Merit pay raises and organization-based self-esteem

We developed and tested a theory of the relationship between merit pay raises and organization-based self-esteem (OBSE) in a longitudinal study of hospital employees. We predicted that the positive relationship between merit pay raise size and OBSE would be stronger when pay-for-performance (PFP) perceptions were high and predicted further that this interaction would be stronger among older employees. As predicted, merit pay raises were not related to OBSE levels for younger employees, but, among older employees, larger merit raises increased OBSE when PFP perceptions were high and decreased OBSE when PFP perceptions were low. Implications of the study for merit pay theory and practice are addressed.