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CAHRS Working Paper Series Center for Advanced Human Resource Studies (CAHRS)

1-15-1987

A Strategic Perspective on Compensation Management

George T. Milkovich
Cornell University

Milkovich, George T., "A Strategic Perspective on Compensation Management" (1987). CAHRS Working Paper Series. Paper 444. http://digitalcommons.ilr.cornell.edu/cahrswp/444

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A STRATEGIC

PERSPECTIVE MANAGEMENT1

ON COMPENSATION

George Working

T. Milkovich Paper 87-01

Center

for Advanced

Human

Resource

Studies

ILR School Cornell University

This paper has not undergone formal review or approval of the faculty of the ILR School. It is intended to make the results of Center research, conferences, and projects available to others interested in human resource management in preliminary form to encourage discussion and suggestions.

To appear in the 1988 volume of Research in Human Resources Management, editors Ken Rowland and Gerald Ferris, JAI Press. Portions of this paper were presented at the Academy of Management, 47th Annual Meetings, New Orleans, 1987.

2
INTRODUCTION The notion the missions that compensation policies are strategic, thereby This affecting is part

of the organization, popularity fad, is part

has considerable strategic. is that

currency. While

of the current

of all things

some may write perspective

it off as another on compensation issues (Dyer,

a less cynical of a growing part

view

a strategic

recognition

that macro-organizational resource management

are an important 1985).

of the study

of human

The importance three fundamental differ

of a strategic tenets.

perspective is that

on compensation compensation and across

rests

on

The first

policies employee

and groups

practices within
evident.

widely

across To some

organizations students

organizations.

of organizations using human

this may be self capital models to

But to others, such as economists compensation policies Anecdotal report differentials, and practices evidence that

examine

differences are treated

in organizations' as random noise with little

compensation
relevance.

and sporadic

surveys

of specific

policies Board,

or practices 1984; claim American

differences Center,

do exist. 1987).

(The Conference

Productivity their incentive firms base

For example,

some organizations others follow others

to position design

pay to meet

the market,

while

it; some short

schemes employ

to emphasize based

long-term incentives

performance, while

term.

Some

individual gainsharing others

others the

emphasize

group

or team based of compensation,

schemes. Some

Some decentralize disclose very guide

administration information while others

do not.

specific charts, and

about

pay

to employees, only

such as ranges policies,

and merit such

communicate

the broad little

as fairness exists

competitiveness.

Surprisingly

systematic

evidence

on the

3
effects of these differences. So the proposition effects requires more that policy systematic and practice study. make options

differences

have meaningful tenet

The second help shape these

is that

the decisions that discretion them.

managers exists does

and employees to choose

differences; used

among the

and the processes importance in tax

to implement effects

This

not discount pressures,

of environmental

such as competitive or workforce

changes

laws and accounting perspective and assesses But tracing exogenous decision most

conventions

demographics.

Indeed,

a strategic pressures systems.

implies whether

the anticipation these pressures

of such require

environmental in pay systems for

changes

all changes

and variations leaving only

in compensation a minor role

to inevitable discretionary Perhaps perspective systems that

imperatives, making,

does not seem

an accurate on which that

representation. a strategic fitting makes compensation

fundamental

of all the tenets is based

on compensation

is the belief

to environmental variation

and organizational in compensation policies

conditions systems

a difference; random noise;

systematic

is more contingent

than

that making

compensation

and practices

on organizational behaviors

and environmental and the performance and theory (Ehrenberg review about

conditions

has some desired

effects

on employee state

of organizations. this

Considering

that

of research

in compensation, & Milkovich,

is probably In light

the greatest beliefs,

leap of faith the present to be strategic by

1987).

of these what affect

focuses

on two basic and

issues:

(1)

does

it mean

compensation?

(2) what

factors

or are affected

compensation

strategies?

4
WHAT The term important.
nothing.

DOES

IT MEAN used

TO BE STRATEGIC? to refer to everything considered it may mean long-term and success. in

strategy

is often is that

The danger Generally,

if it refers refers that

to everything,

strategy

to the overarching,

directions Strategies the external consistent articulated of decisions both plans

of an organization take advantage

are critical

to its survival and manage resources

of the opportunities by marshalling 1985). internal

the threats in some

environment direction

coherent,

(Dyer,

A strategy or it may

may be intended emerge through

and formally the patterns are

in some plan shown

or document,

by the organization's and patterns

behaviors. from the past

Thus,

strategies

for the future applied

(Mintzberg,

1987). illthe

Strategy defined. term

to compensation

management definition

is particularly just discussed,

Analogous

to the more

general

connotes

compensation and threats, and purposes

decisions and linked

responsive

to environmental of the overall long-

opportunities term directions

to or supportive

of the organization. Most probably merit

Thus,

all compensation which job

decisions evaluation candidates. performance likely

are not strategic. plan to adopt

are not. grid

Deciding to use

and which

increase increases position Culling

are unlikely or team are more that are

Choosing

whether

to link pay

to individual in the market

and deciding strategic that

the competitive consequences.

to have those task

those

decisions

not from

are critical

to the performance strategies.

of the organization Being strategic about to

is a major compensation anticipated

in defining support

compensation

implies

of the business

strategy

and sensitivity

environmental

pressures.

5
But such a general or theory characterization building. And does not provide much much leverage for on

for research managing poorly basing

advised.

Nor does

it offer

guidance

compensation. defined constructs

the folly

of undertaking (Schwab,

research 1980).

based

is well

recognized thought

Similarly, ill-

managerial without it will

decisions defining

on poorly what

out purposes

is equally

is meant

by strategic

compensation of such a

decisions, perspective.

be difficult

to examine

the usefulness

As a place perspective decisions decisions, The matrix involves

to start,

I offer focuses

the following

definition:

a strategic

on compensation that are critical

on the patterns

of compensation

to the performance vary by employee this which groups

of the organization. groups within One

Such

in all likelihood, shown as Figure policy

organizations. dimension a pattern of

1 captures choices employee

definition. taken together

the critical

form

of decisions. decisions apply

The critical is the other

to which

these

patterns

dimension.

-------------------------Insert Figure 1 About Here -------------------------Given this definition, decisions the major and employee research groups tasks that are to (1) identify are strategic, (3) extract (2) any basic of if

the compensation develop measures

or descriptions

of these

decisions,

combination organizations compensation the

or patterns

of decisions

that may be related and finally which,

to a variety (4) determine in turn,

and environmental strategies affect

conditions, workforce

behaviors

affect

implementation

of an organization

strategy.

