Canadian Psychology Copyright 2008 by the Canadian Psychological Association

2008. Vol. 49. No. 3. 225-232 0708-5591/08/$12.00 DOI: 10.1037/a0012757

The Study of CompensationSystemsThroughthe Lens of Self-

DeterminationTheory: Reconciling35 Years of Debate

MarylneGagn JacquesForest
Concordia University Universit du Qubec Montral

Although compensation specialists generally argue for incentive systems that link rewards to perfor-
mance, self-determination theory argues that such contingent rewards can have detrimental effects on
autonomous motivation. The authorspresenta model of the motivational effects of compensationsystems
that attempts to reconcile the self-determination theory view and the literature on compensation. This
model evaluateshow compensationsystemcharacteristics, suchas the amountand variability ofpay, can
influence the satisfaction of the needs for autonomy, competence, and relatedness, which in turn
inlluence autonomouswork motivation.

Keywords: self-determinationtheory, compensation,rewards,incentives,organizationaljustice

Self-determinationtheory (SDT; Deci & Ryan, 1985,2000) has
beenusedonly occasionallyto understandorganizationalbehavior,
despitethe fact that the theory offers tremendouspotential to study
organizationalprocessesand outcomes.We will briefly review
organizational research that has been conducted with self-
determinationtheory, and identify gaps in our knowledge of or-
ganizationalbehaviorthat could be filled by using this framework.
We will concentrateespeciallyon the field of compensation.
SDT distinguishesbetween intrinsic motivation and extrinsic
motivation.Intrinsic motivation refers to doing an activity for its
own sake,becauseone finds the activity inherentlyinterestingand
satisfying. In conrast, extrinsic motivation refers to doing an
activity for an instrumental reason. There are different types of
extrinsic motivation that can be relatively controlled by external
factors, or that can be relatively autonomous, that is, regulated
through a person's acquired goals and values. These types of
motivation can be aligned along a continuum representingthe
degree to which they have been intemalized. Intemalization is
defined as "the active assimilationof behavioralregulationsthat
areoriginally alien or externalto the self'(Ryan, 1995,p. 405). At
the low-end lies external regulatktn, which refers to doing an
activity solely to obtain rewards or to avoid punishments.Next,
introjected regulation refers to the regulation of behavior through
self-worth contingencieslike ego-involvementand guilt. It in-
volves taking in a regulationso that it becomesinternallypressur-
ing, and thus involves only partial internalizationthat remains
Marylne Cagn, John Molson School of Business,ConcordiaUniver-
sity; JacquesForest, Dpartementd'organisationet ressourceshumaines,
Ecole des sciencesde la gestion, Universit du Qubec Montral.
We thank Edward Deci, Gary Johns, Richard Koestner,and two anony-
mous reviewers fur their helpf'ul comments on earlier drafts. This work was
partially f'undedby a team grant from the Fonds Qubcoisde RechercheSur
la Socitet la Culture, Quebec (FQRSC) to Marylne Gagn.
Conespondenceconcerningthis article shouldbe addressed to Marylne
Gagn, Department ol Management, John Molson School of Business,
ConcordiaUniversity. 1455 de MaisonneuveW., Montreal, QuebecH3G
lM8, Canada.E-mail: mgagne@jmsb.concordia.ca
controlled, not volitional. Next, identffied regulation refers to
doing an activity becauseone identifieswith its value or meaning,
and acceptsit as one's own, which meansthat it is autonomously
regulated. Finally, integrated regulation refers to identifying with
the value of an activity to the point that it becomes habitual and
part of the person's senseof self. This is the form of extrinsic
motivation that is most fully internalized and autonomous. Exter-
nal regulation and introjection are often categorized as conrrolled
motiveion whereas identification, integration, and intrinsic moti-
vation represenlaubnomous motivation.
Autonomousmotivation has been associatedwith active informa-
tion seeking(Koestner& Losier, 2002), goal attainment(Sheldon&
Elliot, 1998),better performance(Amabile, Goldfarb, & Brackfield,
1990; Baard et aI.,2OO4), and increasedwell-being (Ilardi et al.,
1993). Controlled motivation has been associatedwith inconsistent
goal strivhg (Koestner,Losier, Vallerand, & Carducci, 1996), vul-
nerability to persuasion(Koestner & Losier, 2002), and impaired
performanceand persistencebecauseof concentrationand memory
difficulties (see Vallerand, 1997 for a review).
