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It is easy to overestimate the frequency
with which adults actually go to the opera
and underestimate the frequency with
which they watch TV cartoons on Satur-
day mornings, based on their self-reports.
(Nunnally & Bernstein, 1994, p. 383)

Rynes, Colbert, and Brown (2002) pre-
sented the following statement to 959 mem-
bers of the Society for Human Resource
Management (SHRM): “Surveys that di-
rectly ask employees how important pay is to
them are likely to overestimate pay’s true im-
portance in actual decisions” (p. 158). If our
interpretation (and that of Rynes et al.) of
the research literature is accurate, then the
correct true-false answer to the above state-
ment is “false.” In other words, people are

more likely to underreport than to overreport
the importance of pay as a motivational fac-
tor in most situations. Put another way, re-
search suggests that pay is much more im-
portant in people’s actual choices and
behaviors than it is in their self-reports of
what motivates them, much like the cartoon
viewers mentioned in the quote above. Yet,
only 35% of the respondents in the Rynes et
al. study answered in a way consistent with
research findings (i.e., chose “false”).

Our objective in this article is to show
that employee surveys regarding the impor-
tance of various factors in motivation gener-
ally produce results that are inconsistent
with studies of actual employee behavior. In
particular, we focus on well-documented
findings that employees tend to say that pay


Human Resource Management, Winter 2004, Vol. 43, No. 4, Pp. 381–394
© 2004 Wiley Periodicals, Inc. Published online in Wiley InterScience (
DOI: 10.1002/hrm.20031

Sara L. Rynes, Barry Gerhart, and Kathleen A. Minette

A majority of human resources professionals appear to believe that employees are likely to over-
report the importance of pay in employee surveys. However, research suggests the opposite is ac-
tually true. We review evidence showing the discrepancies between what people say and do with
respect to pay. We then discuss why pay is likely to be such an important general motivator, as
well as a variety of reasons why managers might underestimate its importance. We note that pay
is not equally important in all situations or to all individuals, and identify circumstances under
which pay is likely to be more (or less) important to employees. We close with recommendations
for implementing research findings with respect to pay and suggestions for evaluating pay sys-
tems. © 2004 Wiley Periodicals, Inc.

Correspondence to: Sara L. Rynes, Tippie College of Business, 108 PBB, University of Iowa, Iowa City, IA
52242-1000, tel. 319-335-0838,


is less important to them than it actually is.
This is an important point because if em-
ployees’ reports are taken at face value, HR
professionals are likely to seriously underes-
timate the motivational potential of pay.
Moreover, a quick survey of the journals or
magazines that are most often read by prac-
titioners (in particular, HR Magazine for HR
professionals and Harvard Business Review
for general managers) suggests that they, too,
tend to take employee surveys at face value
without carefully examining the behavioral
evidence related to pay and motivation.

In the section that follows, we first pres-
ent evidence demonstrating the gap between
what people say and what they do with re-
spect to pay. We then show that practitioner
journals present claims about pay importance
that are inconsistent with research about the
actual motivational effects of pay. In general,
there appears to be a consistent (but incor-
rect) message to practitioners that pay is not
a very effective motivator—a message that, if
believed, could cause practitioners to seri-
ously underestimate the motivational poten-
tial of a well-designed compensation system.

Gaps between What People Say and Do
with Respect to Pay

Table I presents findings from a number of
major studies that have attempted to deter-
mine the importance of pay to employees,
relative to other potential motivators. In the
first column are the results of studies that
have simply asked people to rate or rank
pay’s importance, relative to other potential
motivators. In the right-hand column are
the results of studies in real, ongoing or-
ganizations that examine differences in
work output following implementation of
various motivational interventions: modifi-
cations of pay systems, work redesign, in-
creases in employee participation, and en-
hanced performance feedback. In order to
increase the reliability of the conclusions
drawn, we included only studies that are ei-
ther narrative reviews of the literature,
meta-analytic reviews (which incorporate
the data from many individual studies into a
single large-scale empirical analysis),1 or
single studies with very large sample sizes

(e.g., Jurgensen [1978], which had over
50,000 respondents, and Towers Perrin
[2003], which had over 35,000].

As the first column of Table I shows,
when asked directly about the importance of
pay, people tend to give it answers that place
somewhere around fifth (range = second to
eighth) in lists of potential motivators. In
contrast, meta-analytic studies of actual be-
haviors in response to motivational initiatives
(second column) nearly always show pay to
be the most effective motivator. Indeed, after
conducting the first such meta-analysis with
respect to motivational interventions, Locke,
Feren, McCaleb, Shaw, and Denny (1980)
concluded: “Money is the crucial incentive
. . . no other incentive or motivational tech-
nique comes even close to money with re-
spect to its instrumental value” (p. 379).
Subsequent research has continued to sup-
port their conclusion.

Why do such discrepancies occur, and
how can psychological theories help us ex-
plain them? The common tendency for peo-
ple to say one thing but do another is known
as socially desirable responding: “the tendency
to choose items that reflect societally ap-
proved behaviors” (Nunnally & Bernstein,
1994, p. 382). Social desirability stems from
either a lack of self-insight or a lack of frank-
ness (Nunnally & Bernstein, 1994). In the
case of pay, people are likely to understate im-
portance either because they misjudge how
they might react to, say, an offer of a higher-
paying job, or due to social norms that view
money as a less noble source of motivation
than factors such as challenging work or work
that makes a contribution to society.

