Effect of Pay Strategy on Employees´ Pay Satisfaction: Testing and Modifying the Equity Theory

Although pay strategy is an important aspect in organizational strategic management, its effect on employees´ pay satisfaction is unclear yet. In This paper, the effect of pay strategy on employees´ pay satisfaction was examined by a simulative experiment, which was based on the Adams´ equity theory. 122 MBA students participated in the study, and a single-factor completely randomized design was employed. The results indicated that pay strategy has significant effect on employees´ pay satisfaction: market lead strategy resulted in positive reaction on pay satisfaction, but significantly only when participants´ pay was much better than referents; pay lag strategy resulted in dramatic negative reaction on pay satisfaction. The conclusion is that employees were more sensitive for market lag strategy than market lead strategy, and equity theory was unsuitable for the situations of market lead strategy. Based on the results, the theoretical contribution and practical implication of this study were discussed finally.