The Psychological Role of Pay Systems in Undertaking Discretionary Work Hours

Abstract

Drawing on psychological and economic perspectives, this paper models aspects of pay systems that dispose employees towards longer discretionary work hours than predicted by economically rational exchange alone. Three pay-system triggers and their respective paths to the undertaking of discretionary work hours are expounded: 1) pay equated to units of time, 2) pay contingent on subjective individual performance standards, and 3) pay growth determined by tournament pay structures. The effects are conceived as self-reinforcing due to loss aversion stemming from both endowment of income and sunk cost bias. Also considered are implications for human capital, a posed curvilinear relationship that holds practical relevance for organizational sustainability — i.e., maintenance of the firm’s human capital over the long term.

Keywords: Pay structure, pay basis, discretionary work hours, human capital, sustainability

JEL Classification: M12, M52