Autonomous motivation can be promoted by contexts that sat-
isfy the threebasic psychologicalneedsof competence,autonomy
and relatedness(Deci & Ryan, 2000). Therefore,need satisfaction
is the key to promoting optimal functioning, including perfor-
mance improvementand increasedwell-being. Optimal function-
ing in work organizationscan be translatedas employeeengage-
ment,performance,well-being,and retention.Organizationsstrive
to attract and keep employees who are competent, fully engaged,
and healthy. There is some support for the importance of need
satisfaction in work organizations, as it has been related to better
perfbrmance,engagement,well-being,and retention(Baard et al.,
2004; Deci, Gagn,Ryan, Leone, Usunov, & Kornazheva,2001;
Gagn,2003; Meyer & Gagn,2008).
We propose that there are three important organizational levers
that influencework-relatedneed satisfaction:job design,interper-
sonal relations,and compensation.Need satisfactionand autono-
mous motivation have been associatedwith jobs that are designed
to be more interestingand meaningful(Gagn,Sencal,& Koesr
ner, 1997;Millette & Gagn,2008).They have also beenlinked to

225
226 GAGNE AND FOREST
managerialsupport (Baard et al.,2004; Deci et a1.,2001; Lynch,
Plant, & Ryan, 2005) and transformational leadership (Bono &
Judge, 2003), which refers to managersbeing charismatic, inspi-
rational, and consideratetoward subordinates.Controlled motiva-
tion, on the other hand, has been associatedwith the presenceof
contingent rewards (Deci, Koestner, & Ryan, 1999), deadlines
(Amabile, DeJong, & Lepper, 1976), surveillance (Lepper &
Greene,1975),and evaluations(Smith. 1975).Controlled motiva-
tion appearsto be forestalled by transformational leadership(Bono
& Judge, 2003). However, we know of no research that has
examinedthe effects of compensationsystemson employeeneed
satisfaction and work autonomous motivation. We will therefore
concentrateon analyzing the compensationliterature and propose
new researchavenuesin this field. We first describe exoerimental
research on the effects of rewards on motivation.
Rewards and Motivation
Laboratory studies that have examined the effects of rewards on
intrinsic motivation have yielded mixed results and given rise to a
heated debate on the effects of rewards on intrinsic motivation. Deci,
Koestner, and Ryan (1999) attemptedto clarify this debate with a
meta-analysisof 128 laboratory studies.Resultsshowed that the net
effect of rewards on free-choice behavior (engaging in a task in the
absenceof extemal prods) was moderately negative.However, the
effect was positive for verbal rewards, and negative for tangible
rewards. An important moderator of the link between tangible re-
wards and intrinsic motivation was the type of contingency.Obtaining
a reward simply for engaging in a behavior and obtaining a reward for
simply completing a task had greater detrimental effects than obtain-
ing a reward contingent on attaining a specified level of performance
(i.e., a performancecontingentreward).
These findings can be explained through the impact of rewards on
need satisfaction. For example, performance contingent rewards can
affect autonomy negatively by changing the rewardee's locus of
causality from intemal to extemal (like other kinds of contingent
rewards),but they can alsopositively affect feelingsofcompetenceby
providing information about behavioral effectiveness.These two si-
multaneous effects may offset each other in influencing intrinsic
motivation. However, three important wamings have been offered
regardingthe use of performance-contingent rewards(Deci, Koestner,
& Ryan, 2001). First, the preciseimpact of a performance-contingent
reward appears to depend on whether its controlling or competence
aspectis made salient by the interpersonalcontext (Ryan, Mims, &
Koestner, 1983).Second,the use of performance-contingent rewards
in real-life contexts will typically require additional controlling fea-
tures such as surveillance,evaluation,and competition, all of which
can negatively impact motivation. Finally, the use of performance
contingent rewards in real-life context will often result in many
individuals failing to receive the reward because their performance
does not meet the required criteria, and there is clear evidence that
such outcomesare highly damagingto motivation (Deci et a1.,1999).
