The Role of Pay and Leadership in Developing Organizational Commitment[dagger]

Organizations implement various strategies to secure their employees' commitment. Broadly, these can be classified into transactional strategies involving monetary inducements and transformational strategies involving exemplary leadership. In this paper, we study the relative impact of pay satisfaction and transformational leadership on organizational commitment. We collected data from 240 respondents in two Indian organizations. Analysis of our findings showed that transformational leadership and pay satisfaction had an almost equal impact on affective as well as normative commitment. Continuance commitment was affected by neither pay satisfaction nor transformational leadership, but by the years of experience of the employee. INTRODUCTION There is a war for talent in today's world of globalization and expansion. Firms today are facing labor shortages due to demographic changes in the workforce. Therefore, retaining employees is becoming a key focus area as employee turnover can badly affect an organization due to high cost associated with the turnover (Hay, 2002). In order to retain employees, organizations are pursuing two kinds of strategies. First, organizations are focusing on transactional strategies and attempting to induce employees by material rewards. Spiraling salaries are evidence of the fact that companies are trying to outdo each other in enticing employees through generous paychecks. Second, organizations are focusing on transformational strategies, such as developing a positive culture through exemplary leadership. Companies following this strategy often invest large sums of money in leadership development, training, and cultural transformation. While organizations may pursue one or the other, or a mix of both strategies, there are no clear measurable guidelines as to which strategy is more suitable to enhance organizational commitment and retention. In this paper, we attempt to study the relative impact of pay satisfaction and transformational leadership on the employees' organizational commitment. ENHANCING ORGANIZATIONAL COMMITMENT - A RETENTION STRATEGY Organizational commitment is a three-dimensional construct. The affective component of organizational commitment refers to the emotional attachment to, identification with, and involvement of the employee in the organization. The continuance component refers to commitment based on the costs that the employee associates with leaving the organization. The normative component refers to the employee's feelings of obligation to remain with the organization (Allen and Meyer, 1990). Once the employees gain organizational commitment, they are motivated to remain with the organization, as commitment is a strong force in enhancing motivation and job satisfaction (Pool and Pool, 2007). Organizational commitment leads to reduction in intention to quit and hence reduces turnover (Labatmethene et al, 2007). Organization climate, which comprises of aspects such as motivation practices and decision-making practices, and communication climate, which includes information flow like superior- subordinate communication, are positively linked to the organizational commitment (Guzley, 1992) . It is observed that employees with favorable perceptions about internal mobility, employment security, and opportunity for training and development are more psychologically committed to organizations (Gaertner and Nollen, 1989). Each of the three dimensions of organizational commitment is likely to enhance retention in an organization. Affective commitment makes the employee 'want' to stay on in the organization because of affective bonds. Continuance commitment compels the employee to stay on in the organization due to various material or economic constraints. Finally, normative commitment also binds the individual to the organization through a moral binding. Transformational leadership leads to identification of followers with organization. …