Incentive pay and firm performance: moderating roles of procedural justice climate and environmental turbulence

Abstract

In connection with the literature on strategic reward and agency theory, this study investigates the effects of incentive pay on employee outcomes and firm performance. We identify employee outcomes, such as commitment and competence, as mediating processes that explain the effects of incentive pay on firm performance. We further propose procedural justice climate and environmental turbulence as boundary conditions that determine the strength of the effects of incentive pay on employee outcomes. The research model is tested using multisource data collected at three time points over a five-year period from 227 Korean companies. Our analysis confirmed that incentive pay enhanced employee commitment and competence, which, in turn, improved the operational and financial performances of firms. The effect of incentive pay on employee commitment was negative for firms with a low procedural justice climate, but positive for firms operated under a highly turbulent environment. By contrast, the effect of incentive pay on employee competence was positive only for firms operated under a stable environment. This study enriches the literature by presenting and validating plausible underlying mechanisms and boundary conditions under which strategic performance-contingent incentive pay affects firm performance. (c) 2015 Wiley Periodicals, Inc.