Research Location and Sample} 3.4 Sampling Technique

3.5 Research Instrument Design

3.6 Data Collection

3.6.1 Primary Data

3.6.2 Secondary Data 3.7 Data Analysis

3.7.1 _{Pilot Test For Research Instrument}

j. )

33

34

35

37 40 40 41 42

42

vi

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3.7.2 Data Filtering

3.7.3 _{Validity and Reliability Analysis} 3.7.4 _{Pearson Correlation "r"}

43

44

3.7.5 _{Multiple Regression Analysis} 45

3.8 Conclusion 47

4. CHAPTER 4 RESEARCH FINDINGS AND DISCUSSIONS 48

4.1 _Introduction

4.2 Respondents' Profile

4.3 _{The Result of In Depth Interview} 4.4 Data Analysis 48 49 54

57

4.4.1 Pilot Test 57 4.4.2 Data Filtering 58

4.4.3 Validity and Reliability "Test For the Research 60 Variable

4.4.4 Correlation Matrix Analysis 62

4.5 Hypothesis Testing 4.6 Discussion 4.7 Conclusion 64 68 70 vii

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5 _{CHAPTER 5 SUMMARY, RECOMMENDATIONS AND}

72

CONCLUSION

5.1 Introduction

5.2 _{Summary of the Research}

5.3 _{Implication of the Research}

72 T3

75

5.3.1 Implication to the Theory 75 5.3.2 Implication to the Reseach Methodology 75 5.3.3 _{Implication to the Human Resource Practitioner} 76 5.4 Recommendations

5.4.1 _{Recommendations to the organization}

77 77

5.4.2 Recommendations

_{for future research}

78

5.5 Conclusion 6 References

81 ý

8'

7 Appendix 94 vul

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Table 3.1 Table 3.2 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 'Fahle 4.6 Table 4.7 Table 4.8 Table 4.9 Table 4.10 Table 4.1 1 Table 4.12

LIST OF TABLES

7 level of Likert Sacle

Description of Pearson Correlation Value Respondents' gender

Respondents' age

Respondents' education level Respondents' tenure

Respondents' monthly salary Conclusion from the interview

Reliability for pilot test Data filtering result

Reliability and validity result

38

45

49

50

51

52

53

54

57

58

60

Correlation Matrix result for correlation between research 63 variable

Result for multiple regression analysis (standardized Beta) 65 with procedural justice as moderator and employee's job

satisfaction as dependent variable.

Result for multiple regression analysis (standardized Beta) 67 with distributive justice as moderator and employee's job

satisfaction as dependent variable.

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LIST OF FIGURES

Figure 1.1 Research Conceptual Framework 6 Figure 2.1 Equity Theory Model 20 Figure 5.1 _{Recommended conceptual framework for future research} 80

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ABSTRACT

PERCEPTIONS OF JUSTICE ACT AS A MODERATOR OF THE RELATIONSHIP _{BETWEEN PERFORMANCES BASED PAY}

AND JOB SATISFACTION

Wong Kee Hock

This paper examines the relationship performance based pay system, perception of justice and job satisfaction. The conceptual framework for this study is tested by in depth interview and survey questionnaire, using a sample of 107 employees who have worked in Komag (USA) Sdn. Bhd., Sama Jaya Industrial Zone, Kuching, Sarawak. The outcomes of hypotheses testing using hierarchical regression analysis show that (I) procedural justice does act as a moderator between pay procedure and job satisfaction, and (2) distributive justice does not act as a moderator in between pay distribution and job satisfaction. These results demonstrate that procedural justice plays a partial moderating role in the relationship between performance based pay system and job satisfaction. Additionally, the weaknesses and strengths of this study should he considered in future research in order to strengthen compensation theories, increase robustness of research methodology, and help practitioners to improve the way of delivering pay information to employees who have worked in the organizations.

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ABSTRAK

PERSEPSI KEADILAN BERTINDAK SEBAGAI MODERA TOR DALAM

HUBUNGAN ANTARA SISTEM PAMPASAN BERDASARKAN PRESTASI DAN KEPUASAN KERJA

Wong Kee Hock

Kerlu. s kerju ini mengkuji perhubungan antara sistem ganjaran berdasarkan prestasi, per. sep. si keudilun dan kepuasan kerja. Kerangka konsepsual kajian telah diuji

den, ýýun curu temu Aga dan horang soal selidik, menggunakan jumlah saml el 10-7 pekerju Yung herkhidmal di Komag (USA) Sdn. Bhd, Sama Jaya Industrial Zone.