6
strategic The notion literature of compensation Employee strategy Groups originally 1976, surfaced Ellig, in the Salter, was longdecisions elements

on executive a strategic

compensation perspective, basic

(Cooke,

1981,

1973).
defined term

From

compensation base

for executives pay, shortand

in terms

of several benefits,

elements:

incentives,

and perquisites. of total

The major among

strategic the basic term

focused to best

on the deployment achieve

compensation

the missions

of the organization. is an example. versus versus long-term subunit

Long

incentives was directed

as a percent at choices the relative riskiness More executives

of total among

compensation short-term

Attention incentive

various

schemes, and the

emphasis

on corporate compensation

performance,

of the total recently, to middle (Balkin Carroll, business

package. has been Broderick, and finally can be made their extended 1986), beyond scientists

a strategic managers

perspective (Kerr, 1985; 1984)

and engineers (Lawler, make 1981;

& Gomez-Mejia, 1987).

to all employees that only executives has

An argument hence

strategic

decisions, However,

only

compensation groups

strategic

implications.

different

employee

may be critical one business on more force. success become

to the performance strategy efficient If certain may depend production employee

of different heavily

organizations.

For example,

on research

and development, another

another

employees, groups than

and still

on the sales critical their

may be more

(or less) that

to the

of the organization an important Little strategically part

others,

it follows

reward

systems strategy. that point

of implementing work exists

the organization's on identifying that, perhaps

business

empirical relevant.

employee the best

groups starting

are

Lacking

7
is to simply systems use the basic occupations typically for which include sales, separate compensation managerial and

are designed. scientists

These

executives, clerical

professional,

and engineers,

and production.

strategic Turning patterns next

Compensation dimension Table

Decisions of compensation lists strategy, of decisions the deemed

to the other decisions,

of critical

1 contains structure

to be strategic are included.

in the literature. The list proposed

Both

and process while

decisions longest,is of

by Lawler

(1981),

not the

perhaps pay

the most

inclusive.

It includes internal

the market

position

(level

relative

to competitors),

versus

external

orientation, versus

hierarchy skills--for

(the steepness the pay versus

of the pay reward

structure mix,

and the basis--job

structure seniority, listed etc.)

and the basis individual,

of rewards criteria used,

(performance

groups

versus

etc.). Several
size of bonus, defined issues

issues timing,

by Carroll

(1987)

(performance Lawler's

measures, more broadly proposed and applied (1981) the

seem consistent

with

(e.g. basis compensation

for increases). have also become both issues

The original more broadly

issues defined

for executive

to all employees. relative emphasis

For example, to be placed long-term,

proposed elements as part

by Ellig,

on the various are treated

of compensation, of the "mix" decision.

and the short-

versus

------------------------Insert Table 1 About Here ------------------------Salter decisions other (1973) and Lawler (1981) also considered congruency of pay a series of process with subunits,

to be strategic. systems),

These

included

(consistency systems across

organization

standardization

8
communications participation (the type in decision of data making to disclose, (levels change the channels to use, etc.),

of employees strategy

involved

and nature

of involvement), in organization Kerr a somewhat versus versus clarity

and organization change). focusing list

(the role of compensation

(1985),

on the compensation (35 items in all),

of general including

managers,

offered

different

the subjectivity orientation versus (short-

objectivity long-term),

of performance the values

criteria,

the time (performance

orientation

membership), of total

of the performance-reward devoted to incentives.

relationship,

and the proportion

compensation

The expanding raises to mind made What doubts about

list of decisions the efficacy facets more

claimed

to be strategically perspective. and pay

relevant

of a strategic

It brings that 1985). are list

the multiple

of job satisfaction than originally to separate

satisfaction (Heneman, that

the constructs is required from

complex

conceived

is some research those that are not.

those

decisions adopting

strategic

At this point, a framework To this

a generic

of fundamental and perhaps

policy

choices

offers

for the present end, Table

discussion

a guide

for future which

research.

2 contains

a list of six policies policy were involves several from

I propose

are strategically and options. literature

relevant. These

Each
policies

underlying

decisions

extracted

the compensation

management

and the work

discussed

above. ------------------------Insert Table 2 About Here f---------------

9
Competitiveness The first organizations perspective, relative Carroll, However, & Newman, pay forms, policy, and among the degree occupations refers (Belcher, meeting of competitiveness, within can vary From among a strategic

organizations. a firm's

competitiveness

to positioning 1987;

compensation 1987; options. (Milkovich in the

to its competitors 1987). Leading,

Milkovich

& Newman,

or following

are the conventional is more complex

experience 1987).

suggests

that competitiveness forms,

The mix of pay pay

the risk-return

tradeoffs

and the average

level

relative regarding

to competitors

are all of its

relevant

aspects

of a firm's

policy

the competitiveness

compensation. two managerial the other $30,000

The risk-return pay schemes. return

tradeoff

can be illustrated base salary

by considering with base merit, with a

One has a $50,000 of $70,000; these that

a potential

is, $40,000

bonus

potential.

Whether

two competitive

positions

are

equivalent

depends

on the risk-return incorporates

tradeoffs both

of prospect

employees. to total

A risk-return compensation Clearly

tradeoff

the proportion the bonus

of bonus (Rabin,

and the likelihood have

of receiving adopted

1987).

the two employers

different

competitive positions Such

positions

in the market. performance feature highly becoming

The effects

of these

different

on organization are a common others that are

and employee force with

behavior pay systems

are unknown. (some are and recent pay

schemes salary, suggest

of sales leveraged more

straight surveys

incentives) in managerial

it is 1987).

common

(American

Productivity

Center,

10
Internal structure of the internal pay structure relevant. pay is another Typically fundamental it refers (Simon, several policy to

The nature that is proposed

to be strategically of rates, Ehrenberg These or internal

the distribution Mahoney, are 1979;

differentials However,

1957;

& Milkovich,

1987).

choices

involved.

include

the number

of levels the number

in the pay hierarchy, of different other systems

factors used

on which

to base

the hierarchy,

to devise

the structure,

and its congruency differ widely

with across

organization applying

characteristics. different is that even

Pay structures

organizations

technologies. considerable

The premise

underlying to design

a strategic different

perspective pay hierarchies, have

discretion with

exists

in organizations

similar

technologies. obscuring This changes.

Some organizations differences allows

few job classifications details deploy similar and/or specific

and wide skill

ranges,

in task to

requirements. requiring pay

flexibility firms with

the workforce technologies

without adopt

other with

more

job classifications requirements more title

more

detailed a greater

specifications sense these

of work

rules

and skill

to provide changes). but

of promotional cases the slope

opportunities

(e.g.,

In both

of the pay hierarchy between may also

is the same, classes differ.

the number

of job classes The slopes organizational structure which tends

and the differentials of the hierarchies design result

differ. Variations internal in pay on

from many

factors

and the Further,

to mirror

these

arrangements.

the criteria

hierarchies

are based employee

may vary. attributes curves

Pay structures such

in some occupations and or knowledge

are consistent experience

with

as knowledge/skills and scientists

(e.g.,

maturity

for engineers

11
based (e.g., pay for factory workers), and on job attributes professional, (i.e., for other and clerical worth) to apply occupations work).

job evaluations the issue

for managerial, of pay pay equity

Finally, embedded

comparable

is also one or more

in the internal plans 1984;

structure.