These meta-analytic findings raise questionsabout curent com-
pensation practices in organizations and their potential effects on
employee motivation. Real world compensationsystems,however,
cannot easily be categorized within these different types of con-
tingencies. Therefore, we cannot easily extrapolate the meta-
analytic results to the organizational field. Indeed, an attempt to
replicate the Deci et al. (1999) results in a field study of the
motivational effects of compensation was unsuccessful (Fang &
Gerhart, 2000). In fact, employees under a pay-for-perforrnance
system reported greater intrinsic job interest than employeesunder
a base pay system. It seems possible that real-life compensation
systemsaffect need satisfaction differently than laboratory reward
systemsbecauseof differences in importance, size, and time frame
(Rynes, Gerhart & Parks, 2005). We propose that by unpacking the
major dimensions of compensation systems,we can identify their
effects on need satisfaction and motivation.
Compensation Systems in Organizations
Compensation is one of the principal components of a human
resource system, and it is defined as the rewards (monetary and
nonmonetary) that employees receive for performing thet job (Mar-
tocchio, 2001). Monetary compensationincludes basepay (which is
fixed), pay adjustments(e.g.,a market supplement),and incentivepay
(which is variable). Nonmonetary rewards include fringe benefits,
someof which arelegally required(e.g.,disability and unemployment
insurance), and some of which are discretionary (e.g., income protec-
tion, wellness progfirrnmes, and employee assistanceprogrammes).
Examples of popular pay systemssuch as performance and merit pay
are given in the Appendix. They are often used in combinations.
Variable pay systems are currently very popular and are recom-
mended by human resourcesspecialistsbecausesuch systems are
thought to bring competitive advantage to the organization (e.g.,
Lawler, 2000). This assumption relies on the expectancy theory
framework (Vroom, 1964), whereby motivation is determined by
people's self-efficacy beliefs, their perceptions of instrumentality be-
tween behavior and outcome. and the value of this outcome for the
worker. For instance,Lawler (2000) heavily emphasisesthe need to
reward employees according to the value they bring to the organiza-
tion. An organization that profits from an employee's performance
should share its successwith that employee. Since companies no
longer offer secureemployment, Lawler arguesthat compensation is,
nowadays, the only way they can enlist the commitment of employees
to the organization. Moreover, it is only fair to pay the best employee
substantially more than the poorest performer. Lawler calls for an
organizational struchre that replaces bureaucratic conols by foster-
ing employee engagement through using information, knowledge,
decision-makingpower, and rewardscontingenton businesssuccess.
Employees who bring value to the organization are those who manage
themselves,do more complicatedtasks,coordinatetheir work with
the work of others, provide suggestionsfor improvement, and inno-
vate. These competencies,we argue, require that employees not only
have the abilities and resources,but must be autonomouslymovated
to use them.
The dominant view of compensationrelies almost exclusively on
the assumptionsof agencytheory (Jensen& Meckling, 1976). This
may be becausemost of the researchon the effects of compensation
systemson firm performancehasbeendone in accounting and finance
(where agency theory dominates), with little regard to intervening
variables, such as employee motivation and performance. An agency
relationship is defined as a contract between a principal (the em-
ployer) and an agent (the employee). The goal of the employer is to
align the employee'sgoalsto the employer's goals, and assumesthat
the employer must pay the employee for behavior that brings the
employer closer to goal aftainment. Compensaton is therefore a
control mechanismby which the employer influences the employee's
 SPECIAL ISSUE: COMPENSATION SYSTEMS THROUCH THE LENS OF SDT
behaviorin a way that will benetit the employer.Nevefiheless,not all
economic researchsupports agency theory. For example, some re-
search indicates that employer's use of control over the employee
sometimesleadsto a reductionin the employee'speformance(Falk
& Kosfld,2006).