Kuching. Suruti°uk. Kepulusan pengujian hipolesis menggunakcm unalisis regresi hirarki _{le/uh menunjukkan} hahawa (1) keadilan _prosedur hertindak _sebagai

moderator di unluru proses pernhayuran dengan kepuasan kerja; dan (2) keadilan dLsirihulif'gagal _{hertindak sehugai moderator di anlura pembahagian pemhuyarun} den gun kepuusun kerja. Kepulusan pengujian hipotesis ini menerangkan hahau-a keudilcrn prosedur teluh memuinkan peranan sehagai moderator separuh dulam perhuhrmgun unlurcr sistem ganjaran herdasasrkan prestasi dengan kepuasan kerja.

Selcmjurnyu, kelemahan-kelemuhun dun kekualan-kekuatan kajian ini perlu diheri perhulian _{t, ung . seii, ujarnyu} dalum kajian akan dalang supaya hasil kajiunnya dapal

di, iýunu rrnluk memperieguhkun teori-leori _pampusan, _memanlapkan kaedah pemýe/idikun, dun memhuntrr pengumal sumher manusia menamhahhaikkan caru

menVunrpaikcrn muklumul pampasan kepadu pura pekerja yang herkhidmul di organi. scr. si.

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CHAPTER I INTRODUCTION

1.1 Introduction

This chapter consists of nine sections. The first section discusses the background of the current study whereas the problem statement and the research objectives will he discussed respectively in the second section and third section.

Whilst, in part lour, the conceptual framework that present study based on will he included. Part five and six explain the research hypotheses and the definitions of terms. Section seven discusses the importance of the study whereas the last section discusses the limitations of this study.

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1.2 _{Background of the Study}

Compensation is also defined as pay, reward, remuneration or wages and salary. It is a crucial function of human resources management. If pay systems are properly designed according to external and internal organizational factors, it will motivate employees to achieve organization goals and strategy (Milkovich & Newman. 2005).

Traditionally, organizations pay for employees based on job exist in the

organization (Gelani & Weber, 1997). However, in era of globalization, organizations are facing economic pressure and had gone through the downsizing and

de-layering. Organizations are now trying to figure out the most appropriate ways to maximize employees' performance. In this case, performance based pay system is give more attention by most organizations.

Perförmance based pay system was first introduced in factory work and scientific management in the 1920's (Lawler III, 2000). It is implemented to attract.

retain and motivate employees at all level of the organization (Plunket & Attner).

Perförmance based pay system is the pay system design (e. g.: merit pay, bonus. lump sum bonus. gainsharing, profit sharing and so on) that pays by assessing individual performance (Milkovich & Newman. 2005). Whilst. Lawler III (2000) states that an organization employs this performance based pay system to attract the outstanding

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performers to stay in the organization by paying excellent performers highly. Pay is thus, said to be used as recognition to the employees' effort as well as the inspiration

for the employees to perform their best.

Previous studies on the pay system have been conducted to examine two major areas, the pay distribution (Dulebohn & Martocchio, 1998) and the procedure (Brody. Frank & Kowalcky, 2001). Study conducted by Pfeffer and Langton (1993)

found that the pay distributed to them could affect employees' behavior and attitude. This effect is the result of the perception of distributive justice that arises (Dulebohn & Martochio. 1998). Distributive justice or equity theory has gain a lot of attention

since it is formulated by Adam (1965). Employee who does not perceive the existence of the distributive justice in the pay distribution will then lead to low job satisfaction.

On the other hand, under the performance based pay system, pay distribution is base on the employee performance. The performance measurement is the key element for determine the pay distribute to the employee (Milkovich & Newman. 2005). Performance measurement is usually done through the performance appraisal system. However, since the performance measurement is kind of subjective. employee will only be satisfy when the fairness exist in the process (Cook & Grossman. 2004). Poon (2003) point out that fairness in the performance measurement context referred to the procedural justice, which defines as fairness of

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the process use to determine the appraisal. As Vest. Dow Scott, Vest, and Markham (2000) said, without the fairness, employee won't trust with their supervisor in the

performance appraisal process and also in the reward allocation. Trust serve as one of the important moderators to employee job satisfaction, employees are found to have low job satisfaction if fairness does not exist. This statement is support by

Lawler 111 _(2000).

