Pay Satisfaction of Employees: A Case Study of a State-Owned Science Institute in China

Author(s): Shi Zheng, Zhigang Wang and Shunfeng Song

Source: Social Indicators Research , December 2014, Vol. 119, No. 3, The First Six
Articles Belong to the Special Issue: Consumer Finance and Social Indicators in China
(December 2014), pp. 1219-1231
Published by: Springer

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Soc Indic Res (2014) 119:1219-1231
DOI 10.1007/s 11205-013-0554-x

Pay Satisfaction of Employees: A Case Study

of a State-Owned Science Institute in China

Shi Zheng • Zhigang Wang • Shunfeng Song

Accepted: 20 December 2013/Published online: 11 January 2014

1 Springer Science+Business Media Dordrecht 2014

Abstract A pay system is regarded as one of the most important and feasible measures to
motivate employees. With the deepening of China's economic reforms, funds have
decreased for state-owned science institutes (SOSIs)—forcing them to reform themselves
as well as their pay systems in order to become competitive enough to survive in the
market. Based on Adams' equity theory this study describes the pay system reform of a
SOSIs in China, explores the changes in pay satisfaction from before and after the reform,
and analyzes factors that influence the pay satisfaction. The data include original historical
documents and 1,007 questionnaires about personal information and pay satisfaction in
2010. The results indicate that pay satisfaction significantly improved after the pay system
reform, and four dimensions of equity, namely individual, internal, procedural, and
external, have significant positive effects on the staffs general degree of pay satisfaction,
although, procedural and individual equity have more positive effects than internal and
external equity. Male employees are more satisfied and sensitive to the reform.

Keywords Pay satisfaction • Equity theory ■ State-owned science institutes

S. Zheng • Z. Wang (13)

School of Agricultural Economics and Rural Development, Renmin University of China,
Beijing, China
e-mail: ohshigo@163.com
o. zjieng
e-mail: zhengshil974@ruc.edu.cn

S. Song
Department of Economies, University of Nevada, Reno, NV, USA
e-mail: song@unr.edu

S. Song
Center for Research of Private Economy, Zhejiang University, Hangzhou, China

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 1220 S. Zheng et al.

1 Introduction

Pay is the remuneration for an employee's contribution to a company, including effort

wisdom, skill, experience, and job performance. Pay is an important topic for employee
and employers. Yet pay can be a double-edged sword. On one hand, organizations can
make good use of pay as a tool to attract, retain, and motivate talented personnel, allowing
the organizations to benefit from the employees' contributions. On the other hand, it may
cause brain drain and result in a talent crisis for the organizations.
The pay system of China's state-owned science institutes (SOSIs) developed along the
establishment and development of China's socialist market economy. From the perspective
of political leaders, the country's state-owned science and technology system of the late
1980s, with its 8 million personnel and 10,000 research institutes, was expensive, under
utilized and not very productive. Dissatisfaction with the system had become pervasive,
and both scientists and political leaders agreed on the necessity for fundamental reform and
believed that science still was not serving the needs of the economy. Political leaders and
senior scientists identified a number of organizational problems that were inherent in the
system adopted from the Soviet Union and that had been compounded by problematic
practices in Chinese work units, including uneven development and lack of coordination
among scientific fields; duplication of research and facilities; rivalry among institutes,
administrative bodies, and hierarchies; maldistribution of personnel, with some units and
fields overstaffed and others very short of skilled personnel; the prevalence of depart
mentalism, compartmentalism, and fragmentation of efforts; poor management, poorly
educated managers; absence of incentives for good work or of penalties for poor perfor
mance; absence of direct communication between research units and productive enter
prises; and the shortcomings resulted in the failure of the science and technology
establishment to serve production and economic growth (Li 2000).
With the start of the pay system nationwide reform in 1993 to solve the problems of the
country's state-owned science and technology system, most SOSIs adopted a positiona
pay system in which organizations determined an employee's pay based on his/her job
classification and professional title (State Council of China 1993). In this system, the pay is
composed of a fixed amount based on job classification and a flexible part based on job
performance. To some extent this innovation stimulated the employees' motivations in the
early 1990s. But with the deepening of China's economic reforms, funds have decreased
for SOSIs, forcing them to enter the market to seek for external funds and other resources
At the same time, competitions among SOSIs and commercial corporations became more
intense, and limitations to the positional pay system emerged, including a lack of com
petition among peers and departments, poor employee performance, and brain drain. To
better develop China's technology and economic development, the National Science and
Technology Commission (1998) proposed to establish a research system with key science
institutes and universities to form an open, mobile, competitive, and cooperative research
mechanism, to establish a new industry-driven technology development system, and to
transit science institutes into an enterprise management system. Under this new policy,
SOSIs have to reform their pay system and make it competitive enough to survive in the
market.

