Delayed pay and employee turnover: The buffering role of pay‐for‐performance

Abstract

AbstractIn response to a financial crisis, many organizations adjust their pay systems to reduce labor costs. In this research, we focus on the use of delayed pay (the postponement of employees' contractual compensation) and examine its effect on employee voluntary turnover outcomes. In a field study (Study 1) with data collected from the executive managers of 129 Chinese hotels experiencing a financial crisis caused by coronavirus disease 2019 (COVID‐19), we find a positive relationship between delayed pay and the voluntary turnover rate at the organizational level. In addition, this relationship becomes weaker when delayed pay consists of a larger proportion of pay‐for‐performance (PFP). We then conduct an experiment (Study 2) to extend our theoretical framework to the individual level, establish causality, and examine the underlying mechanism. The results show that the perceived negative instrumentality of stay (i.e., expected economic losses associated with staying in an organization) explains why individuals intend to leave organizations adopting delayed base pay but not delayed PFP. We further replicate these findings in a critical incident technique study (Study 3). We also discuss the theoretical and practical implications of these findings.