A well designed salary system can influence employee’s work motivation and will reflect on their work performance. It would not be difficult to understand, based on the theory of expectancy, a linkage between reward and performance will motivate employee to work harder, and from which to create good performance and in turn to receive better rewards. That is to say a business which adopts an incentive reward system to motivate employee will receive better performance from them in a consistent manner and the end result is to improve the performance of the organization.
In the past, there have been many researches on influence of salary system on pay satisfaction and working attitude of employee, but few has studied differences in individual risk preference which can interfere with pay satisfaction and to explore differences in risk preference of employee, the effect of variable pay on pay satisfaction and working attitudes.
Through empirical analyses, it was found that:
1. In an organization, an implementation of variable pay system will affect pay satisfaction. As salary links more closely with performance, employee’s pay satisfaction increases.
2. The impact of variable pay on pay satisfaction is not influenced by individual risk preference. Due to differences in salary system to motivate employee, in the business this study concludes if employee is unaware of risk or incentive that is structured in the salary system, then there will be not interaction between difference in risk preference and variable pay system, and will also have no impact on salary satisfaction.
3. Pay satisfaction will have an effect on work attitude of employee. The higher the pay satisfaction, the stronger the organization commitment and job involvement by the employee.
4. Through pay satisfaction, variable pay will indirectly affect employee’s work attitude. A reflection on organizational commitment and job involvement due to salary variable as a result of performance change in part must pass through the intermediate effect of pay satisfaction.
Keywords: variable pay, risk preferences, pay satisfaction, organizational commitment, job involvement