Pay satisfaction is an important indicator to assess the effectiveness of the institutes' pay
system reforms. A higher level of pay satisfaction can motivate employees to work harder,
gaining more revenues and resources for the organizations. In turn, employees will get
recognized and be appreciated by employers. As a result, employers are willing to provide
higher pay and thus can recruit and retain more productive employees, creating a virtuous

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 Pay Satisfaction of Employees 1221

circle. On the contrary, if employees are no

as hard nor contribute as much as they co
not satisfied with the employees and are
vicious circle causing brain drain. The st
mance, and the level of pay satisfaction di
incentive compensation not only guaran
gives them sufficient encouragement to
organization's economic efficiency and m
There are numerous well-known incentiv
Herzberg's two-factor theory, Maslow's
Vroom's expectancy theory, McGregor
achievement motivation theory (Wang
about the inequity of pay than pay itse
employees think that the system is even-
incentive effects of pay and promotion
The purpose of the study is to analyze th
perspective of equity theory, discuss the
reforms, identify the factors that influenc
pay system reforms in other science ins
tuals play crucial roles in Chinese techno
changes have taken place in the past tw
investigate the changes and effects on em
the first study to examine the pay syst
satisfaction from perspective of equity th
employers to better understand factors th
ways to improve employee well-being, bu
changes and adjust their behaviors accordi
follows. Section 2 contains a review of rela
data and reports the results from the de
metric model and discusses the empirical
policy recommendations.

2 Literature Review

Pay satisfaction is defined as the level of positive or negative feelings that individuals h
toward their pay (Miceli and Lane 1991). It can be measured using the pay satisfact
questionnaire (PSQ), which is broken down into several pay dimensions that affect
viduals' feelings (Heneman and Schwab 1985). Since the 1960s, scholars have syste
atically studied job and pay satisfaction, including measures, influential factors, struct
and function (Chen 2009; Yetim and Yetim 2006; Lavanchy et al. 2004; Yoav 1
Malinowska-Tabaka 1987; Bokeimer and Lacy 1987; Scheer 1975; Seashore 1974). Th
understanding of pay satisfaction has evolved from a single dimension to multip
dimensions. Heneman and Schwab (1985) divided pay into four dimensions including
pay levels, pay benefits, pay raises, and pay structure. Sweeney and McFarlin (20
argued that despite differences in culture, for instance, how Western cultures tend to
more emphasis on the individual while the Chinese focus on the group, employees
tend to report their pay satisfaction based on comparing their pay to how much t
counterparts are earning. Chinese research on pay satisfaction is still in its infancy. Ch

'S Springer

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 1222 S. Zheng et al.