Generally speaking, the more a particu-
lar question touches on strongly held social
values, the less valid direct self-reports are
likely to be. In such cases, both managers
and researchers must find additional ways of
ferreting out more valid information. Recog-
nizing this, some researchers have ap-
proached the topic of pay importance by ex-
amining how employees’ behaviors (such as
turnover or performance) change in re-
sponse to changes in pay and other HR prac-
tices (e.g., the second column in Table I).
These behavioral responses are far more
compelling pieces of evidence than people’s

In general,
there appears to
be a consistent
(but incorrect)
message to
that pay is not
a very effective
message that, if
believed, could
practitioners to
potential of a

The Importance of Pay in Employee Motivation • 383

responses to surveys regarding what is “im-
portant” to them. As Table I shows, on aver-
age, employees respond more effectively to
monetary incentives than to any other moti-
vational HR intervention.

The presence of socially desirable re-
sponding has been revealed using a number
of other research techniques as well. For ex-
ample, one common psychological research
strategy is to adopt projective techniques
(e.g., asking what people think others proba-
bly think or do, or asking them to create a
motivational story from an ambiguous pic-
ture) to draw out sensitive or threatening in-

formation. A creative example of this ap-
proach was implemented by Jurgensen
(1978), who assessed the relative importance
of ten job characteristics (including pay) to
50,000 job applicants over a 30-year period
by asking them to “decide which of the fol-
lowing [job attributes] is most important to
you” (p. 268). Based on these direct re-
sponses, males reported pay to be only the
fifth most important factor, while women re-
ported it to be even lower (seventh; see Table
I). However, when Jurgensen asked the same
men and women to rank the importance of
the same ten attributes to “someone just like

Discrepancies between Self-Reports of Pay Importance and Behavioral Responses to Changes in Pay

Major Studies of Behavioral Responses to Pay and Other
Major Studies of Self-Reported Pay Importance Motivational Interventions

1. Locke, Feren, McCaleb, Shaw, and Denny, 1980. Meta-
analysis (see Note 1 at end of article) of productivity-en-
hancing interventions in actual work settings found that in-
troduction of individual pay incentives increased
productivity by an average of 30%. In contrast, job enrich-
ment produced productivity increases ranging from 9–17%,
while employee participation programs increased productiv-
ity by less than 1%, on average.

2. Guzzo, Jette, and Katzell, 1985. Meta-analysis of monetary
incentives and other motivational programs on productivity
or physical output. Financial incentives had by far the
largest effect on productivity of all interventions. For exam-
ple, pay was four times more effective than interventions
designed to make work more interesting.

3. Judiesch, 1994. Meta-analysis found that individual pay in-
centives increased productivity by an average of 43.7%. Re-
sults were even larger (48.8%) when the sample was re-
stricted to studies in real organizations (as opposed to
laboratory experiments). Other interventions were not stud-
ied, but we know of no meta-analysis that has presented
findings for other motivational interventions that come
close to approaching these effect sizes.

4. Stajkovic and Luthans, 1997. Meta-analysis found that in-
centive systems yielded productivity 1.36 standard devia-
tions higher than in comparable groups without incentives
in manufacturing firms (comparable figure in service firms
was .42). Similar effect sizes were found for feedback and
social rewards.

5. Jenkins, Mitra, Gupta, & Shaw, 1998. Meta-analysis of rela-
tionships between financial incentives and performance
quantity and quality. Found an average correlation of .32
between incentives and quantity of production, but no reli-
able relationship between incentives and product quality.


1. Herzberg, Mausner, Peterson, and Capwell, 1957. Litera-
ture review of 16 studies showed that pay ranked sixth in
importance. Ranking above pay were job security, interest-
ing work, opportunity for advancement, appreciation, and
company and management.

2. Lawler, 1971. Reviewed 49 studies showing that pay
ranked approximately third across studies. Did not list
rankings for other motivators.

3. Jurgensen, 1978. Collected rankings of importance from
more than 50,000 applicants to the Minneapolis Gas Com-
pany over a 30-year period. Pay ranked fifth in importance
to men, and seventh in importance to women. For men,
security, advancement, type of work, and company ranked
higher than pay. For women, type of work, company, secu-
rity, supervisor, advancement, and coworkers ranked higher.

4. Towers Perrin, 2003. Surveyed more than 35,000 U.S. em-
ployees. Found importance of pay varies by objective. Com-
petitive base pay ranked second and pay raises based on in-
dividual performance ranked eighth for attracting
employees. Competitive base pay ranked sixth in retaining
employees. Pay was not ranked in the top ten in terms of
“engaging” (motivating) employees.


yourself—same age, education, and gender,”
pay jumped to first place among both men
and women. In other words, job applicants
seemed to believe that pay is the most impor-
tant attribute to everyone except themselves!

A second creative technique, called
“policy capturing,” examines how people
evaluate the attractiveness of holistic job al-
ternatives (i.e., entire “bundles” of job char-
acteristics, such as pay, location, type of
work, and benefits) in order to tease out the
relative contribution that pay and other
characteristics make to their overall assess-
ments. The use of holistic job descriptions
presents a situation much closer to the deci-
sions job seekers actually make about
prospective jobs than asking them to rate or
rank a list of abstract, decontextualized job
characteristics. By measuring each job in
terms of its underlying characteristics (i.e.,
level of pay, location, type of work, average
time to promotion) and then comparing
those characteristics with people’s overall
ratings of job attractiveness, the importance
of each underlying job characteristic to over-
all attractiveness can be inferred without
asking direct questions about importance.