From the perspectiveof self-determinationtheory, one major prob-
lem of agency theory is that it assumesthat the employeecould not
possiblyinternalizethe employer's goals.Therefore,the only way the
employer can influence the employee'sbehavior is through coercive
methods,such as linking the employee's pay to organizationalper-
formance. Consistent with our thinking, Frey and Osterloh (2005)
argue that agency theory relies solely on the concept of extrinsic
motivation, and that incentive pay does not, in fact, lead to the
expected goal alignment between employer and employee. These
economistsshow that the relative price effct hypothesizedby agency
theory, whereby increasesin payment lead to increasesin efort, is
counteractedby a "crowding out" eflct on intrinsic motivation. The
crowding out effect is the same detrimental efTctof rewards on
intrinsic motivation fbund within self-determinationtheory (Frey,
1993). The crowding out effect is efectively subtractedfiom the
relativeprice effect, resultingin reducedefTorl.To avoid the crowding
out efTect,Frey and Osterloh advocatethe use of fixed pay systems
(i.e.,noncontingent) coupledwith a governancestnrcturethat fbsters
need satisfaction.Although they say that it is difficult to fbrecastthe
strengthof the crowding out efct, we arguethat it can be predicted
if we carefully analyzethe efects of compensationsystemson need
satisfction.
Research on Compensation
Befbre proposingways to test the efectsof compensationsystems
on need satisfctionand work motivation, we review current com-
pensationresearchto determineits etlcts on employee and organi-
zationaloutcomes.The compensationliteraturehasgenerallyreported
positive incentive e1ctson employee perfbrmance(Gerharr &
Rynes,2003),and economicstudiesrepo( anywhereftom4o/aIo9Vc
increasesin lirrn performance(Booth & Frank, 1999;L,tzear,2000
Piekkola, 2005). Such increasesseemto be accountedfbr by fctors
suchas reducedcosts.improvedemployeeretention.increasedsales
growth, increasedcustomer satisfction,and safty improvements
(Wemer & Ward, 2004). However, these positive effcts may be
causedby two very diflrent mechanisms:(a) an incentiveeflct,
acting on employeemotivation, and (b) a sorting eflct, acting on the
attraction and retention of the best performing employees(Laz.etr,
19861Rynes.Gerhart.& Parks.2005).
A close examination of these incentive efcts reveals several
limiting conditions.For example.in one meta-analysis, monetary
incentiveshad a positive efIct on performancequantity, but not
on perfbrmancequality (Jenkins,Mitra, Gupta, & Shaw, 1998).
Another meta-analysisshowed positive effcts of incentives in
manufacturingfirms. but not in service firms (Stajkovic &
Luthans, 1991). A more recent meta-analysisof the effcts of
performance-contingentrewards on perfbrmance that included
studiesfrom economicsandpsychology(rnlike the previousmeta-
analyses)found an overall positiveeffect @ :0.23). but this effect
was moderatedby tasktype. Fol simple and boring tasks,the eftct
was d : 0.42, while fbr complex or interestingtasks,the eftct
was d : 0. l3 (Weibel,Rost. & Osterloh,2007).SDT actually
predicts positive reward efcts tbr algorithrnic tasks,which ask
221
fbr a straightfbrwardsolution or rule application,but more nega-
tive effectsfbr heuristictasks,which require more cognitive flex-
ibility (Gagn& Deci. 2005). In fact, most studiesthat have found
a positiveeffect of contingentpay planson performancehave used
algorithmic tasks (Bandiera,Barankay, & Rasul, 2007; Cadsby,
Song,& Tapon,2007;Locke, Feren,McCaleb,Shaw, & Denny,
1980),while studiesthat have found no effect or a negativeeffct
usedheuristictasks(e.g.,Amabile et al., 1990).
The compensationliteraturealso filed to addressthe efTectsof
compensationsystemson employeemental health.Becauseof its
reliance on agency theory, compensationresearchershave ne-
glected motivation theories that fbcus on needs and instead
adoptedthe assumptionthat individualscan substituteone needfbr
another (without any consequences)when their satisfaction is
impossible(Jensen& Meckling, 1994).Given the high costsof
mental health problems to organizationsand the economy (Ste-
phens& Joubert,2001), it is importantto addressthis issue.Apart
fiom having studiedthe impact of compensationsystemson job
satisf'action(Igalens& Roussel,1999),pay satisfaction(Williams,
McDaniel, & Nguyen, 2006), and perfbrmance (as mentioned
earlier), no researchhas examined the impact of compensation
systemson employees'optimal functioning.