The decision has

job evaluation worth (Remick,

across Treiman

all occupations & Hartman,

implications

for comparable

1981).

Forms

of Pay A third policy in the proposed elements Lawler, pay, strategic of total 1981; a variety of stock perspective compensation 1973). pertains (Heneman to the &

forms

of the mix of various 1984; Heneman, may include 1986;

Schwab,

Salter,

Total
schemes, cost of

compensation of living benefits. to which

base

of incentive options

adjustments, Decisions each

various include

forms

and an array

the number

of forms

to offer, their

the degree membership incentives), of total form

is contingent (e.g.,

on employees' entitlements) form

maintaining

in the organization the relative compensation) For example,

or performance benefits

(e.g.,

importance

of each

(e.g.,

as a percent

and the proportion in some organizations compensation,

of the workforce all employees only a handful

eligible receive

for each stock

options are

or deferred
covered.

in others

of executives

Basis

for Increases The policies for granting facets pay increases are are also proposed involved; they to be range 1987; from Ellig,

strategic. an emphasis

Many

to these

policies

on short-

versus

long-term

incentives

(Carroll,

12
1976; Salter, 1973; Wallace, 1987), the degree of pay differentiation in

performance 1987;

differences Newman

(Carroll,

1987),

the size of the payments Lawler, 1981),

(Carroll,

Krzystofiak,

& Krefting, subunit

1982; versus

the relative (Carroll,

emphasis 1987;

on individual 1986;

versus

corporate

performance on

Kerr,

Lawler,

1981; (Carroll,

Salter,

1973),

and the emphasis 1986).

guaranteed

compensation

1987; Rabin,

Role

in HR Strategy Descriptions of firms' a variety High human resource strategies 1985). suggest In some, plans that compensation at financial

compensation plays

plays

of roles risk-high

(Dyer, return

a dominant firms,

role.

incentive

investment firms

and performance-based In others, role

incentives

at some manufacturing to be in a coordinate (Herzberg, (e.g. 1959). IBM's

are examples. subordinate they may security

compensation human

appears

or even Instead,

to other their

resource

systems

emphasize

employee

relations

policies

employment
"HPWay" ) .

as a shared vein,

responsibility (1981)

and the Hewlett that

Packard-

In a similar

Lawler

suggests

a compensation business changes. of

system

can be out on the point or it can playa policy proposed

to signal

changes role

in an organization during organization is the role

strategy,

less prominent in a strategic human resource

So the fifth compensation

perspective strategy.

in the overall

Administrative Finally, to have Salter,

Style the process used to administer compensation Kerr, 1986; also is regarded 1981;

strategic 1973).

properties Administrative

(Broderick, processes

1985;

Lawler,

involve

several

choices.

Among

13
these are the nature vs. specific of information details) to disclose to employees (i.e., broad in

policies pay

the nature

of employee

participation

design

and administration, the nature these among

and the degree

of centralization procedures. position, role

of pay

administration, In summary, structure, strategy strategic mix

of dispute

resolution

six policies--competitive basis for increases,

internal resource of a

forms,

in human

and administrative perspective theme

style--represent

a proposed

definition

on compensation. in personnel

The need

to describe 1983).

and measure In the case of

is a recurring of compensation strategic Much work

research

(Wallace,

strategy,

this means

construct

validation

of patterns of pay. about

decisions is required is new.

involved here, Many

in the design because the

and administration strategic

idea of being beginning

compensation it means concept

employers

are only

to consider

what

and what may afford

issues

are involved.

However,

research

on an emerging in making outdated relevant issues.

an opportunity rather

to offer studying

some guidance past

compensation

decisions, to begin

than

and often most

One place critical more

is to select

employee

groups

likely

to be

to the implementation employees technology) managers

of an organization's responsible

business

strategy; distinctive marketing

specifically, (e.g., General

for the organization's advantage (e.g.,

competence strategy). engineers examples. then

and competitive in highly

decentralized technology employee policies

firms firms groups applied

and scientists, are probably are identified, to them can

and marketing Once these

personnel

in high critical

strategically

the patterns

in the six compensation

be assessed.

14
Assessing strategy Most as applied Compensation resource strategies management studies is bereft describing of research. formal are of

to human

of the literature in specific to emerge

is prescriptive--case employers. However,

procedures beginning strategies section

a few empirical 1986; Dyer, 1985).

studies studies

(deBejar

& Milkovich,

specifically them.

related

to compensation

are even

rarer.

This

examines

Only critical

one reported

study

directly

posed

the question, (i.e., strategic

"Can a set of decisions) five basic basis and

organizational-level and measured?"

pay decision In this

be identified strategic

study,

(Broderick, mix,

1985),

decisions

(competitiveness, were extracted

hierarchy,

increase

administrative and eight based

style)

from the literature. answered

Two hundred questionnaire was

corporate

compensation decisions. Seven

directors

a 70-item

on the five basic of the study. analysis

Compensation shown

for middle

managers

the focus the factor about

factors, most

in Table

3, emerged decisions

from speculated

and confirmed Three

of the strategic factors

in the

literature. (expressed

structural meets

emerged:

(1), external average

competitiveness pay level);

as leads,

or follows

competitors'

(2), mix

(expressed

as the proportion and

of total

compensation increases

contingent (expressed
growth) .

on membership as increases And four

or performance); based

(3), basis

for pay

on efficiency/costs style

improvement also

or revenue

aspects

of administrative of managers units and

emerged: pay

(1),
(3)

employee similarity related and

participation of plans

(2), level business

approving

decisions

across

(4), formalization. not found

Items

to the internal about

pay hierarchies

were

to be significant, human resource

items

the role of compensation

in the overall

15
strategy were not included. ------------------------Insert Table 3 About Here ------------------------It is not clear may very are well be that made; why the hierarchical decisions about factor was not confirmed. pay such

It

the nature

of internal jolts,

structures as threats

infrequently

that only major economic

environmental or major

of unionization, innovations, on which the

lawsuits,

survival

technological the factors

act as triggers internal

to cause

employers

to reconsider

structure

is based. internal

It may

also be that managers to be strategic. on another employee

do not consider It would

policies

regarding

structure this

be interesting

to see if replicating yield surveyed

study

group--engineers,

for example--would research

similar

results. adopted a

All of the remaining particular Little

in this paper

set of pay decisions over

assumed

by the researchers assumption

to be strategic.

concern

the correctness deemed

of their

is reported. found

Nevertheless, some empirical

the decisions support

to be strategic (1985) study,

in the literature at least

in Broderick's

for managerial

compensation.