In such studies, pay has generally been
found to be a substantially more important
factor when inferred via policy capturing
than when assessed via people’s direct re-
ports (Barber, 1998; Rynes, Schwab, & Hen-
eman, 1983; Schwab, 1982). For example,
Feldman and Arnold (1978) found that pay
was fourth out of six job attributes (opportu-
nities to use important skills and abilities was
first) when graduate business students were
asked to rank them from “most preferred to
least preferred” (p. 707). In contrast, when
using policy capturing with “willingness to
accept the position” as the outcome variable
and the six job attributes as the predictor
variables, they found that pay’s “importance
weight” was largest and nearly twice as large
as that of the next job attribute.

In summary, there is strong evidence that
pay is a powerful motivator—perhaps the
most powerful potential motivator—of per-
formance. (We say “potential” motivator be-
cause in order to motivate, pay must be no-
ticeably contingent on performance—a
condition that does not hold in many organ-

izations; more on this later.) However, the
study by Rynes et al. (2002) suggests that
managers do not believe pay is as important
to employee behaviors as employees say it is,
despite the fact that employees themselves
appear to seriously underreport pay’s impor-
tance to their actual behaviors! The system-
atic underestimation of pay’s importance,
both by managers and employees, is a puzzle
that merits examination.

We have already noted that one potential
explanation for these discrepancies is social
desirability—the idea that to be motivated by
money is somehow “crass” or undignified.
Another explanation, however, may lie in the
kinds of information that HR professionals
receive about pay in the most widely read
practitioner journals. A review of these jour-
nals shows that articles about motivation are
based on the types of survey evidence pre-
sented in the first column of Table I, rather
than the behavioral evidence reported in col-
umn two. As such, it is perhaps not surpris-
ing that practitioner journals tend to widely
disseminate the idea that pay is not a very
important motivator.

Consider, for example, the February
2004 issue of HR Magazine, the periodical
that Rynes et al. (2002) found to be far and
away the most frequently read source of in-
formation by HR professionals. The cover
story, called “Getting Engaged” (Bates,
2004), reports on two recent surveys of em-
ployee “engagement,” defined as the “bases
for . . . an innate human desire to contribute
something of value to the workplace.”
Roughly, then, engagement would appear to
have much in common with the psychologi-
cal construct of motivation.

The first survey, by Towers Perrin (2003),
identified ten factors influencing engage-
ment. In contradiction of the meta-analytic
evidence presented earlier, pay was not even
on the list. (The top four were senior man-
agers’ interest in employees’ well-being, chal-
lenging work, decision-making authority, and
customer focus.) A Towers Perrin principal
was quoted as saying, “A lot of the drivers of
engagement are subtle issues that don’t re-
quire a lot of capital outlay. They take work”
(Bates, 2004, p. 64).2 Similarly, the second
survey (by Walker Information) reported the

The systematic
of pay’s
both by
managers and
employees, is a
puzzle that

The Importance of Pay in Employee Motivation • 385

The broad
usefulness of
money as well
as its many
suggests that,
far from being
a mere low-
order motivator,
pay can assist
in obtaining
virtually any
level on
including social
esteem and self-

top five factors with the “greatest influence
on an employee’s commitment to a firm”
(note that commitment is not the same as
motivation). Again, pay was not on the list.

A similar tendency to publish viewpoints
arguing against the importance of pay exists
in other practitioner resources as well. Con-
sider, for example, the Harvard Business Re-
view, which has a circulation of a quarter-
million and tends to be read by high-level
executives who are in charge of corporate
strategy. A review over the past 12 years re-
veals the following titles: “Why Incentive
Plans Cannot Work” (Kohn, 1993, who goes
on to explain “why bribes simply cannot
work”), “Six Dangerous Myths about Pay”
(Pfeffer, 1998, which claims it is a “myth”
that individual pay-for-performance is an ef-
fective motivator), and “One More Time:
How Do You Motivate Employees?”
(Herzberg, 1987, whose answer basically is
“not with pay, because pay is actually a de-
motivator”). Moreover, in introducing a re-
cent special issue of HBR on “The Most Tan-
gible Assets” (i.e., employees), the “From the
Editors” section identified two overarching
themes of the articles, one of which was that
“we learn that while traditional rewards and
punishments can, if ill managed, severely
damage motivation, they have little benefi-
cial effect under even the best of circum-
stances.” These claims are simply inconsis-
tent with the voluminous evidence, based on
hundreds of studies, exemplified in the sec-
ond column of Table I. (For a more extensive
treatment of these and other research distor-
tions, see Gerhart & Rynes, 2003.)

In summary, research on employee re-
sponses to HR interventions shows rather
convincingly that pay is a very important mo-
tivator. The most general theoretical explana-
tion for pay’s importance is the fact that it is
useful for obtaining so many other desirable
things (Lawler, 1971). For example, in addi-
tion to Maslow’s (1943) frequently men-
tioned “lower-order” needs (such as food and
shelter), money can also pave the way toward
social status, a good education for one’s chil-
dren, or making it possible to retire early and
enjoy increased leisure.