SDT offers a rich set of propositionsthat can help understandthe
impact of compensationsystemson well being. Numerous studies
have shown that anything that decreasesneed satisfction,including
rew:ud systems,is likely to decreasesubjectivewell-being (Ryan &
Deci. 2000). The literatr.rreon financial wealth and subjectivewell-
being has shown clear empirical evidencethat once basic physiolog-
ical needsare met, adding wealth doesnot contributesignificantly to
increasedsubjectivewell-being(Diener,Sandvik,Seidlitz,& Diener,
1993;Grouzetet a1.,2005;Kasser,Cohn, Kanner,& Ryan,2007;
Kasser& Ryan, 1993;l,ee, Sheldon,& Turban,2003;Oishi,Diener,
Lucas,& Suh, 1999)Perhapsit is becausethis wealthaddsnothingto
psychologicalneedsatisfction.Extensiveresearchshowsthat extrin-
sic motivation/goals/values generallyhave a negativeimpact on well-
being while intrinsicmotivatior/goals/values have a posiriveimpacr
on well-being(Baardet al., 2004;Grouzetet a1.,2005; Kasseret al.,
2007; Kasser& Ryan, 1993;Lee et a1.,2003;Oishi et a1.,1999).By
examining the efects of compensationsystemson need satisfaction
and work motivation,we can ascertainwhy, when, and how rewards
have an effect (eitherpositive or negative)on employeeperformance
rrld well-being.
A Model of the Effects of ComDensation on Work
Motivation
Missing fiom our knowledgeabout compensationsystemsis their
efIctson the satisf'actionof psychologicalneeds,the key to promot-
ing autonomouswork motivation, betterperfbrmance,and employee
weli being. Therefore,we proposethat future researchshould exam-
ine the elTctsof compensationsystemson the needsfor autonomy,
competence,and relatedness. This will help explain why certain
compensationsystemsare more efllcient for promoting the autono-
mous motivation of employees.As mentionedpreviously,the effects
of compensationsystemson needsatisfactionand worker motivation
can be assessed if we can extractessentialcharacteristicsof compen-
sation systemsthat can be empirically studied.We took the compen-
sationsystemsdepictedin the appendixand analyzedtheir essential
characteristicsto extract dimensionsalong which we can categorize
228 GAGNE AND FOREST
them. The processresultedin five dimensionsthat can be empirically
operationalized:(a) the absoluteamountof pay in monetaryvalue; (b)
the perceivedequity of the compensation,operationalizedin terms of
distributive justice; (c) the ratio of fixed amount of pay versus the
amount of pay that varies according to a certain criterion, such as
performance; (d) the objectivity of the performance appraisal that
determinescompensation;and (e) the number of people whose per-
formance is used to determineone's compensation,in other words,
whether it is a group or individual incentive. Using thesecharacter-
istics, we proposea model whereby the satisfactionof the needsfor
autonomy, competenceand relatednessthrough compensationsys-
tems influences autonomouswork motivation. In tum, autonomous
motivation influences employee performance and well-being (see
Figure 1).
We could use thesedimensionsto test total compensationpack-
ages or their components.For example, commission pay would
lead to a certain amount of total pay that we can control for in
analyzrngthe influence of this compensation system on employee
motivation and performance. Perceptions of equity of this system
can be assessedempirically with validated scales.The ratio of
fixed versus variable pay can be assessedeasily by determining if
a commission is added to a fixed basesalary. This ratio can be used
as a variable in itself in the model. The periormance measurethat
determinescommissionswill usually be a closed salesdeal or an
attainedsalesquota, which representsa relatively objective indi-
cator. Finally, commissionsare usually given basedon individual
performance. With this information, we can now predict the im-
pact that commission pay will have on autonomousmotivation. To
do so, we added a few intervening variables to explain the impact
of these compensation characteristics on employee motivation.
Some mediators are proposed, namely, procedural justice and
organizational culture. Work climate support is proposed as a
moderator for some of the relations in the model (see Figure l).
Pay Level
One study found that higher base pay fosters better performance
and affective commitment, and that this can be explained through
# of PeopleWhose Cooperativevs.
PerformanceDetermines CompetitiveCulture
the Reward
Figure l. Model of compensation effects on work motivation.
higher intrinsic work motivation (Kuvaas, 2006). The author con-
tended that higher base pay signals the recognition of high compe-
tence and the valuation of the employer-employee relationship. The
use of basepay that is above market averageto attract good per{orm-
ers has also been advocated (Rynes, Gerhart, & Minette, 2004).