FACTORS The basic of policy resource

AFFECTING issue

STRATEGIC

CHOICES

IN COMPENSATION what factors research shape the patterns human sets

here

is to determine

choices strategy

in compensation. and compensation

Preliminary suggests

in overall three

the following strategies,

major

of factors in the

are involved:

organization

business

and factors

internal

and external

environment.

16
-------------------------Insert Figure 2 About Here -------------------------Using the schematic strategy in Figure 2 as a guide, studies three of the determinants sets. Those that

of compensation focused primarily

can be grouped

into these

on the relationship unit,

of organization human resource Most

strategies

(i.e., to

corporate, compensation research opined

business policies here,

and functional

strategies) of the reported strategy

and systems since

is the first.

falls

in the literature,

compensation

is

to be primarily group

a function

of the organization's which consider

overall

strategy. making its

The second

consists

of a few studies environment.

factors

up the organization's structural

internal

These style,

variables

include

arrangements, Finally,

its administrative the schematic those that

and its technological 2 suggest the possibility

characteristics. of a third environment

in Figure factors

set of studies; as important

treat

in the external policies.

determinants

of compensation

Organization The nature the primary 1984;

strategy

and Compensation strategy

strategy postulated to be

of an organization's

has been strategy

determinant 1981;

of its compensation 1973). among These 1978;

(Balkin

& Gomez-Mejia,

Lawler,

Salter

A convention three levels

in the organization of strategies: but corporate, distinct Leontiades, human of level,

literature business concepts

is to distinguish unit, (Hofer functional. & Schendel,

are seen as interrelated Galbraith & Schendel,

1983;

1982). These three levels have been carried

resource management literature (Dyer, 1985).

into the strategic Since such

a variety at each

definitions,

typologies,

and measures

of strategies

exists

17
only those used in research directly related to compensation are discussed

here.

Corporate The two proxies compensation these seems proxies strategy for corporate

strategies strategy employed in the research Neither on of

are diversification measures

and life cycles. strategy.

are direct

of organization strategy

Diversification operating

to be an outcome product

of a corporate Life

which

involves could

in multiple determination

markets.

cycles, business

arguably, strategy.

be a

of an organization's of these proxies

The lack of clarity inherent it, dominant, 1974). rise to in

in the meaning this research.

is but one of the is the most widely they

limitation used.

Diversification are classified product

With

organizations related, According the need business

as to whether diversification greater

exhibit

a single, (Rumelt, gives

or unrelated

strategy

to organization for mechanisms units consistent

theory,

diversification

to integrate with system

and control

the corporation's (Lawrence

separate

corporate serves

objectives as a key

& Lorsch, and control

1967).
mechanism

The compensation available studies 1985).

integration

to management. of corporate Three general issues diversification were also examined compensation (1) to what unit (2)

Several issues degree versus to what (Kerr, were

of principal incentives

interest:

division

managers'

based

on business performance; versus were

some combination degree were

of business performance

unit

and corporate

their

measures and

subjective

quantitative managers'

and based

on end results; versus

(3) to what

degree

general

bonuses

discretionary

formula-based.

18
One grew study of five conglomerates (i.e., unrelated product (i.e., firms that

rapidly

by acquisition)

and five diversified by internal

firms

related that the

products basis

that grew more increases managers

slowly

expansion)

reported

for pay

(performance varied. This

measurement) difference was

and incentives attributed (Berg, managers

(pay mix)

for division

to different 1969, 1973).

corporate/division The conglomerate's firms

relationships goals were

in the conglomerates the division

to retain

of acquired

and to motivate

them

to operate

as autonomous divisions.

entrepreneurs Accordingly, using discretion

accountable compensation quantitative

for the performance increases were

of their

based

on division measures,

performance, with

end results amounts

or financial of bonus

considerable

in establishing rather

awards.

Management

was by incentives

than by controls. and Allen firm. (1973) studied two conglomerates used more formalized and one vertically procedures pay with

Lorsch integrated predetermined were tied

The conglomerates based

indices

on division

results;

managers' used

increases end

to objective The

formulas integrated

and the conglomerates firm used some

financial system

results

criteria.

a less formal

based

on corporate

results,

incorporating which 1976) were

intermediate to pay

measures increases

as well by a managers

as end results
formula.

measures, (1974,

not linked

Pitts

studied

the evaluation firmslf (IGDs), growth

of division similar

in six Ifinternal growth conglomerates, similar pay and five

diversified "acquisitive majors.

to Berg's

diversified that

firmslf (AGDs), had

to Berg's

diversified

He found only;

four of the AGDs

increases

based group,

on division and corporate

results

the

IGDs used AGDs

some combination bonus awards

of division,

results.

Four

computed

19
using a formula-based that allowed process on quantitative, financial type performance The rest of determination. a limited and

measures the firms

no discretion degree

in determining of discretion in findings, earlier

bonuses. in bonus only

allowed studies,

for varying though

These range

consistent policies

examined

of the compensation only on business factors

proposed

in this paper, size

focused

unit

level managers. ratio

Due to sample costs

limitations, profitability, limitations, sample were

such as size,

of labor

to total these

costs,

and so on, were Kerr (1985)

not controlled. a study

Considering

designed

of 20 firms, policies

controlling in this

the study

for size increase

(revenues). criteria,

Compensation performance

included mix

pay

measurement,

(i.e.,

salary,

bonus,

stock

awards, Corporate

perquisites, strategy

and promotions)

and administrative

processes.

was measured

on two dimensions:

degree
or internal

of diversification unrelated evolution ventures). patterns, product); versus Kerr

(single-product, and process

dominant-product,

related-product (growth through and joint

of diversification mergers, according

expansion categorized

through firms

acquisitions, to similarity

of compensation proposed labelled

analogous

to the definition strategies

of compensation were identified. managers were

strategy In one,

above. Two compensation

hierarchy-based, determined other,

the bonuses

for general a small

subjectively

and constituted a formal were

portion based to pay

of total strategy, increases. were

compensation. precise

In the

labelled

performance linked managers' Internal

definitions was formal

of performance and objective, allowing based pay little

tightly

The process

the general discretion.