and Ping (2011) system

regarding the impact
fuzzy mathematics and
pay satisfaction. Effe
their highest ability, g
motivation, of which p
performance-related p
which an employee's
effort to achieve max
iable pay as a share of
directly explains pay's
used pay systems, incl
the mixed pay system
organizations should a
Equity theory was fir
individuals perceive a s
respond to such a situa
Adams stated that indi
Equity theory propose
being fair when compa
equity theory in busin
the equity sensitivity
Cowherd and Levine 1
pay fairness and satis
information fairness,
external, and procedu
of the staff and super
the impact of pay sy
performance. Wang (2
the city of Taizhou an
faction from three dim
fairness based on the
prises in the city of N
including distribution
tional fairness, used th
dimensions of pay fair
score using a fuzzy m
Our analysis is based
external, and procedu
by employees. When in
ratios and if the result
horizontal comparison
horizontal comparison
pay competitiveness
refers to democracy,
implementation and w
found that procedura
The method of dimen
validity has been pro

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 Pay Satisfaction of Employees 1223

Weobourne 1994; Sturman and Short 200

too, and researchers have tried to impro
analysis to study the relationship of pay
mance, and organization outcomes (Mice
et al. 2005). The method of dimensionality
widely used in similar studies, but also
SOSIs. Given the whole country is still und
SOSIs are at very early stages of modern
focuses on individual feelings rather than
approach for this study.

3 Data and Descriptive Analysis

Data were obtained from Institute S, and f

is not used in the paper. Institute S is a
manufacturing institute, which after 50
Yuan in revenue each year with 2,800 em
implemented the same pay system as othe
systems: the technical professional pay s
technical worker pay system. Generally
classification and technical title. As the
tages related to the pay system have em
competition, poor performance, and brain
system in 1998 by introducing position
methods to differentiate the pay levels. U
determined by their job titles or classifica
organization and their individual perfor
and more seriously implemented, and bre
that lead to organization losses are punis
for their actions. For example, the new
employees' pay to their physical presenc
objective way. The institute also establis
monthly and annual assessment system,
ation system, linked individual employe
determined by the department's contribut
to meet the three requirements of being
employee's performance is closely conne
incentive measures. Therefore, the reform
1998 as the reference point to compare an
and after the reform.

The data include questionnaires and original historical documents that were collected in
March 2010 from departments such as HR, finance and administration, containingpersonal
information of employees like education, age, gender etc., production information like
revenue, quantity, inventory ect, pay level, and pay satisfaction. In early March, 2010, the
questionnaire designed by the research group was sent electronically to all 2,800
employees. By March 16, 1,007 valid questionnaires were collected by the administrative
assistants of all departments with a response rate of 36 %. The questionnaire was divided
into two main parts: personal information and pay satisfaction. The first part asks about

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 1224 S. Zheng et al.

Table 1 Basic characteristi

(%) (%)

Education Job title

Below special secondary school 19.86 Researcher 3.97

Special secondary school 5.06 Associate researcher 20.06

Junior college 15.29 Engineer 40.81

Undergraduate 44.49 Assistant engineer 30.98

Master and above 15.29 Junior engineer 4.17

Gender Entry date

Male 74.38 Before 1998 71.10

Female 25.62 After 1998 28.90

Age structure Annual pay (yuan)