Therefore, we propose that high base pay or base pay that is above
market averagewill foster greater need satisfaction, partly becauseof
desirable social comparisons and improved perceptions of distributive
justice (hence the Iink between amount of pay and distributive jus-
tice). Moreover, it is advisableto control for pay level when testing
the effects of other compensationsystemcharacteristics.
Ratio of Variable Versus Fixed Pay
By assessingthe ratio of variable versus fixed pay, we can
determine the extent to which total pay is contingent on perfor-
mance. A vignette study showed that a high proportion of perfor-
mance-contingentpay was related to a larger decrement of intrin-
sic motivation, which in tum negatively affected performance
(Weibel et a1.,2007).High proportions of variable pay in the form
of performance-contingentrewards have been positively related to
tumover (Harrison, Virick, & William, 1996). However, another
study found a positive relation between bonus-to-baseratios (bo-
nuses in the form of stock options) and organizational return on
asset (Gerhart & Milkovich, 1990). Therefore, more research is
needed to determine the effects of these variable/fixed ratios on
employeeand organizationaloutcomes.
Objectivity of the Petformance Appraisal Methods
Examining pay ratios is insufficient to understand all of the
effects of compensation on need satisfaction. The way perfor-
mance is assessedand used to determine rewards will also influ-
ence the impact of compensationsystemson employee motivation.
Whether compensationis based on one's individual characteristics
(e.g., skill-basedpay plan) or one's performance(e.g., commis-
sions) will influence need satisfaction. Skill based pay plans are
 SPECIAL ISSUE: COMPENSATION SYSTEMS THROUGH THE LENS OF SDT
more likely to satisfy psychological needs, as they have been
argued to improve the motivating potential of a job by providing
workers with enrichedjobs and opportunitiesto use more skills
(Murray & Gerhart, 1996). In contrast, commission-heavypay
systemsbreed more competition, which could diminish percep-
tions of relatednessand autonomy.The way performanceapprais-
als are conducted also influences the impact of compensation
systemson motivation.Merit pay systemsare notoriousfor relying
too much on subjective performanceappraisals(i.e., managers'
impressions),which makesemployeesdissatisfiedbecauseof neg-
ative proceduraljustice perceptions(Lawler, 2000; Pearce,Steven-
son, & Peny, 1985). Profit sharing relies on the output of a
collective of individuals who will later share the fruit of their
commonly created productivity. This is likely to foster greater
relatedness,even if it could potentially decreasefeelings of com-
petence (becausesuch systems are known to lack a clear link
betweenindividual performanceand firm productivity; Magnan &
SrOnge, 2005). Two studies fbund that rewards in the form of
profit sharing and stock ownership were positively related to
affectiveorganizationalcommitment(Coyle-Shapiro,Monow, Ri-
chardson,& Dunn, 2002; Kuvaas,2003), which has beenlinked to
autonomousmotivation (Gagn,Boies, Martens,& Donia, 2006).
Individual Versus Group Incentives
Somepay systemsare individually based(e.g.,commissionsand
merit increases),while othersare group based(e.g.,gain sharing).
Group incentiveshave the propensityto increasethe satisfactionof
the need fbr relatednessrelative to individual incentives.Group
incentivescan also foster a cooperativeculture, while individual
incentivesrun the risk of creatinga competitiveculture.However,
as some economists have argued (Han & Shen, 2007), group
incentivescan also lead to monitoring between employees,who
will want to avoid free riding problems. This peer pressurecan
potentially decreasethe satisfctionof the need for autonomy.