bonuses

large

and formula-based, the hierarchical

diversifiers firms,

followed

strategy

and the evolutionary

followed

the formal

20
performance-based was influenced strategy. more Kerr concluded that compensation strategy

by the process and that a need

of diversification strategy

than by the extent influenced units. emerge as measures are to be and pay strategy

of diversification through generating on these become

the corporate over

for control

the business propositions

Based corporations are used determined defined

studies,

the following

increasingly managerial formulas,

diversified: performance,

(1) quantitative
(2) pay increases

to evaluate

by objective subunit

(3) performance rather than

is more corporate

likely results,

through

performance

(4) compensation (internal

strategies

are affected

by the process

of diversification

vs. acquisition). a recent pay these were study examining criteria, findings the relationship and corporate (Napier among manager 1985). corporate compensation

However, diversification,

increase earlier reported

did not support diversified and bonuses in more

& Smith,

Less
criteria

firms were

to use more greater

objective

pay

increase

a significantly corporations. sizes

proportion

of total in results

compensation may be due studied. whereas group, to the

diversified sample studies

The differences

to the small The earlier Napier

and the differences on business

in employee unit general

groups managers,

all focused pay

and Smith

examined

strategies Once again,

for a more these

heterogeneous point

"corporate need

level managers." definitions since

differences as well

for rigorous

of employee

groups

as organization to

charact~ristics be related

strategic

compensation

decisions

are conceived

to both.

21
Life Perhaps should vary the most with detailed Cycles of how compensation used the concept strategy

prescriptions strategy have

organization of life cycles

of life cycle. in

The application executive pay (Cook,

in compensation since been

management

originated

compensation, 1973; Ellig, vary

but has 1982;

extended

to cover

all employees'

Milkovich,

1986). but generally phase the includes

Prescriptions recommended an external disagreement term

depending

on the author,

strategy market exists

for an organization emphasis, low base/high

in the startup incentive to place mix

(though versus short-

on the relative

emphasis

on longstyle

incentives),

low benefits, and informality. typically

and an administrative The recommended

that for

emphasizes

decentralization mature/stable emphasis,

strategy

firms

has the following

pattern:

internal a high base

equity and with

competitiveness incentives

that meets/leads mix,

competition, processes

benefits/low
control.

and administrative

consistent

Life

cycles

have

received

widespread

attention yet,

as heuristic the concept than one cycle

devices

in the professional widely criticized. policies

compensation These

literature, include:

has been set of & Dyer, (e.g.,

criticisms

more

compensation 1984;

may be appropriate Milkovich & Newman,

for a given 1987),

(Wils

Milkovich,

1986;

it is deterministic cycles)

managers' 1985); stages exists whereas

objectives

may be to avoid typically making

or prevent

declining products

(Kerr,

and organizations in a life cycle, over types

have multiple

at different Confusion (Ellig, also 1981), life

classification Some use product or industry

difficult. life cycle

of cycles.

others

use the market

life cycle

and the company

22
cycle (Cooke, 1973). Cooke even alludes to the life cycle or aging of

compensation cycles

techniques, accurately but

paralleling reflect

the life cycle business still unit apply. device,

of the firm. than

Life

may more

rather

corporate

characteristics,

the criticisms

For all its attention and compensation and 72 non-high (1984) reported sales systems tech

as a heuristic is rare. As part

research study

on life

cycles tech

of their

of 33 high

firms'

compensation of two stages

strategies,

Balkin

and Gomez-Mejia growth (defined

the effects growth

in the life cycle; and mature (defined tech

as annual of product of their higher

of 10% or greater) Firms were

in terms if the ratio was an that

fmniliarity). R&D costs firms

classified exceeded are more

as high 5%.

to total

revenues stage

The hypothesis to follow stage. incentives stage,

tech

in the growth than

likely

incentive-based concluded a lower

strategy

companies

at the mature to adopt

The authors and select is just

that mature competitive of what

firms

are more than

likely

position was

firms For

in the growth some reason

which

the reverse was

expected.

the product

life cycle that

not significantly less emphasis product

related on R&D.

to compensation Caution needs

strategies

in firms here.

placed example,

to be exercised

For

familiarity

may be more than

of an indicator of a mature firms

of market stage. were classified (1984)

penetration

and saturation study,

are measure

In another into growth, reported that

in which

2000 manufacturing stages, Anderson (pay level They also

mature,

or declining

and Zeithaml relative

the firms'

competitiveness stage.

to competitors) that the higher

was greater relative However, pay

in each progressive in mature firms firms with

reported

adversely pay

affected levels

their

return

on investment.

growth

higher

relative

to competitors'

23
reported increased market share.

Business In perhaps Mejia (1987) the most

Unit

Strategies of compensation corporate strategy, Gomezunit

ambitious

study

examined

the relationship

of both

and business responses

strategies from

to pay

strategies. professionals strategy using was

The study

was based

on survey

compensation

in 192 business defined

units

in manufacturing of product Business market unit

firms. Corporate
diversification, strategies Compensation market salary, which groups were

as the extent

Rumelt's

classification growth

scheme.

grouped

into two types: had several

and maintenance. competitiveness relative (i.e., of

strategies

dimensions: (i.e.,

positioning benefits included to which

of pay and

level),

pay mix and

importance policy

incentives), for pay

13 administrative

choices,

the basis these

increases

and procedures. applied were

The employee not specified. sales volume,

compensation were

strategies also costs

A number

of control

variables

included to total the most

specifically costs. diversified with

profitability,

and ratio

of labor

The preliminary (related levels product

findings

show that study)

corporations higher pay than degree

markets

in this greater

are associated on salaries centralization, were associated

(competitiveness), (mix), The greater least

emphasis

and benefits

incentives of secrecy.

formalization, firms

and a higher with lower

diversified emphasis

competitiveness open

and greater

on incentives decision policies

in their

pay mix,

more

communication,

and decentralized of compensation into their

making. were

Using able

discriminant

analysis, classify

the patterns business units

to correctly beyond

appropriate

strategy

considerably

24 chance.
management The results adjusts are interpreted strategies as supporting the proposition that

its pay

to fit the organization's unit, compensation

strategies and

(Gomez-Mejia, techniques corporate

1987).

In a given by both

business the degree

policies at the

are affected level

of decentralization faces growth

and whether markets.

the business

unit

or maintenance

in its product policies

And the identifiable for different types

patterns

of compensation unit strategies. that unit's business

can be identified back

of business

Harking a corporate approach unit

to the schematic strategy

in Figure direct

2, the research effects

suggests

business

has both

on a business the various

to compensation More

and an indirect specifically,

effect

through that

strategies.

the extent

a corporation this emphasis

diversifies

its products, directly basis used

and the process affect

it uses

to achieve

diversification, on incentives,

its degree pay

of competitiveness, increases,

to determine exists unit,

and administrative

style.
The

Conflicting

evidence

on the nature defined

of the relationship. of its market niche,

strategy

of each business a direct role

in terms

also plays

in shaping

compensation of these

strategies. findings needs to be the employee or professional interview

Caution
exercised.

regarding Every

the robustness emphasizes

article

its preliminary tend

nature;

groups

to which

the pay policies specified; tend

apply

to be managerial on surveyor

or are not well data;

the findings

are based

and the data

to be the perceptions

of personnel/compensation

managers.