Another general explanation for the im-
portance of pay is that pay is frequently used

as a yardstick for social status (Frank, 1999)
and personal accomplishment vis à vis oth-
ers, particularly among high achievers
(Trank, Rynes, & Bretz, 2002). Status- and
accomplishment-based signals associated
with compensation appear to be particularly
sensitive to relative pay, or pay comparisons,
rather than absolute levels of pay. Equity the-
ory (Adams, 1963) has long emphasized the
importance of pay comparisons to individu-
als’ sense of fairness and well-being. More
recently, sociobiologists and evolutionary
psychologists have built a compelling case
that the importance of relative wealth and
status is “hard-wired” in human nature—the
result of evolutionary and natural selection
processes that favor (in terms of procre-
ational success) those who come out “on
top” in a positional or hierarchical sense.
Thus, we find that people are often moti-
vated to buy houses or yachts that are “just a
little bigger” than those of some close com-
parator (Frank, 1999), or to demand that
their salaries always be “just a little bit
higher” than the highest current salary
among their peers (e.g., Crystal, 1991).

In summary, the broad usefulness of
money as well as its many symbolic meanings
suggests that, far from being a mere low-
order motivator, pay can assist in obtaining
virtually any level on Maslow’s motivational
hierarchy, including social esteem and self-

Contingency Factors: The “It Depends”
Nature of Pay Importance

To this point, we have presented evidence
suggesting that pay is a very important moti-
vator, despite employee self-reports and per-
sistent articles in practitioner journals that
suggest otherwise. In fact, meta-analytic re-
sults do not reveal any motivational interven-
tions that work better than performance-
contingent pay for enticing people to attain
higher performance levels.

However, in emphasizing the impor-
tance of pay as a motivator, we are not say-
ing that pay is the only important motivator.
Indeed, it is clear that many of the other fac-
tors mentioned by researchers such as
Maslow and Herzberg (for example, interest-


ing work and participation in decision mak-
ing) are also important motivators to many
people, as confirmed in the empirical results
shown in both columns of Table I. Thus, we
recommend that multiple motivators—for
example, performance-based pay and chal-
lenging work—be used in conjunction with
one another as they are in such successful
firms as Microsoft and General Electric, or
firms that use open book management prac-
tices (a combination of complete financial
information sharing, companywide perfor-
mance-based pay, and high levels of em-
ployee involvement in decision making; see
Case, 1998).

In addition, we are not saying that pay is
always the most important motivator or that
pay is equally important in all situations. Al-
though meta-analytic results can tell us
about motivational effects “on average,” they
cannot tell us what is appropriate for a par-
ticular manager to do in a given situation.
Most managers (correctly) believe that the
importance of pay depends on a number of
variables, both situational (e.g., what others
are paying) and individual (e.g., personality
or performance level). This same point has
also been made by academics. For example,
economists have emphasized that attribute
importance can only be determined in con-
crete choice situations where various job
characteristics are assumed to be traded off
against each other to reach the highest over-
all utility (Rottenberg, 1956). Similarly, psy-
chologists have noted that individual differ-
ences in personality and performance also
influence the attention given to pay in be-
haviors and decisions (e.g., Trank et al.,
2002; Trevor, Gerhart, & Boudreau, 1997).

Space limitations preclude us from dis-
cussing all the contingencies that appear to
affect the importance of pay in a given situ-
ation (for a more complete summary, see
Gerhart & Rynes, 2003). However, some of
the most interesting or consistent findings
are presented in Table II, which is broken
down into “individual difference” and “situ-
ational” contingencies.

On the individual differences front, we
think it is very important to note the types of
individuals who are most likely to prefer pay
that is contingent on performance. Specifi-

cally, research suggests that individual pay-
for-performance schemes (e.g., merit pay,
individual incentives, or bonuses) are most
important to high academic achievers, high-
performing employees, and individuals with
high self-efficacy and high needs for
achievement (e.g., Harrison, Virick, &
Williams, 1996; Trank et al., 2002; Trevor et
al., 1997; Turban & Keon, 1993)—just the
types of people most employers claim to be
looking for! In addition, pay is more impor-
tant to extroverts than to introverts (e.g.,
Stewart, 1996), while pay relative to peers is
of higher importance to individuals who
have held more leadership positions in col-
lege (Trank et al., 2002). Once again, these
are the types of employees—those with
“people” and leadership skills—that most
companies seem to be looking for.

We think these findings are important,
particularly in light of the currently pre-
dominant advice suggesting that employers
reduce the relationship between individual
pay and performance (e.g., Herzberg,
1968/2003; Kohn, 1993; Pfeffer, 1998). Al-
though there are some reasonable notions
behind such recommendations (e.g., to en-
courage teamwork), it is important to con-
sider that some of the most sought-after and
desirable employees do not wish to work in
systems that do not differentiate individual
performance. Indeed, the average U.S.
worker desires individual (rather than team-
or organization-based) pay-for-performance
(e.g., Bureau of National Affairs, 1988), with
high performers desiring it to an even greater
extent (e.g., Trank et al., 2002).

There are also a number of interesting
findings on the situational side of Table II.
Some of the most important of these can be
summarized in terms of four general princi-
ples. The first such principle is that in order
for pay to be an important motivator, there has
to be variability in pay options. For example,
consider an applicant’s job choice decision.
Taken to the extreme, a person faced with
several job alternatives, all at the same pay
and benefit levels, would indeed find that
salary was not “important” to his or her job
choice. Likewise, if employees in the same
job at the same company all receive highly
similar “merit” increases despite noticeable

suggests that
individual pay-
schemes (e.g.,
merit pay,
incentives, or
bonuses) are
most important
to high
achievers, high-
employees, and
with high self-
efficacy and
high needs for
just the types of
people most
claim to be
looking for!