<30 15.49 <50,000 15.49

30-39 36.84 >50,000 and <100,000 61.37

40-49 32.47 >100,000 and <150,000 14.70

>50 15.19 >150,000 8.44

Department Position

Research 58.69 Key technical 13.80

Administrative 15.19 General technical 44.29

Logistic 19.86 Senior management 4.27

Subsidiary 6.26 General management 15.59

Advanced operational 5.86

General operational 16.19

basic personal information, such as education level, gender, age, service length, and
department category. The second part is about the level of satisfaction before and after the
reform in terms of individual, internal, external, and procedural equity and in terms of the
two categories: pay structure and pay level. Pay structure mainly evaluates the employees'
performance, the connection between performance and pay, and other aspects regarding
pay satisfaction. Pay level mainly considers their work experience, other employees in the
same position, the local labor market, the institute's revenues and the level of satisfaction.
Based on the 1,007 valid questionnaires, 716 people began working in Institute S before
1998, accounting for 71.1 %, and 291 people started working in Institute S after 1998,
accounting for 28.9 %. We were unable to collect information from employees who left the
institute in the past two decades. For employees who joined the institute after 1998,
because they experienced most policy changes and have a good understanding of the pay
reforms, they are also included in our analysis and provide important information. The
characteristics of the 1,007 employees are summarized in Table 1.
Since pay satisfaction is a multiple-indicator system, following Wang and Zhang
(2011), a hierarchical structure is used to set up a pay satisfaction evaluation system, as
shown in Table 2. Pay satisfaction indicators are divided into three levels. Overall satis
faction, the first-level indicator, reflects employees' general evaluation of pay satisfaction.
Individual, internal, external, and procedural equity are second-level indicators. The details
pertaining to the four equities serve as third-level indicators, and they were asked in the
survey. In the survey, one represents very dissatisfied, two dissatisfied, three neutral, four

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 Pay Satisfaction of Employees 1225

Table 2 Pay satisfaction indicators

First-level indicator Second-level Third-level indicator

indicator

Overall satisfaction Satisfaction level of Considering your qualifications, are yo

level of individual equity level?
compensation Compared to other employees in the same position,
you satisfied with your pay level?
Satisfaction level of Compared to other employees in the same p
internal equity you satisfied with your pay level?
Considering the current state of business, are you sa
with your pay level?
Satisfaction level of Considering the local labor market, are you
external equity your pay level?
Compared with the pay levels for practitioners both inside
and outside of Institute S, what is your pay expectation
for your work effort levels?
Satisfaction level of Are you satisfied with the fact that compensation for all
procedural equity employees in both high and low positions depends on
performance?
Are you satisfied with the transparency of the
compensation?
Are you satisfied with the way the institute conducted the
scientific evaluation in determining the pay level for the
position and took into account the staffs views on
developing compensation programs?

satisfied, and five very satisfied. Based on the theories and previous studies reviewed
before, we develop the following five testable hypotheses:

Hypothesis 1: Overall satisfaction level of equity improved after the reform of pay
system;

Hypothesis 2: Satisfaction level of individual equity improved after the reform of pay
system;

Hypothesis 3: Satisfaction level of internal equity improved after the reform of pay
system;

Hypothesis 4: Satisfaction level of external equity improved after the reform of pay
system;

Hypothesis 5: Satisfaction level of procedural equity improved after the reform of pay
system;

The level of pay satisfaction before and after the 1998 reform is shown in Table 3. The
analysis of the 716 questionnaires filled out by senior employees who entered the institute
before 1998 shows that since the reform employees' pay satisfaction has significantly
improved. Overall, the staffs level of satisfaction increased from 2.19 before the reform to
3.44 after the reform. Individual, internal, external, and procedural equity satisfaction
levels increased by 44, 40, 28, and 32 %, respectively. In addition, the t test statistics and
p values show that the changes in the four second-level indicators before and after the
reform are significant.

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 1226 S. Zheng et al.

Table 3 Comparison of p

Categories Satisfaction level Satisfaction Satisfaction Satisfaction level Overall

of individual level of internal level of external of procedural satisfaction
equity equity equity equity level of pay

Before the 1.86 2.05 2.48 2.46 2.19

reform

After the 3.31 3.44 3.45 3.60 3.44

reform

Value of 5.926 6.547 9.900 8.474 7.318

t test

p value 0.027 0.023 0.010 0.014 0.018

4 Econometric Analysis

4.1 Model and Variable Definitions

The most direct method to estimate the employees' level of pay satisfaction is with OLS
seen in Eq. (1).

P,=X,ß' + £i (1)
where P, is the observed employees' s
variables such as the satisfaction level
parameter; and s, is the stochastic error
In the model observed employee satis
and the independent variables used in
individual equity, internal equity, exter
the model, the correlation coefficient m
and the results show that correlation c
annual pay, and department are all abo
independent variables related to the e
gender and department. The variables
were omitted from the model to avoid m
definitions for the variables and their d
in Table 4.