25
Human Two studies resource examined strategy report also Resource that strategy suggest that an organization's The first strategies 1984). or these human

findings affects

its compensation twenty-two

policies.

the relationship of their unit

between human

business

units'

and dimensions The business stabilization. three business

resource were

strategies

(Wils

& Dyer, profit,

strategies

classified

as growth, found units

Human

resource

strategies

were

to vary listed

among

strategies.

Managers

of growth

compensation,

recruitment important most

of new managers, personnel

and organization Compensation profit

development was

as the most the study

activities.

not seen as among units. rather

important

activities

in either

or stabilized perceptions that varied

This than in the

is unique personnel context

in that

it surveyed

line managers concluded strategy

specialists. of the total

The authors human resource pursues.

compensation with

the business

strategies

an organization study

The second of business definition factor

analyzed from

the business a variety strategy

and human

resource to derive

strategies an empirical

units

(129)

of industries (deBejar

of human

resource

& Milkovich, activities, dimension.

1986).

After

analyzing

items

describing emerged failed

major

personnel

the nature other dimensions

of incentive

compensation strategy

as a critical

of compensation resource

to emerge

as critical

aspects

of a human

strategy. two studies is also suggest that an organization's human was approach to

These compensation results human

related

to its overall Compensation

resource

strategy. in growth strategy,

The
firms' and

are very resource

preliminary.

important of business

strategy

but not in other

types

26
incentives other focus forms may be more closely related Here to the human managerial resource strategy was than the

of compensation. studies.

again,

compensation

of these

Internal Obviously, differences nature listed other

Environment organization

and Compensation characteristics These

strategy besides strategies of the affect

in compensation

systems.

are treated

as part 3.

of the internal are those used

organization in studies (e.g. size,

environment here.

in Figure Many labor

The variables treated costs).

reviewed

of them were costs/total the

as control Miles

variables and Snow

profitability, an approach

(1978)

proposed

to typing

characteristics but went The three have been beyond

of organizations it to include

which structure,

incorporated

elements style

of strategy, and the like.

administrative Prospectors (Broderick, different,

organization related

prototypes,

Defenders, strategies have very

and Analyzers, 1985; Carroll, opposite two.

to compensation and Prospectors whereas Analyzers

1987). Defenders
characteristics, Defender design operates

almost

are a composite stable

of the other

in narrowly

defined,

markets.

Its structural approaches, and

is functional,

it emphasizes tends

cost/efficiency-based formal,

its administrative Prospectors, changing and

style

to be centralized, innovative

and standardized. to dynamic,

by contrast,

emphasize

approaches

markets.

Its structure style

tends

to be divisional

or product-based, informal, and of

its administrative Analyzers

tends

to be decentralized, markets and tend

flexible.

are in multiple of the other two.

to be a mixture

the characteristics

27
Carroll characteristics Broderick summarized and number seven (1985) (1987) are has suggested that organizations different with such different

likely that

to adopt they do.

compensation of her size that

strategies. study are net sales among pay

found 3.

The results

in Table

Controlling

for organization she reported in Table Defender

(i.e.,

of employees)

and industry, column between

the patterns manager

policies differed

(see the third significantly When considered

3) for middle

systems

and Prospector three of the seven policiesand

organizations. -basis for pay

individually, versus across

increases

(efficiency

growth),

participation, types.

formalization--varied individual
significant.

significantly varied

organization directions, the patterns

The other not seven

dimensions Using were able

in the expected analysis, classify

but were among the

discriminant to correctly chance,

dimensions type

the organizations additional

as the correct evidence

significantly

beyond

thus offering

supporting among

the proposition types labor

that patterns

of compensation

decisions

vary

different Internal

of organizations. is another Doeringer approach & Piore, to classify 1971). organization in terms

markets

environments of the rules resources, (hiring

(Osterman, that

1984;

Defined

regulate labor

the allocation markets have

and compensation been variously only

of human as open levels),

internal

classified skill

at all levels)

versus

closed

(hiring with

at lower

craft-professional mobility (general except skills

(technically within with the craft

skilled

little

intra-organizational

or profession),

and salaried-managerial Different types

high

cross-functional

mobility).

of internal policies.

markets

are described descriptions

as possessing of internal

different markets

compensation published,

A few case

have been

28
but they remain to be content analyzed for differences The nature in compensation of the rules used markets

policies

and practices pay

(Osterman,

1984). with

to determine that

are so intertwined measure of each

the definition

of internal

an independent

type of market

may prove

difficult.

External The model legislation, which

Environment

and Compensation a third This vector

strategy of variables: environment

in Figure

2 contains

union,

and labor

markets.

is the external None

directly cited

affects above

compensation

strategies.

of the research differences. selection 1985), (Balkin but

studies Some

considered

the effects effects

of environmental through sample 1987;

attempted

to control 1984;

for these

& Gomez-Mejia, most simply

Broderick,

1985; Gomez-Mejia,

Kerr,

do not refer of unions

to the possibility on various aspects

of environmental of compensation administrative 1984).

effects. strategy procedures) This body human of

The effect (level, mix,

hierarchy,

basis

for increases, (Medoff

has a substantial knowledge management

research

base

& Freeman, into

is beginning models

to be integrated Katz

the strategic 1986; Osterman,

resource

(Kochan,

& McKersie,

1988). change the

The responsiveness is widely discussed, Act but

of compensation

decisions

to legislative

not systematically

researched.

For example, effect

1986 Tax Reform and middle significant

is said to be having compensation are pension may trigger groups.

a significant 1987).

on executive of worth

management legislation

(Cooke, reform

Other

examples

and Minnesota's responses

comparable

law. Legislative
policies minimum

change

different

in compensation changes in

for certain wage affects

employee lower

For example,

include

paid

employees,

tax reform

affects

executive

29
pay, and pension Whether adopt reform affects changes based all covered allow employees. sufficient strategy minimum discretion is open need to to be the to

legislative policies

managers business

different

on their

conjecture.

Increases is nothing

in the legally too strategic

required about

wage

paid.
decision labor

There

that

decision.

However,

to increase has

investment

in automation since strategy. a variety

in anticipation

of increased

costs

strategic

properties

it is critical

to the external

implementation jolts with

of the organization do permit strategies factors

Non-legislative of adaptations internal effect

such as a strike different business

by organizations environments.

and different have a major

In summary, choices made

external

on the strategic and broad relations industry and labor

in compensation. are well

The effects

of unions

characteristics economics

documented

in the industrial is systematic and other policies

literature. faced

What with

is missing

data on whether external pressures

organizations adopt different

similar

industry

patterns

of compensation

and practices.