The Importance of Pay in Employee Motivation • 387

differences in performance (a rather com-
mon situation, by most accounts), managers
will similarly conclude that pay is not effec-
tive in motivating people.

However, it is important to recognize
that in these examples, pay is not motivating
because it is not being used in a way that
would be expected to produce motivation. In
both scenarios, pay would be expected to
play an important role if opportunities for
pay varied significantly across employers, or
across individuals of varying performance
levels within the same employer. The impor-
tance of pay variability in influencing pay im-
portance has been demonstrated empirically
under carefully controlled conditions. For ex-

ample, Rynes et al. (1983) showed that pay
explained an average of 65% of the variance
in subjects’ overall evaluations of job attrac-
tiveness when presented with jobs having a
wide range of salary alternatives, as com-
pared to only 40% when presented with a pay
range half as great.

The fact that the importance of pay
changes with variability in pay alternatives
can also be seen by contrasting the effects of
pay in vibrant versus stagnant economies.
During the late 1990s, for example, the im-
portance of pay in shaping behavior could
easily be observed as many of the most mar-
ketable employees bailed out of large, rela-
tively stable employers to pursue much

Illustrative Examples of Contingency Factors Affecting Pay Importance

Individual Difference Contingencies Situational Contingencies

1. Pay is more important in job choice when pay varies widely
across employers than when pay is relatively more uniform
(Rynes, Schwab, & Heneman, 1983).

2. There is a declining marginal utility to additional incre-
ments of pay. This means that, dollar for dollar, being
“under market” has a stronger deterrent or demotivational
effect than the positive effect of paying above market. Peo-
ple often reject low-paying job offers on the basis of pay
alone, without considering other factors (Rynes, Schwab, &
Heneman, 1983).

3. The salience or “importance” of pay is likely to rise after
changes are made to pay systems. Employees are particu-
larly sensitive to pay cuts. For example, Greenberg (1990)
showed substantial increases in employee theft when em-
ployees were subjected to pay cuts.

4. Employee reactions to changes in pay depend heavily on
communication of the reasons for pay policies and changes.
For example, Greenberg observed a 141% increase in theft
when a 15% pay cut was made without explanation, as com-
pared with only a 54% increase in theft in a plant where
workers received an adequate explanation and where man-
agers expressed remorse.

5. Pay is probably more important in job choice than in deci-
sions to quit, in part because pay is one of the few charac-
teristics people can know with certainty before taking a job.
In contrast, once a person has been on the job for awhile,
other factors (such as quality of supervision) come into play
(Rynes et al., 1983; Towers Perrin, 2003).

6. Pay will do little to motivate performance in systems where
people receive similar pay increases regardless of individual
or firm performance. However, dramatic changes in perfor-
mance often occur when pay is made more contingent on
performance (see column 2, Table I).


1. Pay is more important to extroverts than to introverts
(Lucas, Diener, Grob, Suh, & Shao, 2000; Stewart, 1996).

2. Receiving performance-based pay is more important to high
academic achievers than to others. Receiving higher pay
than their co-workers is more important to extroverts and
individuals with a history of social achievements (e.g., lead-
ership positions; Trank, Rynes, & Bretz, 2002).

3. High-performing employees appear to be particularly sensi-
tive to whether their higher performance is rewarded with
above-average pay increases, while low performers prefer
low-contingency pay systems (e.g., Harrison, Virick, &
Williams, 1996; Trevor, Gerhart, & Boudreau, 1997).

4. Pay appears to be more important to men than to women
(e.g., Hollenbeck, Ilgen, Ostroff, & Vancouver, 1987; Jur-
gensen, 1978; Mincer & Polachek, 1974).

5. People with high need for achievement and higher feelings
of self-efficacy prefer pay systems that more closely link
pay to performance (e.g., Bretz, Ash, & Dreher, 1989; Tur-
ban & Keon, 1993).


higher upside earnings opportunities (via
stock options and grants) at smaller, high-
growth companies. Indeed, before the slow-
down in 2000, large numbers of MBA stu-
dents were leaving such elite universities as
Harvard before completing their degrees in
order to take advantage of the dot-com and
Silicon Valley bubbles. Retaining informa-
tion technology professionals became ex-
tremely difficult for many employers, as
companies continually outbid each other in
an effort to secure scarce talent in a booming
economy. But these effects dampened con-
siderably as the economy collapsed and em-
ployers no longer had to bid employees away
by offering higher salaries and increased
variable pay.

A second general principle is that the
motivational effect of money is nonlinear
across pay levels. This phenomenon is re-
flected in the economic principle of “declin-
ing marginal utility,” which suggests, for ex-
ample, that the opportunity to earn an
additional $100 will be more motivating to
an individual at the poverty level than to
someone earning $100,000 per year. Another
important example of nonlinear pay impor-
tance is the concept of a reservation wage in
job choice—a level of pay that must be met
before an individual will even consider ac-
cepting a job offer. Thus, companies that fall
considerably below market in terms of start-
ing salaries will find that this lower threshold
of acceptability will be a rather severe im-
pediment to applicant attraction, while those
who are near the middle of the market will
find that factors other than pay begin to play
a much larger role in applicants’ job choices.

