Publication

Formality of financial reward management, availability of non-financial rewards and employee outcomes in SMEs: An investigation using psychological contract theory

Salahisanandaj, Neda
Citation
Abstract
This PhD study investigates whether the formality of financial reward management and the availability of non-financial rewards are associated with more positive employee outcomes in small and medium-sized enterprises (SMEs). In particular, drawing on psychological contract theory, this study investigates the effect of employees’ perceptions of (i) the level of formality of financial reward management (i.e., the level of documentation and regular application of reward policies and procedures) and (ii) the availability of nonfinancial rewards (i.e., autonomy, recognition, flexible working hours and flexible working locations) in their organisation on employees’ motivation and turnover intention within an SME context. The appropriateness of human resource management (HRM) formality in the SME context has been controversial in the literature. SMEs may need the flexibility that comes with informality to respond quickly to the organisational context and changing environments. Therefore, achieving a suitable balance between HRM formality and informality to capture the advantages of the two approaches within the SME context is a challenge that warrants further research. The current study addresses a number of gaps in the limited literature on HRM formality, reward management, and psychological contract theory in SMEs. The current study makes several key contributions to the literature and theory. First, the PhD focuses on employees’ perceptions of the formality dimension in SMEs’ reward management practices. In contrast, previous studies of HRM formality in SMEs mostly focused on the managerial view only. Second, the current study examines the variation in employees’ perceptions of the level of formality of financial reward management across different SME size categories by focusing on five SME size groups. This is an important contribution as oftentimes SMEs are considered in a homogenous manner. Still, there are differences in resources and practices from the small SME size (e.g., 10 employees) and the upper end of the medium category (i.e., 249 employees). Third, the present study investigates the appropriateness of financial reward formality in the SME context and the balance between the formality of financial reward management and informality offered by the availability of non-financial rewards. Fourth, the current study examines how the interplay between employees’ perception of the level of formality of financial reward management and the availability of non-financial rewards in their organisation influences employees’ perceived psychological contracts, employee motivation and turnover intention in SMEs. The empirical research presented in the current study is based on an employee survey (n = 154) within small and medium-sized enterprises operating in the service sector in Ireland. A multiple mediation model with the studied variables is tested using Partial Least Squares Structural Equation Modelling (PLS-SEM). The results of the current study support the view that SME firm size is positively related to the level of formality of financial reward management. Furthermore, the results provide further support for the additional influence of specific business contexts in which SMEs operate, which consequently cause heterogeneity and diversity of SMEs indicated in the literature. The results highlight that employees’ perception of (i) the level of formality of financial reward management and (ii) the availability of non-financial rewards in SME organisations is negatively related to employees’ turnover intention through multiple mediations of employees’ perceived psychological contract and employees’ motivation. The current study results suggest that SMEs may need to find ways to blend elements of informality and formality to generate a context-specific level of formality of their reward management systems. More specifically, the results suggest that, on the one hand, the formality of financial reward management makes things more transparent, and clear communication may contribute to explicit expectations, which consequently reduces the likelihood of transactional psychological contract breach and increases employees’ perception of fairness and trust in management. On the other hand, offering non-financial rewards such as recognition, autonomy, flexible working hours (FWH), and flexible working locations (FWL) may increase employees’ feelings of having flexibility, informality, freedom, and respect, contributing to employees’ perceived positive relational psychological contract. Therefore, this appropriate balance between the formality of financial reward management and informality boosted by offering non-financial rewards in SMEs can develop employees’ positive psychological contract, increase motivation, and reduce turnover intention. The implications of the findings for future research and practice are discussed, and the limitations of the present study are discussed.
Funder
Publisher
NUI Galway
Publisher DOI
Rights
Attribution-NonCommercial-NoDerivs 3.0 Ireland
CC BY-NC-ND 3.0 IE