DO COMPENSATION Here we face strategies upon matter? the "so what"

STRATEGIES

MATTER extent do compensation question Contingency rely

question: seeking

to what an answer

Most theory

of those

to this

contingency seems

and the related art form, effective. & Nathanson, is depicted

...

concept

of "fit."

theory

a situational not equally (Galbraith strategy

"there is no one best way--but

is dependent or contingent applied is each

all ways...are on something" to compensation that

The choice 1979). in Figure

Contingency 3.

theory

The basic

premise "fit"

compensation

strategies

and organization

strategies

should

30
other; the better the fit, the better the organization's performance.

-------------------------Insert Figure 3 About Here -------------------------Conceptually, compensation is that several contingencies between organization The most and obvious one

strategies

are implied

in this model. likely

compensation

strategies

are more strategy

to be effective

if they other

are contingent things being

on the overall equal (e.g.,

followed

by an organization, environment). strategy

the internal

and external

Conversely likely This

and less apparently

an organization's

business

is more

to be effective rests

if it is contingent on the premise on human that

on it's compensation successful

strategy. of

contingency

implementation an

business

strategies

depends

resources.

Formulating resources. their

organization's decisions

strategy

involves these

assessing resources retain,

internal through

Compensation on expenses human

directly ability

affect

impact

and on their
resources.

to attract,

and motivate

critical

To the extent as a constraint the minimum,

that

the current

pay

systems

are inflexible,

they

act

on the organization's

ability

to shift strategy

its strategy. which better

At
fits

implementing strategy union

a new compensation may be hindered contracts,

the organization's pay system, existing

by the existence internal norms

of the original and

and the

expectations. suffers. The degree strategy

In such

cases,

contingency

theory

predicts

that performance

of fit between

compensation

strategy

and organization and rewarding

contributes that

to organization are consistent

performance

by signaling

the behaviors

with

the organization's

objectives.

31
Further, behaviors better fit more accurately signals to applicants demands the types on the of

expected cash

and accommodates flow (Ellig, theory

compensation

organization's cornerstone compensation

1983).

So the degree

of fit is the effect that

of contingency strategy has

and underlies

the presumed

an organization a queasy

performance. sense of constructing on shifting

Yet doubts

remain;

one gets

sands. All three constructs

strategy, This compensation to its use management (1985)

on which

performance

depends--organization especially as well fit. as in

strategy

and fit--are

elusive,

applies

in the policy/strategy (Van de Ven & Drazin, defined

literature 1985;

compensation

Venkatraman

& Gran, between employed. with between

1986). Broderick
compensation One was

fit empirically strategies. dimension

as the variance Two measures were

policies

and business of each strategy.

the relationship in corporate patterns

of compensation

strategy

differences different

The other policies

was the relationships in

of compensation

and differences

organizational Contingency reality like

strategies. models applied to compensation treat fit as static. strategies timing

The
is

may be that matching at a moving performance. strategy, For example, performance

compensation This

and organization suggests fits that both system

shooting

target.

and degree

of fit affect its business advantage. to define

A firm that

its pay may have

to support

and does

it quickly,

a competitive on performance, than individual,

the move

to a greater

emphasis

as team or unit pay hierarchies

(gainsharing), is believed

rather to create

and to knowledge-based advantage (Lawler,

a competitive

1981).

32
Just how does one determine one hand, and the more congruent the appropriate degree of fit.

On the

the compensation

system

with

the organization hand,

its environment, compensation

the better strategies to take

the performance.

On the other may

tailoring

to fit too tightly, advantage of future

straightjacket (Mahoney,

the flexibility

required

opportunities

1987).
Research been reported on compensation on its effects Some of the work (Ehrenberg examine strategy strategy is so recent that little work has

on organization on executive 1987). among

performance

or employee and firm performance included strategy, 1987, Gomezattempts

behaviors.

compensation Two studies organization

is related to directly compensation Mejia,

& Milkovich, the relationship

and performance was assessed system

(Balkin

& Gomez-Mejia

1987).

Performance the pay The

by asking

compensation

directors of

the extent

to which

contributed

to the achievement were

organizational

goals. but

limitations using system

of this measure the logic that

recognized is logic

by the researchers a key criterion is accepted, constituents

justified

acceptability Even if this

of compensation

performance. more (Tsui

managers to judge

and employees pay system

are arguably

appropriate & Milkovich, 1987).

acceptability

So the effects organization

of compensation strategy

strategy

and the degree unplowed of fit,

of its fit with Considering like risky

on performance

remain

turf. it seems

the elusiveness
research.

of the notion

of the degree

33
CONCLUDING Research compensation structure, executives was on compensation and in studies and process. were the focal dimension OBSERVATIONS began in the context between of executive strategy, mechanism, schemes recognition

strategy

of the relationships was

business

Compensation group

conceived

as a control incentive Little

and the nature

of pay

the principal

of compensation compensation

included. more

was given Typically, involved

to the need the level

to define of analysis

systematically. and strategies studied

was the corporation,

diversification. studies, the definition evolved of compensation, ways. the variables

In subsequent included

and the methodologies needs

in several to recognize

The definition

of compensation Research policies has been that may

to be broadened variations

its multidimensionality. pattern of compensation The focal group groups

has begun in addition extended

to study

in the total

to variations executives,

in specific

policies.

beyond

to all employees success. extended internal

and to employee

are critical affect

to the organization's strategy have

The determinants beyond corporate

that

compensation business unit Thus,

strategies and

to include external

strategies, control

organization

factors, labor

factors. costs,

variables sales,

such as industry, workforce size,

costs/total

profitability, designs.

and the

like

need

to be included More jolts that major

in research needs

attention

to be devoted

to the effect

of environmental (1987) suggests,

on compensation strategic jolts

strategies. occur

It may be, in brief

as Mintzberg quantum realign leaps. their

reorientations

Accordingly, business

are required to set their

before direction

organizations or layout

strategies

new courses

of action.

In

34
between studies shed such reorientations, of organizations on which stability prevails. such jolts have If this is so, then may

experiencing

and reorientations strategic properties, of the

light

compensation are likely

decisions to be. strategy

and what

their

effects

Finally,

studies

relationship are beginning,

between

compensation

and organization

performance

but more

are required. in a strategic perspective of compensation that human

At the root of the interest is the basic resource affect tenet referred in general,

to at the beginning and compensation performance. resource

of this paper: policies

policies workforce

in particular, is largely rests upon tenet

and organization field that

The belief management

untested,

yet the entire agenda

of human emerges

it. The research

is extremely perspective this paper. finance,

from

a desire

to examine

this

complex on human

(Dyer, resource

1980).