4.2 Results

Table 5 presents the results of the regression model. The results show that individu
internal, external, and procedural equity satisfactions all have a significant and posi
effect on the level of overall pay satisfaction. Compared with the old system, the new p
system is more fair and reasonable in the following aspects. First, the previous "eat
from the big pot" and pay based on seniority and status have been changed to "equal
for equal work," where pay is based on an employee's work and his or her contributio
the organization. New elements such as positional pay and performance pay have b
introduced to differentiate the incomes between the scientific research personnel,
agement personnel, and other personnel. Since the same pay standard was implemen
nationwide in the SOSIs before the pay reform, it is highly unlikely for Institute S'

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 Pay Satisfaction of Employees 1227

Table 4 Definitions of variables and descriptive s

Definition of variable Attribute of variable Mean Standard

deviation

Dependent Change of the overall Difference between the overall satisfaction 1.7754 1.3058
variable satisfaction level level before and after the reform

Independent Change in the individual Difference between the individual equity 1.3423 1.3805
variable equity satisfaction satisfaction level before and after the
level reform

Change in the internal Difference between the internal equity 1.3926 1.3675
equity satisfaction satisfaction level before and after the
level reform

Change in the Difference between the procedure equity1.2813 1.5184

procedural equity satisfaction level before and after the
satisfaction level reform

Change in the external Difference between the external equity 0.9749 1.4993
equity satisfaction satisfaction level before and after the
level reform

Gender Male = 1, female = 0 0.7438 0.4360

Department Research = 1, other departments = 0 0.5869 0.4926

Table 5 Results of OLS model on changes of overall pay satisfaction

Independent variable Change in the overall satisfaction level

Coefficient t value

Change in the individual equity satisfaction level 0.2235*** 8.45

Change in the internal equity satisfaction level 0.1312*** 4.67
Change in the procedural equity satisfaction level 0.3011*** 7.96
Change in the external equity satisfaction level 0.1233*** 3.78
Gender 0.1624*** 3.55

Department 0.1090 1.43

Number of Observations = 1,0

Adj R2= 0.8023

F-statistic = 322

Represents significance level at 1,5, 10 %, respectively

level to match the market level. As a result, the pay level for the most competitive talent in
key positions lays far below the market level, resulting in a low individual level of pay
satisfaction. After the pay reform in 1998, an individual's pay level linked to his or her
performance and contribution to the organization. This largely improves employees'
degree of individual equity satisfaction and positively affects the employees' overall level
of satisfaction about the pay system.
Second, the nominal once-every-2-year evaluation system had been replaced with
monthly and annual position evaluation systems. Under the new systems, employees are
evaluated more frequently and thus feel more pressures. The evaluation results determine
the amount of position pay and performance pay. The results support the points of Robbins
(2003) who argued that a performance-related pay plan is based on the relationship

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 1228 S. Zheng et al.

between pay and motiv

formance evaluation.

Third, individual employee's pay is linked to their department's total pay, and the total
pay of the department is determined by the department's contribution to the organization.
The institute periodically evaluates each department's contribution based on their revenue
and other services to the institute. In this way, the individual's interest is expected to be
consistent with both the department's and organization's interests. The basic pay and
position pay guarantee the employee a basic living standard. Yet the year-end bonus, which
is determined by individual and department's performance, encourages employees to
cooperate with each other and improve their productivity.
Fourth, the level of procedural equity satisfaction mainly reflects whether the employees
participate in the organizational pay decision-making, whether they know how the final
decisions are made, and whether managers explain the new rules. After the reform, the pay
system and structure have become more transparent and the employees have had a better
understanding of the source and constitution of their own pay. Therefore, the improved
level of procedural equity satisfaction positively affects the employees' overall degree of
satisfaction related to the pay system, which agrees with Thibaut and Walker (1978) who
found that procedural equity has an impact on a subject's behavior and attitude.
The results above provide additional support for Adam's Equity Theory, which states
that an individual considers that she (or he) is treated fairly if she perceives the ratio of her
inputs to her outcomes to be equivalent to those around her, and if an employee perceives
underpaid then she may feel hostile towards the organization and perhaps their co-workers,
which may result in the employee not performing well at work anymore (Adams 1965).
Based on the above analysis, it can be seen that after the pay reform, the level of
satisfaction related to individual, internal, external, and procedural equity are all improved,
which produces positive effects on the employees' overall level of pay satisfaction. In
terms of which type of equity was most impacted by the reform, procedural equity ranks
first, individual equity places second, followed by internal equity satisfaction and external
equity satisfaction. Therefore, the results show that the employee's overall level of pay
satisfaction is most impacted by whether their pay setting is democratic, open, and
transparent. If the pay system cannot meet the three requirements of being democratic,
open, and transparent, it would dampen employees' work enthusiasm. Regarding the
individual characteristics, male employees' level of pay fairness satisfaction is more
sensitive and the overall level of satisfaction is higher than that of female employees. An
explanation is that male employees have more employment opportunities outside of the
institute than their female peers; they also could be more ambitious for promotions and
bonuses. Therefore, men are more sensitive to and obtain more benefits from the pay
system reforms.

