Personnel knowledge of the pay system, pay satisfaction and pay effectiveness: evidence from Finnish personnel funds

Abstract

Using data collected from over 1,000 individuals in 30 Finnish personnel funds, we study the links between pay knowledge, pay satisfaction and pay effectiveness. We find consistent evidence that higher levels of pay knowledge are associated with improved pay satisfaction and perceived pay effectiveness at the organizational level. We find that pay knowledge has an independent impact on organizational outcomes, rather than being mediated through pay satisfaction. Finally, comparing measures of actual pay knowledge and perceived pay knowledge, we find that the measures of actual knowledge were better connected to the outcomes. This last result suggests that to reliably estimate the relationship between pay knowledge and pay effectiveness researchers should prefer measures of actual knowledge.

Keywords:

• employee share ownership
• pay effectiveness
• pay knowledge
• pay satisfaction
• profit sharing

Acknowledgements

The authors acknowledge financial support from the Academy of Finland, the Finnish Work Environment Fund, Helsingin Sanomat Foundation, The Finnish Association of Graduates in Economics and Business Administration, Federation of Salaried Employees, Federation of The Finnish Information Industries, The Federation of Special Service and Clerical Employees, Federation of Professional and Managerial Staff, Fundservice PLC, The personnel fund of Neste Oil and the personnel fund of Hartwall. Some of the research was carried out when Kalmi visited the ILR School at Cornell University and he is grateful for their hospitality. The authors thank an anonymous referee, Matti Vartiainen, Aino Salimäki and the participants of the Employee Ownership track of the EURAM conference in Paris, May 2007, for constructive comments on earlier versions of this paper.

Notes

 1. By ‘financial participation’ we refer to the forms of compensation where part of the employees' total compensation depends on measures of profitability and share performance, such as profit sharing, employee share ownership and stock options. See Poutsma (2001) for further discussion.

 2. Budd (2006) studies whether employees correctly perceive that they are or are not covered by financial participation schemes. Klein et al. (2007) study the effect of stock option knowledge on stock option enthusiasm.

 3. The discussion in this section draws from Vartiainen and Sweins (2002) and Sweins (2004).

 4. Most of the funds were established in the beginning of the 1990s. After the recession in the beginning of the 1990s only a few funds have been established each year. In 2000, when the empirical material for this study was collected, there were 36 funds with 80,500 members.

 5. See Poutsma (2001) and Pendleton and Poutsma (2004) for a more detailed discussion on these schemes.

 6. Other seminal work includes Klein (1987) and Poole and Jenkins (1990). For reviews of the literature, see e.g. Pendleton, Wilson and Wright (1998) and Bakan et al. (2004).

 7. However, see Spector (2006) for a view that the common method variance problem is often overstated.

 8. We thank an anonymous referee for pointing this out.

 9. The questions for the second and third factor were the same as those used in Nurmela, Hakonen, Hulkko, Kuula and Vartiainen 1999.

10. These 6 questions were chosen initially from 10 questions measuring employee actual knowledge in the questionnaire. The excluded questions were issues related to the establishment of the fund or fund administration. We did not think that knowledge of these issues was essential for employees to understand the operating principles of the fund. In many cases, the establishment of the fund happened a long time ago, and must have appeared distant to many respondents at the time of the survey. Nevertheless, we repeated our analysis by using a measure constructed from all 10 items and the results were virtually unchanged.

11. The results where these variables are included are available upon request.

12. We do not repeat the regressions in columns 4 and 5 (test of mediation) since the measure of perceived knowledge already fails the first two steps of the test of mediation.