It is part

of the organizational to at the beginning of

management links

alluded

Its conceptual theory 1985).

are as much

to policy,

microeconomics, organization behavior

organization (Dyer, need

and sociology

as to micro

and psychology

An immediate descriptions involved

exists

for research

aimed

at collecting

accurate

of the content

of compensation What

strategy

and the process dimensions of be

in its formulation. For which and/or

are the critical groups? those How who

compensation? answered? roles, is one Both

employee observing

should

such questions

Asking

are

in strategically compensation capturing"

relevant committees,

such as executives approach. Another

and members

of corporate "policy

is to undertake that simply

studies.

require

access

and data

are not readily

available.

35
Beyond what descriptive research, more work is needed to understand decisions research both

determines

variations challenge defined

in patterns

of compensation manageable

their issues.

effects. Issues

A major too narrowly

is to formulate suffer from

ignoring

the multi-

dimensionality occur. too

of compensation On the other ambiguous, Perhaps have strategic

and the context issues

in which

compensation

decisions

hand,

too broadly and often

drawn

are too time specified. compensation within

consuming,

too expensive, a place

poorly

to begin

is to identify

decisions the same

that industry

properties.

For example, positions

do firms in labor

establish wisdom levels

different they pay,

competitive do.

markets?

Conventional average of

is that of base

How do they accomplish the risk-return

this--by tradeoffs

different

by varying

or the ratio

incentives vary with

to total their

compensation?

Do characteristics These might

of organizations include some of the strategies, does a firm's

competitive

position?

determinants organization competitive

discussed

in this paper

such as organization factors. effect

characteristics, position have

and external

Finally

any discernable

on the size people

and quality

of the applicant or its ability Similar For example,

pool,

on its ability high

to hire

those

it selects,

to retain studies little need

performers? for each aspect of compensation. structure The or the can

to be conducted about

is known

the nature on workforce

of the pay behaviors.

mix of pay

forms

and their

effects

same

be said about

each of the dimensions it is useful

of compensation. and consider argument have grown the nature can be made over time of that in a

In closing, compensation existing

to step back

management.

A fairly

convincing

compensation

policies

and practices

36
somewhat pressure, process. attempt But even in these haphazard rather If that to impose if this decisions manner, than as ad hoc administrative some rational, responses to various

through

analytical, has

objective-directed simply been an

is so, then much structure

of the foregoing

and rationality the need

on compensation to understand

management. the variation affect

is the case, made

remains

by organizations

and how these

variations

the behaviors

of the workforce

and the success

of the organization.

37

ACKNOWLEDGEMENTS

(1) Many people have contributed

Among Renae the most Broderick, valuable prominent Gloria

to the thoughts

that

are in this paper. students, colleagues

are three deBejar

of my former

graduate

and Jeanne

Adkins. grateful

Several

offered Vida

comments, Lee Dyer

I am particularly and Jerry Newman.

to Sara Rynes,

Scarpello,

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T3b1e 1
Evolution of Compensation Decisions Considered Critical to Organiz~tion Performance

E11ig/Cooke Employee Occupation

(1976)

Salter

(1973)

Lawler

(1981)

Carroll

(1987)

Executives

Executives and Managers

All

Employees

All

Employees

Structure (Design)

Relative Emphasis on each element Short vs. long term incentives

Short vs. long term incentives Unit vs. corporate performance Degree of risk (bonus/base)

Market position Internal vs. external emphasis Degree of hierarchy Reward mix Basis for increases

Pay level in market Internal equity Performance Measures Frequency of Measures Size of Bonus Merit Differentiation Use of Individual Bonus Use of Group Bonus Long vs. Short Term

use
Deferred Compensation Use of Gainsharing Use of Guaranteed Compensation

Process
(Administrative style)

Pay system

congru-

Pay

system

congru-

ency
Standardization across subunits

ency
Decision making Centralization Communications Change strategy

.p.. f-J

43
Table 2
STRATEGICALLY
RELEVANT

COMPENSATION

POLICIES:

AN A PRIORI

SET

1) COMPETITIVENESS

Competitive

position

relative

to competi-

tion
- Lead, - Total lag, meet compensation, risk-return trade-off

2)

INTERNAL

STRUCTURE

- Internal
-

pay

differentials criteria for hierarchy,

features

Number

of levels,
with

congruency

organization

Number

of different

job evaluation

systems

used 3) MIX AMONG FORMS

Forms to offer
Relative Short vs. importance long term of each

4) BASIS FOR INCREASES

Membership

vs. performance

Specific criteria, individual, unit,

corporate performance

Size and frequency

5) ROLE IN OVERALL
RESOURCES

HUMAN STRATEGY

Dominant vs. coordinate vs. subordinate

Signal vs. support organization change

6) ADMINISTRATIVE

STYLE

Employee

participation

Communications Centralization Dispute resolution mechanisms

Table.3 Empirically Derived Dimensions of Compensation Str~tegy

Strategic

Issues

Liter~ture.

Bascd

Dimensions

Empirically

Based

Dimensions

(1)

Competitiveness

(1)

External Internal

Competition Pressures

vs.

(1)

External Competitiveness

(2)

Internal Hierarchics

(2)

Differential Hierarchies Egalitarian Arrangements

Job Content vs. Knowledge Requirements

vs.

(3) (4)

Mix
Pay Increase Bases

(3) (4)

Membership vs. Performance

Corporate, Individual Short vs. subunit vs.

(2) (3)

Performance/Membership
Efficiency Growth (costs) vs.

Long

Term Participa(4) Level of managers ticipating Level of managers proving decisions Standardization, larity of plans
.

(5)

Administrative

Style

(5)

Degree

of Employee

par-

tion
Degree of Centralization (5)

ap-

Degree of Standardization (consistency across subunits) Degree of Formalization

(6)

simiacross

units
Formalization written documentation

(1)

Based

on Broderick

(1985).
+:--

45

Figure A STRATEGIC PERSPECTIVE

1 ON COMPENSATION

CRITICAL

EMPLOYEES

GROUPS

Executives

R&D

Sales

Production

. . . . .

CRITICAL Compensation Strategies:

POLICY

Patterns that

of Compensation are Critical

Decisions

to the Performance

CHOICES
of the Organization

Figure

DETERMINANTS OF COMPENSATION STRATEGY

Internal Environment
.Organization Types .Internal Labor Markets .Size .Profitability .Labor Costs/ Total Costs

..j::'~

..

..

Figure Contingency Model Applied

3 to Compensation Strategy

Organization Strategies

Compensation Strategies

Organization Performance and. Workforce Behaviors

.p.. J