A third principle is that people judge the
fairness of pay in relative terms. Equity theory
(Adams, 1963) posits that individuals assess
the fairness of their pay by comparing their
own ratio of inputs (e.g., effort and skill) and
outcomes (pay, recognition) to the input-out-
come ratios of important “comparison oth-
ers” such as close coworkers, workers in
other companies, or the employee’s past
work history. The theory also predicts that an
individual who perceives her raise to be in-
equitable is likely to change her behavior in
one of several ways: expressing dissatisfac-
tion to her supervisor, working harder to get

a bigger raise next year, working less to bring
her inputs in line with her perceived out-
comes, or quitting in disgust.

One implication of the importance of
comparative standards and past practices to
employees’ sense of justice is that employ-
ees react strongly to changes in pay that af-
fect their standing relative to some impor-
tant standard (e.g., the past, or a coworker
perceived to be a close rival for future ad-
vancement). As such, every time employers
make pay changes, employees are on “high
alert” for changes that might signal differ-
ences in how they are regarded by the em-
ployer, particularly in relation to peers or to
their own past relationship with the em-
ployer. Psychological contract perspectives
likewise recognize the key role that pay has
in the broader employment relationship,
noting that “the meaning of compensation
systems is far broader than mere economic
terms, signaling much about the nature of
the employment relationship” (Rousseau &
Ho, 2000, p. 304).

For example, pay level will clearly be-
come “important” and affect employee be-
haviors if it is cut, particularly if employers
do not communicate a convincing reason
for the change (e.g., Greenberg, 1990). In-
deed, most managers have at least an im-
plicit understanding of this psychological
dynamic in that they appreciate the extreme
sensitivity of the decisions they make con-
cerning pay and how it is communicated.
Unfortunately, awareness of employees’
sensitivity to pay often causes managers to
shrink from openly communicating about it
(Lawler, 1981), despite the fact that direct
communication can be very important in
terms of making employees feel that deci-
sions were fairly arrived at and in motivat-
ing future performance (e.g., Greenberg,
1990; Prince & Lawler, 1986).

The fourth principle is that the impor-
tance of pay tends to differ depending upon
whether the objective is attraction, retention,
or on-the-job performance. In addition, differ-
ent dimensions of pay differentially affect
these three objectives. As an example of the
first point, pay level is likely to be quite im-
portant both in attracting employees (e.g.,
Rynes et al., 1983) and in retaining them

Every time
employers make
pay changes,
employees are
on “high alert”
for changes that
might signal
differences in
how they are
regarded by the
particularly in
relation to
peers or to their
own past
with the

The Importance of Pay in Employee Motivation • 389

The aspect of
pay that will
most directly
will be the
extent to which
pay is
contingent on
Thus, if raises
are barely
on the basis of
then it should
not be at all
surprising to
find little
influence of
pay on

(e.g., Delery, Gupta, Shaw, Jenkins, &
Ganster, 2000; Guthrie, 2000). However, it
is likely to be relatively more important in at-
traction than retention (Towers Perrin, 2003;
see column 1, Table I). This is because pay is
one of the few job characteristics that can be
known with certainty at the point of job
choice. In contrast, other important factors
(such as the quality of management or the
camaraderie among coworkers) may not be
known until one has been on the job for
some time (Rees, 1973). As such, these other
factors are likely to become relatively more
important in the decision of whether to leave
an employer than they are in job choice.

To the second point (that different di-
mensions of pay differentially affect different
outcomes), applicant attraction and reten-
tion are probably most heavily influenced by
pay level, or the extent to which employees
receive higher or lower pay than similar
workers at other companies.3 However, once
employees have decided to accept a job, pay
levels will not be much of a factor in how
hard they work (with the partial exception
that if the pay level is noticeably above-mar-
ket, most employees will probably work hard
enough not to get fired). The aspect of pay
that will most directly motivate performance,
however, will be the extent to which pay is
contingent on performance. Thus, if raises
are barely differentiated on the basis of per-
formance, then it should not be at all sur-
prising to find little influence of pay on mo-
tivation. In contrast, as meta-analytic
evidence shows, when pay is sharply differ-
entiated on the basis of performance, pay is
a very effective motivator indeed.

We cannot emphasize this last point
enough. To this point in the article, we have
suggested that practitioners generally under-
estimate the motivational potential of pay
because of socially desirable responding by
employees in surveys and misinformation in
the practitioner press. However, it is now
time to add a third possibility—that most
practitioners work in companies where the
differential rewards for performance are so
small, or so well concealed, that employees
are not in fact motivated by money. How-
ever, this is not because employees can’t be
motivated by money, but rather because they

do not believe that higher performance will
result in noticeably more money. Observers
of pay practices have long noted that char-
acteristics of so-called “merit pay” systems
generally result in only minuscule perfor-
mance-based raise differentials among em-
ployees, with the bulk of the raise pool being
distributed very closely around the “average”
increase level. In this respect, most private-
sector employees are not all that different
from government employees, whose general
level of efficiency is bemoaned by taxpayers
due to the fact that they have “no incentive”
for better performance.

In summary, although pay has strong
motivational potential, its actual effective-
ness as a motivator depends on a variety of
individual and situational factors, including
the way it is administered in practice. We
turn now to a discussion of how practitioners
can incorporate the findings from this re-
search into their compensation systems.

Implementing General Principles from
Compensation Research

The preceding evidence leads to the follow-
ing suggestions:

• Take complaints about pay seri-
ously. Given that there is a general
social norm against revealing that
one is motivated by pay (at least in
nonunionized situations), when an
employee does indicate pay dissatis-
faction, it is generally a cause for
concern. This assumes, of course,
that you actually want to retain the

• Do not fall very far below market
pay levels. It is more disadvanta-
geous to be “way below market” than
it is advantageous to be “way above”
it. Being noticeably below market
will cause some applicants, often the
most desirable ones, to reject your
offer out of hand. However, once you
reach market levels, choices will gen-
erally be made on a multidimen-
sional basis, where factors other
than pay can also become competi-
tive advantages (or disadvantages).