Justice Perceptions
Fairness is also an important predictor of autonomouswork
motivation. Distributive justice refers to the perceivedfairnessof
decision outcomesrelative to contributions (Adams, 1965; Lev-
enthal, 1976).Procedural lusticerefersto the perceivedfirnessof
processesused to arrive at outcome decisions(Byrne & Cropan-
zano,200l; Leventhal, 1980;Thibault & Walker, 1975).A recent
study found that both proceduraland distributivejustice percep-
tions were positively relatedto autonomouswork motivation,and
that need satisfactioncompletely mediatedthese elects (Gagn,
Brub, & Donia, 2007). Interestingly,one study found that con-
tingent rewards are often perceived to be more fair, which in-
creasedthe likelihood of need satisfaction,and ultimately,higher
autonomousmotivation (Gagn,2008). This may explain the pos-
itive relationsfbund betweenincentivesand performancein some
field studies (Fang & Cerhart, 2000). It was also found that
fairnesscan partly explain the positiveeffectsofhigh basepay and
stock ownership on performanceand affective commitment(Ku-
vaas,2003, 2006). Therefore,we proposedistributivejustice as an
inherentcharacteristicof compensationsystems,and hypothesize
that it will directly influenceneedsatisfaction(Gagnet al., 2007).
Proceduraljustice is influenced by other characteristicsof the
229
compensationsystem,namely, the ratio of variable versus fixed
pay, the objectivity of the performance appraisal, and the number
of people whose performanceis used to determinea reward.
O r ganizational Culture
Organizational culture is defined as a set of habitual ways of
thinking, feeling, and behaving that are characteristic of members
of an organization. Culture determinesthe norms that dictate how
employeesshould think and behave(Ken & Slocum, 2005). Re-
ward systemsshould reflect this culture,but will also reinforce it.
Some researchshows how easy it is to create norms, at least in
experiments.For example, one study reported that simple instruc-
tions to cooperateincreasecooperationby 407o(Frey & Osterloh,
2005) and another found that task labelling (i.e., World Trade
Center Game vs. Community Game) can influence cooperation
versus competition tactics (Liberman, Samuels,& Ross, 2004).
Therefore,we can forecastthat a culture that values cooperation
over fostering individualism or competition will increase need
satisfaction(especiallyrelatedness).
Compensationspecialistsgenerally agree that compensation
plans will affect the corporate culture (Baker, Jensen,& Murphy,
1988).Commissions,for example,will foster individualistic,even
egoisticand competitive,behavior.Profit sharingand gain sharing,
in contrast,may foster more cooperation.Although many argue
that culture and reward systemsare inherently neither good nor
bad, and that it all dependson their fit to the total organizational
system (Ker & Slocum, 2005), SDT would argue that not al1
culturesand reward systemsare good for individuals.Those sys-
tems that thwart need satisfaction will detract from employee
engagementand well-being, which will ultimately cost the orga-
nization.Basedon this, we hypothesizethat the number of people
whose performancedeterminesone's reward will influence this
aspectof organizationalculture.
Work Climate Support
The general work climate, operationalizedin terms of how
supportiveof psychologicalneedsit is, will influencethe interpre-
tation of some compensationsystemcharacteristics.For the sake
of simplicity, we define the general work climate through mana-
gerial supportandjob design.Goodman(2000) arguedthat incen-
tives are related to businessoutcomes through "organizational
linkages," like the manner in which incentivesare used by man-
agers, such that managerial styles may moderate the effects of
incentiveson work motivation and outcomes.Researchhas shown
that jobs that are designedto be more meaningful and interesting
increaseautonomousmotivation (Gagn, Sncal, & Koestner,
1997).Researchon transfbrmationalleadershipshowsthat it has a
positive impact on employee autonomousmotivation (Bono &
Judge,2003). Indeed,managerswho supportemployees'psycho-
logical needs also have a positive impact on their autonomous
motivation(Baardet al., 2004; Deci, Connell,& Ryan, 1989;Deci,
Ryan, & Koestner,2001). Therefore,we predict a direct relation
between a supportive work climate and employee-need satisfac-
tion. Adding this link allows one to study the relative impact of
compensationon need satisfaction,and also possibleinteractions
with other work climate factors. We expect that the work climate
will influence whether the variable-to-fixed oav ratio will be
230 GAGNEAND FOREST
interpreted as lnore or less controlling and infbrmative about
competence.Similarly, we expect that the work climate will in-
Uuencehow informative (and accurate)performanceassessments
are judged to be. These interactionswill influence the extent to
which thesecompensationcharacteristicswill be judged as fir (as
measuredthrough proceduraljustice perceptions).Compensation
systemsthat are leastcontrolling and most informativeshouldlead
to greaterneed satisfaction(Ryan et al., 1983).