5 Conclusions and Implications

Based on Adams' equity theory and data from a survey of the 1,007 respondents from
Institute S, this study examined the pay system reform of a SOSIs in China, explored the
changes in pay satisfaction before and after the reforms, and analyzed influencing factors
of pay satisfaction. Based on our empirical results, we are able to make the following
conclusions. First, pay satisfaction significantly improved after the pay system reform and
the four dimensions of equity, namely individual, internal, procedural, and external equity,
have significant and positive effects on the staffs general level of pay satisfaction. Second,

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 Pay Satisfaction of Employees 1229

procedural and individual equity have stronger po

satisfaction level than internal and external equ
isfied and sensitive to the reforms.
Several policy implications could be derived from
that engaging employees in the reforms helps t
pay satisfaction. When conducting job analyses
other pay-related tasks, managers should use prof
justice. The results should be disclosed to the em
fair and more motivated to work harder, and in t
organizations so that their well-beings will be fur
make the compensation policy clear and transpa
investigation on the local rates of compensation
employees. When conducting a comprehensive a
institutes and companies as well as take the loca
of organizational development, and development
they will have a better understanding of emplo
policies accordingly, leading to a better labor-pa
Third, to achieve a better internal equity, the
responsibilities of each department, determine the
the reliability and validity of job analyses and ev
pay should be based on his or her contribution
organization. At the same time, institutes shou
establish a fair mechanism for promotion, and en
challenging but feasible. Under the fair and co
become more productive and receive more com
agers should set up a two-way communication
understand the organization's policies. Manage
regarding the pay system in a timely manner,
feedback. Yet with effective two-way commun
bility to help staff form correct values of co
satisfaction, while employees can better evaluate t
organizations, become more considerate of organ
more satisfied with certain level of compensat
satisfaction.

This study suffers from several limitations that need future research. First, the data came
from one organization only, and this limits the generalizability of the results. Future studies
based on data from diverse organizations in different sizes, fields, areas and industries will
yield more generalized results to enrich the literature. A second limitation is about
employees who worked in the institute before the pay reform but left after 1998. It is thus
possible that employees left the institute because they did not feel happier with the reform
or they had better places to go (or retire). This lack of data may cause a selection bias and
could be a challenge for any future research. Third, many SOSIs have been transformed
into corporations over the past two decades. It would be important and interesting to
examine and compare employee pay satisfactions in SOSIs and in then-SOSIs but now
private corporations.

Acknowledgments We gratefully acknowledge the work of Mo Li, Yabo Zhao and Xinyi Zou and
appreciate their help with this paper. We also thank Grace Morris for her editorial assistance. The paper was
financially supported by Major Research Plan of the National Social Science Foundation (Grant No.

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 1230 S. Zheng et al.

11&ZD052), Foreign Public

10XNK092, 12XNQ069), an

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