The utility of pay raises/cuts: A simulation experimental study

•We offer an interdisciplinary theoretical view of the utility of pay raises/cuts.•We reports results of an experimental simulation based on 192 student employees.•We found support for a quadratic relationship between pay raises and utility.•Our results suggest that small pay raises are associated w...

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Bibliographic Details
Published in:Journal of economic psychology 2015-08, Vol.49, p.150-166
Main Authors: Mitra, Atul, Jenkins, G. Douglas, Gupta, Nina, Shaw, Jason D.
Format: Article
Language:English
Subjects:
Economic psychology
Economic theory
Organizational behavior
Organizational behaviour
Pay cuts
Pay raises
Raises
Simulation
Studies
Utility and disutility
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Summary:•We offer an interdisciplinary theoretical view of the utility of pay raises/cuts.•We reports results of an experimental simulation based on 192 student employees.•We found support for a quadratic relationship between pay raises and utility.•Our results suggest that small pay raises are associated with disutility.•We found support for a linear relationship between pay cuts and disutility. Theories from the fields of psychophysics, economics, and organizational behavior are integrated to develop insights about people’s attitudinal reactions to (i.e., the utility and disutility of) pay raises and pay cuts of different sizes. Linear, logarithmic, power, and quadratic functions are developed from this integration. Techniques for evaluating the empirical applicability of these utility/disutility relationships are illustrated among a sample of 192 student “employees” in an experimental simulation. The results provide a partial test of the integrated framework. The results indicate a quadratic relationship for pay raises and a linear relationship for pay cuts. Implications of these findings are discussed.
ISSN:0167-4870
1872-7719
DOI:10.1016/j.joep.2015.05.003