Person-based differences in pay reactions: A compensation-activation theory and integrative conceptual review

Compensation research has focused traditionally on how pay design characteristics (e.g., pay level, individual or group incentives) relate to average employee outcomes and, in toto, on how these outcomes affect organizational performance. Recently, scholars have begun to pay more attention to how individuals vary in the strength of their reactions to pay. Empirical research in several disciplines examines how the interplay of pay systems and person-based characteristics (psychological individual differences, demographics, and relative performance or position in a group) relate to important work-related outcomes. We develop a compensation-activation theory that frames compensation design characteristics as workplace "situations" providing cues that activate individuals' corresponding fundamental social motives made salient due to chronic or transient person-based characteristics. Where activation occurs, stronger-than-average responses to the compensation "situation" are expected. Using the theory as a lens, we synthesize and reinterpret existing research on person-based reactions to pay characteristics, including sorting, incentive/motivational effects, and effects on collective pay system reactions and unit/ organizational outcomes. We conclude with a research agenda aimed at refining compensation-activation theory and advancing the study of compensation as it affects individual and organizational outcomes.