Though, some of researchers find that distributive justice has better significant relationship with job satisfaction (Kim & Mauborgne, 1992), while others (Brooke,

Rusell. & Price. 1988; Dailey & Kirk, 1992; Greenberg. 1987) found procedural justice to he more significant.

1.3 Problem Statement

Previous studies on compensation system hilight that implementation of pay system may affect employee's feeling of justice (St-Onge. 2000; Vest, Dow Scott.

Vest & Markham, 2000; Fischer, 2004). Further _{research in this area reveals that}

perceptions of_justice about pay procedure and distribution in pay system may lead to

increase job satisfaction (Vest, Dow Scott, Vest & Markham, 2000; Kim & Mauborgne. 1993; Katzell. Thompson & Guzzo, 1992).

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These finding is consistent with the notion of organization justice theory. However. the nature of this relationship has less emphasized in past research studies. The result getting unpredictable when it is implementing in the performance based pay system, which need to reward the high performing employee consistently. Therefore, this studies will be conducted to test the moderating role of perception of justice in the relatioship between performance based pay and job satisfaction.

1.4 Research Objectives

The broad objective of this research is to investigate the moderating effect of perceptions of justice on the relationship between performances based pay and the job satisfaction.

The narrow objectives are:

a) To examine the moderating effect of procedure justice on the relationship between pays procedure and job satisfaction.

h) _{To examine the moderating effect of distributive justice on the relationship} between pay distribution and job satisfaction.

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1.5 Conceptual Framework

Figure l. l: Research Conceptual Framework

Independent Variable _{Dependent Variable}

Per/nrmance Base Pay

---

" Pay Procedure

" Pay Distribution

1---I

i

Perception of Procedures Justice

Moderating Variable

Perception of Distributive Justice

6

Job

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1.6 Research Hypotheses

There are two types of hypotheses. which are broad and narrow hypotheses.

1.6.1 Broad Research Hypothesis

11: _{Perceptions of justice moderate the relationship between performances based} pay and job satisfaction

1.6.2 Narrow Research Hypothesis

Ill: _{Procedural justice moderates the relationship between pay procedure and job} satisfaction.

112: _{Distributive justice moderates the relationship between pay distribution and} job satisfaction.

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1.7 _{Operational Definition of Terms}

This section will describe the operational definitions of terms for the research variables whereas conceptual definitions of terms for the research variables will be explained in the chapter 2.

1.7.1 Performance Based Pay

Performance based pay refers to the non-monetary and monetary rewards that are given by the employer to its employee based on merit.

1.7.2 Pay Procedure

Pay procedure refers to the process and system of distributing pays according to performance appraisal, communication and participation chances exist in the pay system.

1.7.3 Pay Distribution

Pay distribution means the amount, type and level of monetary and non- monetary rewards that are given by the employer to high performing employees.

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1.7.4 Procedural Justice

Procedural justice means perceptions of fairness about the procedure of distributing pays to high performing employees.

1.7.5 Distributive Justice

Distributive justice refers to employees feel justice about the pay allocation based on merit criteria.

1.7.6 Job Satisfaction

Job satisfaction is defined as employee satisfaction with the job factors. which are pay, fringe benefit. status. working condition and intrinsic reward.

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1.8 _{The Importance of the Research}

1.8.1 Importance to the theory

This research helps to clarify more regarding the importance of perception of justice among employees in the performance based pay system. The results of this

study may contribute to the literature regarding the relationship between the performance based pay system and job satisfaction. Thus, it helps to make the justice theory more complete in terms of the relationship.

1.8.2 Importance to the research method

Most studies in this area use either qualitative or quantitative research method. In this study, in depth interview and survey questionnaire method will be used to gather relevant data. This may help the research to gain valid and reliable data that may contribute to valid and reliable research findings.

1.8.3 Importance to the Human Resource Practitioner

Previous research in this area has not sufficiently described the moderating role of perceptions of justice in the compensation system models. Through this study. human resources practitioners will better understand the concept of justice