• Realize that most of the best em-
ployees want strong pay-perfor-
mance relationships. On average,
the ability to earn a lot of money for
outstanding performance is a com-
petitive advantage for attracting,
motivating, and retaining high-per-
forming employees. This is not to
say that organizations cannot attract
good employees without high-con-
tingency systems; clearly, a number
of well-known firms have done so
(e.g., SAS software). However, in
such cases, the absence of contin-
gent pay is compensated by a strong
culture emphasizing other values
and benefits (in SAS’s case, family-
friendliness, as well as high general
pay levels and benefits). In addition,
there are also a number of organiza-
tions that thrive on high company-
based (versus individually based)
contingent pay, such as Southwest
Airlines or Nucor Steel. These com-
panies are able to attract high per-
formers who also hold relatively
strong collectivist values.

• Evaluate current pay systems with
respect to the strength of pay-per-
formance relationships. Although
most nonunionized and nongovern-
ment employees are ostensibly paid
on the basis of merit, examination
of most companies’ pay systems re-
veals little differentiation in raises
between average and superior per-
formers. Pay-performance contin-
gencies are generally limited by
such practices as setting job grade
ceilings and paying for nonmerit
considerations (e.g., external equity
adjustments or matching competing
offers) out of the “merit” pay
budget. Similarly, pay-performance
contingencies should also be evalu-
ated at the supra-individual level:
Are there gain-sharing or profit-
sharing programs? If so, are the pay-
outs large enough, immediate
enough, or frequent enough to
make a difference to how hard peo-
ple are willing to work? (For exam-

ple, deferred profit-sharing plans
that are designed as substitutes for
defined benefit pensions are un-
likely to have a motivational effect.)
Finally, examine how closely pay-in-
crease budgets mirror changes in
organizational performance levels.
Many employees have become quite
used to being told that the annual
increase budget will be very modest
due to limited ability to pay (i.e.,
low corporate profitability). How-
ever, the reverse is often not true,
with raise pools remaining modest
even in years of high profitability
and the remaining money being al-
located elsewhere.

• Examine whether executive pay is
moving in the same direction, and
at roughly proportionate rates, as
employee increases. Evidence from
the past 30 years reveals quite con-
vincingly that in the typical corpora-
tion, the ratio between executive
and nonexecutive compensation has
increased to a very substantial de-
gree. Not only has the earnings gap
between executive and nonexecu-
tive employees exploded over the
past several decades (Bok, 1993;
Crystal, 1991; Frank & Cook, 1995;
Shulman, 2003), but there are also
many examples of disproportionate
increases in executive pay in the
face of poor organizational perfor-
mance (Samuelson, 2003; Useem,
2003). Because how people feel
about their pay is a result of com-
parative processes, organizations
with huge variance between execu-
tive and employee pay practices are
likely to be populated with workers
eagerly awaiting opportunities to
move to other organizations. (An
important side note is that workers
are often accepting of very high ex-
ecutive pay, such as Bill Gates at
Microsoft or General Electric under
Jack Welch, so long as the fruits of
strong organizational performance
are also passed on to lower layers of
the organization.)

Although most
employees are
ostensibly paid
on the basis of
examination of
companies’ pay
systems reveals
in raises
average and

The Importance of Pay in Employee Motivation • 391

One of the most
suggestions to
emerge from
the reviewed
research is that
one needs to
track employee
behaviors as
well as

Evaluating the Effectiveness of Pay

After following the general design principles
outlined in the preceding section, how can
an organization evaluate the success of its
compensation policies and practices? One of
the most important suggestions to emerge
from the reviewed research is that one needs
to track employee behaviors as well as em-
ployee attitudes. On the behavioral side,
there are at least three outcomes that are
likely to be heavily affected by compensation
practices: attraction, retention, and perfor-
mance. Each of these outcomes should be
closely monitored to detect problems with
the compensation system.

For example, with respect to attraction, is
a company’s job acceptance rate higher or
lower than those of other companies in its area
or industry? If lower, are applicants accepting
positions with higher or lower starting salaries?
In addition, what types of applicants and em-
ployees are being lost—the most desirable or
the least? Similar questions should be asked
about retention. (A good example of monitor-
ing turnover by employee performance levels
can be found in Trevor et al. [1997].) Also, in
both cases, outcomes should be tracked in re-
lation to previous years, as well as to bench-
mark firms or competitors. Different results
suggest different kinds of solutions.

Similar kinds of tracking should be done
with respect to employee performance. Be-
cause most firms do not have objective mea-
sures of individual performance, perfor-
mance outcomes must often be tracked at
team, department, or plant levels. Of partic-
ular interest are changes in performance as-
sociated with major changes in HR practices,
such as shifting from individual to team pro-
duction or from merit pay to gain sharing.

Although assessing employee behaviors
is crucial to evaluating effectiveness, there
are still reasons to monitor employee attitudes
as well. In particular, changes in satisfaction
or importance levels are often leading indica-
tors of subsequent changes in behavior. As
such, employee surveys can still be a valu-
able part of the evaluative arsenal.