Need Satisfaction
Besidesthe already establishedresearchon the effcts of need
satisfactionon autonomousmotivation (Deci & Ryan, 1985),the
compensationliterature (e.g., Rynes, Gerhart, & Minette, 2004;
Rynes, Gerhart,& Parks,2005) conectly stressesthat money has
an impact on "lower-order needs" (such as shelterand food) and
pavesthe way fbr "higher-orderneeds."This idea is basedon older
needs theories (Aldefer, 1972; Herzberg, 1966; Maslow, 1954)
but is also compatiblewith SDT. The differenceis that unlike other
need theories,SDT has the tools to empirically test old theories.
For example,it would now be possibleto test Herzberg's(1996)
hypothesisthat pay is only a hygiene factor by testingthe effects
of compensationsystemson need satisfactionanclneedfrustration
(Van den Broeck, Vansteenkiste,Lens, Soenens,& DeWitte,
2007). Thus, we could test whetherbasepay diminishesautonomy
and competencefrustration, while profit sharing increasesthe
lelings of autonomy and competence.SDT has also found some
evidence fbr Alderfer's hypothesis that thwarting higher order
needs leads to compensatingby a focus on lower-order needs.
Thus, one study fbund that individuals who grew up in environ-
ments that did not support basic psychological needs later ap-
peared to compensatefbr this deficit by overvaluing financial
success(Kasser,Ryan, Zax, & Sameroff, 1995).
Conclusion
The model we presentedaddressesLawler's (2000) criticism
that intrinsic motivation researchhas traditionally criticized the
use of pay-for-performancewithout providing a clear alternative
fbr organizations.It also answersRynes et al.'s (2005) call fbr
researchon compensationthat takes into account mediating psy-
chological variables. Although SDT researchershave provided
clear guidelines fbr engaging employeesthrough leadershipand
job design, they have not yet addressedhow to align reward
systemswith theseother guidelines.We hope that empirical tests
of this model will fbllow and result in clear guidelineson how to
choose amongst different compensationsystems,and even help
develop new kinds of compensationsystemsthat will foster and
maintainrutonomousmotivation.
Rsum
Si les spcialistesen rmunrationsont gnralementen fveur des Deci, E. L., & Ryan. R. M. (2000).The 'what' and 'why' of goal pursuits:
systmesde primes qui lient la rcompense la perfbrmance,la
thoriede l'autodtermination.quant elle, suggreque de telles
rcompenses contingentespeuventnuire la motivationautonome.
Nous prsentonsun modle des effets motivationnelsengendrs
par les systmesde rmunrationqui tente de faire concorderla
thoriede I'autodterminationavec la documentationsur la rmu-
nration.Ce modlevaluede quelle faon les caractristiques des
systmesde rmunration,tels les variationsde la rmunrationet
son niveau, peuvent influer sur la satisfaction du besoin
d'autonomie,la comptenceet le rapprochement,lesquelspeuvent,
leur tour, marquerla motivation autonomeau travail.
Mots-cls: thorie de l'autodtermination,compensation,rcom-
penses,mesuresincitatives,justice organisationnelle
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Appendix1

PopularCompensation
Plans
Reward determined
Compensation system by performance of Description

Base pay Individual Giving a fixed amount of pay on a regular basis (e.g., hourly.
weekly, monthly) for occupying a position in the
organization, regardlessof performance. Amount is most
often determined by job type, seniority, or rank.
Pay-for-performance Individual Giving a set monetary reward for a pre-defined performance
unit (e.g.,commissions,piece-rate).
Bonus Individual Giving a set monetary reward for attaining a certain perfor-
mance standard or quota.
Merit pay Individual Increasing base pay based on yearly performance appraisal.
Skill basedpay Individual Increasing base pay based on skill or knowledge
competencies and acquisition.
Gainsharing Group Giving a monetary reward (equality or equity based
distribution to individuals) based on reaching a group -
based goal or quota (e.g., reducing scraps)
Profit sharing Organizational Sharing the organization's profit with its employees. Pay out
is based on a profitability target.
Stocks and options Organizational Giving stock ownership or the right to purchase a fixed
number of sharesof stock at a fixed price, regardless of
actual stock orice.

Received December 14, 2007

Revision received April 3, 2008
Accepted April 12, 2008