Does Allowing Employees to Set Their Own Pay Motivate Greater Effort? A Re-examination of Potential Drivers

Abstract

Studies find allowing employees to set their own pay (pay delegation) increases effort, attributing this effect to employees’ sense of responsibility and/or guilt aversion, and not to trust. However, these studies use experimental designs that likely inhibited the emergence of trust and do not measure responsibility or guilt aversion. Using a modified design to address these issues, we find trust has greater explanatory power than either responsibility or guilt aversion. However, we also observe the presence of countervailing forces that offset the mediating effects of trust. We also find combining pay delegation with either a compensation cap or an incentive contract does not help firms retain the effects of pay delegation through trust while mitigating the countervailing forces. Thus, the motivational effects of pay delegation are more nuanced than previously believed, and our results reinforce the need for further research on the motivational effects of pay delegation.