The impact of reward systems on organisational performance: Exploring the role of ethnic diversity and employee’s cultural traits

Abstract

Due to economic shifts, globalisation, and increasing domestic diversity, the field of human resources management (HRM) is experiencing significant pressures for change. Most organisations nowadays are composed of ethnically diverse workforce, prompting a need for changes in HR theories, processes and practices. While firms with ethnically diverse employees benefit from the variety of knowledge, information, and ideas, there are challenges, such as reduced trust, that can influence reward systems’ role in enhancing trust. Additionally, individuals from different ethnic backgrounds have distinct preferences and motivations regarding reward processes and practices, which, combined with general distrust, can affect the effectiveness of rewards in motivating these diverse groups. There varying motivations stem from unique cultural triats that shape work values, attitudes, and behaviours, making it challenging for organisations to align reward systems with the values of multiple individuals. Research has highlighted the impact of ethnic diversity on organisational performance; however, the role of cultural traits in this context has not been thoroughly examined. Understanding how cultural traits influence reward systems has become increasingly important not only due to globalisation and the rising number of immigrants altering the workforce. Also, because traditional HR theories and practices were designed for a homogeneous workforce with individualistic cultural values, reaviling a significant gap in the literature. Relatively limited research has thus far examined three critical areas: (1) the interaction effect between ethnic diversity and rewards (whether antagonistic or synergistic) on trust and subsequent organisational performance; (2) the extent to which cultural traits influence organisational performance and the effectiveness of rewards in enhancing such performance; and (3) whether preferences for reward allocation criteria, inherent from cultural values, indicate motivation or aversion to pay inequality, thereby affecting the impact of pay inequality on organisational performance. Consequently, this thesis aims to extend HRM, psychology, and management theories and research by addressing six important areas by conducting and reporting three distinct studies. Study 1 examined the mediating role of trust in the relationship between rewards and organisational performance, and the moderating role of ethnic diversity in the relationship between rewards and trust. Drawing upon the behavioural perspective, social exchange theory, and psychological contract, our model suggests that the effect of rewards on organisational performance is mediated by trust, while the relationship between rewards and trust is moderated by ethnic diversity. By utilising ordinary least squares (OLS) regression analysis and nationally representative data from the 2011 Workplace Employment Relations Survey (WERS) in Britain, the study finds empirical support for the proposed relationships. Findings reveal that trust fully mediates the relationship between rewards and organisational performance and that this indirect effect depends on the level of ethnic diversity, which is shown by the moderating effect of ethnic diversity on the rewards-trust relationship. The implications of these findings for theory, future research, and managerial practice are discussed. Study 2 examined how cultural traits impact organisational performance, and moderate the relationship between rewards and organisational performance. Drawing on the social exchange theory (SET) and Hofstede’s cultural framework, we highlight the potential effect of cultural traits on performance and the influence of cultural traits on the role of rewards within organisations. To analyse the study hypotheses, we employed the ordinary least squares (OLS) method and utilized nationally representative data from the WERS 2011 survey in Britain. The findings reveal a significantly negative association between masculinity and performance; individualism and performance; and uncertainty avoidance and performance (the association between power distance and performance was not supported). Additionally, evidence supports that workforce cultural traits moderate the relationship between rewards and organisational performance. Specifically, cultural traits, such as higher individualism, masculinity, and uncertainty avoidance strengthen the relationship between rewards and performance. Conversely, under high power distance reduces the size of the positive effect of rewards on organisational performance. These findings contribute to the advancement of HRM literature by highlighting the critical role of national culture in shaping the effectiveness of reward systems. The implications of these findings for theory, empirical evidence, and practice are discussed. Study 3 examined the impact of pay inequality on organisational performance and the moderating role of cultural traits on this effect. Drawing on equity theory and insights from Hofstede’s cultural and contingency models, this study posits that pay inequality negatively impacts organisational performance and that employees' reactions to pay inequality practices are contingent upon their cultural characteristics. Specifically, the degree of aversion or motivation towards pay inequality varies based on cultural traits, consequently influencing the extent of the negative impact of pay inequality on organisational performance. This proposition is examined by analysing panel data from the Adult Social Care sector in England with 25,000 establishments over the six-year period from 2014 to 2019. Findings revealed that pay inequality has a negative effect on organisational performance and that this negative effect was larger in establishments, in which employees exhibited inequality aversion (i.e., high power distance and high uncertainty avoidance). While, in establishments where employees exhibited inequality preference (i.e., individualism and masculinity) the negative effect was mitigated. This paper extends existing theory by demonstrating the significant impact of cultural traits on the relationship between pay inequality and performance. This thesis makes significant contributions to the fields of strategic and international HRM, workforce diversity, and organisational performance by integrating cultural traits and ethnic diversity into the understanding of how reward systems influence organisational performance. The findings offer valuable insights for managers and policymakers on the importance of tailoring reward systems to the cultural and ethnic composition of the workforce, potentially leading to more effective HR practices and improved organisational outcomes. Furthermore, this research paves the way for future studies to explore the nuanced effects of cultural diversity on various organisational processes.