Previous research has shown that re-
sponses to employee surveys (e.g., which

items are rated as more “important” or “sat-
isfying” than others) can be heavily depend-
ent on such things as the precise wording
and format of the questions asked (Lawler,
1971). Therefore, managers should use
highly similar surveys from year to year and
pay considerable attention to changes in re-
sponses to key questions having to do with
pay importance, pay fairness, and pay satis-
faction. If the implicit contract regarding pay
level, pay-for-performance, or any other as-
pect of pay has changed (due either to actual
changes in practice or to a changing market
or workforce conditions), a good survey
should be able to capture this.

In particular, the responses and reac-
tions of the top performers should be care-
fully monitored. Of course, employee survey
data are typically anonymous, so direct links
to performance data may not be feasible.
However, self-reported performance on em-
ployee surveys can be used. Additionally, the
turnover rates of high performers can be
compared to those of other employees.

Employers can also be more proactive in
anticipating and heading off certain prob-
lems (e.g., eroding pay levels) by using salary
surveys to benchmark their pay level and
other pay practices against other organiza-
tions. Finally, realizing that people may not
always be forthright in exit interviews about
their reasons for leaving, one should ask di-
rectly what they will be earning in their new
job as a way of gauging the extent to which
pay might be a determining factor.


Money is not the only motivator and it is not
the primary motivator for everyone. How-
ever, there is overwhelming evidence that
money is an important motivator for most
people. Further, there is ample evidence that
surveys asking people to rank order money
and other motivators do not accurately re-
flect the important effects that changes in
pay levels or the way pay is determined actu-
ally have on people’s decisions to join and
leave organizations. Likewise, the often-
modest survey rankings are at odds with be-
havioral evidence on the powerful effects
that monetary incentives have on the goals


that people choose to pursue within organi-
zations and the effort and commitment they
exert toward those goals. Thus, while man-
agers will (and should) consider both finan-
cial and nonfinancial tools for attracting,
motivating, and retaining employees, it
would be a mistake to conclude, based on
general surveys, that monetary rewards are
not highly important. Finally, as we have
demonstrated, the importance (or potential
importance) of monetary rewards in any
particular situation can be evaluated by
considering both the situational variables
(e.g., pay variability) and individual vari-
ables (e.g., performance level) that best de-
scribe the context of a particular manager’s

The empirical evidence we have pre-
sented here is highly consistent with the mo-

tivational views of former CEO Jack Welch,
who is widely acknowledged to have
breathed new life into a well-respected, but
somewhat “sleepy,” General Electric. Chang-
ing GE’s pay system to provide much higher
rewards for strong individual and organiza-
tional performance was one of the pivotal
tactics in Welch’s overall strategy for revital-
ization and growth:

I think showering rewards on people for ex-
cellence is an important part of the man-
agement process. There’s nothing I like
more than giving big raises . . . You have to
get rewarded in the soul and the wallet.
The money isn’t enough, but a plaque isn’t
enough either. . . . you have to give both.
(Jack Welch, quoted in Hymowitz & Mur-
ray, 1999, p. B1)

Sara L. Rynes is the John F. Murray Professor of Management and Organizations
at the University of Iowa. Her research interests include staffing, compensation,
and knowledge transfer between academics and practitioners. Rynes is incoming
editor of the Academy of Management Journal and has served on the editorial boards
of Journal of Applied Psychology, Personnel Psychology, and Frontiers in Industrial
and Organizational Psychology. She is a Fellow of the American Psychological Asso-
ciation and the Society for Industrial and Organizational Psychology. Prior to mov-
ing to Iowa, she was on the faculties of the University of Minnesota and Cornell

Barry Gerhart is the John and Barbara Keller Distinguished Chair of Business at
the University of Wisconsin-Madison. His research interests are human resource
management and strategy, compensation, and business performance. In 1991, Pro-
fessor Gerhart received the Scholarly Achievement Award from the Human Re-
sources Division, Academy of Management. He is a Fellow of the American Psycho-
logical Association and the Society for Industrial and Organizational Psychology.
Professor Gerhart is coauthor of the recent book, Compensation: Theory, Evidence,
and Strategic Implications, as well as coeditor of Compensation in Organizations, and
coauthor of Human Resource Management: Gaining a Competitive Advantage, now in
its fourth edition.

Kathleen A. Minette is presently vice president of human resources with Pearson,
having joined the organization in 1994. Her undergraduate degrees in sociology and
journalism are from Drake University, and her master’s degree in organizational com-
munication is from the University of Northern Iowa. Ms. Minette holds lifetime cer-
tification as a Senior in Human Resource Management (SPHR) from the Human Re-
sources Certification Institute (HRCI). She presently sits on the HRCI board of
directors as the Western Regional Examination Development Director. She teaches
human resource management as an adjunct professor in the Tippie College of Busi-
ness at the University of Iowa.

The Importance of Pay in Employee Motivation • 393


1. Meta-analysis is a method that combines effect
size estimates from previous studies to increase
sample size and thus yield better estimates of the
mean and variance of the population effect size.

2. Note in Table I that the complete Towers Perrin
report does show pay to be in the top ten for
both attraction (second) and retention (sixth).
However, these findings are not reported in HR

3. There can also be some effect of pay basis—i.e.,
the bases for pay increases, such as seniority,
merit, gain sharing, or profit sharing—on appli-
cant attraction and retention, since high-
achieving applicants and employees often seek
companies that differentially reward for high
performance (Towers Perrin, 2003; Trank et al.,
2002; Trevor et al., 1997).


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