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Skyrocketing salaries, signing bonuses, and stock options have radically altered the landscape of compensation in today's organizations. At the same time, workforce shortages, reduced employee loyalty, and increased employee access to salary information have made compensation one of the hottest topics in business. This volume examines the most recent developments in compensation practice and serves up important findings concerning its most pertinent issues.
Over a dozen leading I/O researchers and consultants tackle the questions at the core of compensation study. In the first part of the book they explore what is known—and not known—about how compensation is actually determined. They dissect the effects of pay on employee attraction, retention, attitudes, and performance. And in one chapter, they distill those insights into nine principles for constructing incentive systems that will boost employee satisfaction and effectiveness.
In the second part of the book, the contributors focus on how recent changes in technology, business strategy, organizational structure, and job design have affected pay strategies. They discuss how new pay strategies have modified the psychological contracts between workers and employers. And they take a critical look at research in the areas of alternative work arrangements and risk in compensation systems.
A concluding chapter summarizes the contributors' most important insights, points to areas that require additional study, and suggests concepts, methods, and questions from other disciplines that I/O psychologists might adopt in conducting compensation research.
In today's competitive business environment, effective compensation is vital to every company's success. Compensation in Organizations takes stock of the current state of research into compensation and provides encouragement and direction for taking that research and practice forward.
Psychological Research on Determinants of Pay: Review, Evaluation, and Suggestions for Future Research (S. Rynes & J. Bono).
Compensation, Attraction, and Retention (A. Barber & R. Bretz).
Compensation Attitudes: A Review and RecommAndation for Future Research (H. Heneman & T. Judge).
Incentives and Motivation (K. Bartol & E. Locke).
Compensation Strategy and Firm Performance (B. Gerhart).
The Effects of Changes in the Nature of Work on Compensation (R. Heneman, et al.).
Bringing Organization and Labor Relations into Psychological Research on Compensation (P. Sherer).
Psychological Contract Issues in Compensation (D. Rousseau & V. Ho).
Rethinking Compensation Risk (R. Wiseman, et al.).
Market prices are inherently job-related, although the market may embody social judgments as to the "worth" of some jobs. Employers are, to that extent, "pricetakers." They deal with the market as a given, and do not meaningfully have a "policy" about it. Spaulding v. University of Washington (1984)
It is naive ... to talk of the "competitive wage," the "equilibrium wage," or the "wage that clears the market." Richard A. Lester (1952)
The majority of the chapters in this book speak primarily to the effects of pay on people's attitudes and behaviors. However, information about people's reactions to pay have little practical importance to employers unless employers have discretion in setting pay and developing pay policies. As indicated elsewhere in this volume (see Chapters Five, Six, and Seven), employers not only have such discretion but have been exercising it in increasingly diverse ways over the past decade. The increasing diversity of pay strategies and practices makes the study of pay determination processes an important and potentially exciting venture.
We focus on these journals because of their high quality ratings and because of the association between rankings of journal quality and journal citation rates (see Johnson & Podsakoff, 1994; Salancik, 1986). Because the vast majority of academic research builds in small increments on previously published research (Campbell, Daft, & Hulin, 1982; Sackett & Larson, 1990; Webb, 1968), future research is likely to proceed in much the same fashion as past research unless explicit attempts are made to change research priorities. It is therefore helpful to assess the extent to which the current state of the literature serves as an adequate basis for future research.
Our review uncovered two basic types of studies aimed at discovering pay determinants and/or pay determination processes. One category consists of experimental studies that directly examine how managers (or students) use various pieces of information in making compensation decisions. The second category consists of field or laboratory studies that infer pay determinants by correlating actual salary distributions with employee, supervisory, or organizational characteristics. The studies we reviewed are summarized in Table 1.1.
Most direct examinations of pay determination have been one-of-a-kind studies with respect to the issues investigated. Studies have varied both in terms of dependent variables (pay level, pay increase, job pay, job evaluation points) and independent variables (such as managerial and employee characteristics). However, there has been less variability in methodology, with most studies employing some variant of policy capturing.
Another group of studies drew indirect inferences about the determinants of pay decisions, based on observed correlations with actual pay outcomes. Although most of these correlations were obtained via field surveys, in two cases they were obtained from experimental negotiation exercises.
related differences in negotiated salary for subjects who received self-management training, while subjects with high self-efficacy negotiated larger salaries than other subjects in the goal-setting training condition. one managers and professionals from a single organization. Results suggested that the correlation between pay and performance at the group level was considerably larger (r = .45) than the pay-performance relationship at the more conventional individual level of analysis (r = .19) or at the individual-within-groups level (r = -.03).
One conclusion that can be drawn on the basis of both direct and indirect studies of pay determination is that factors other than individual productivity generally enter into compensation decisions. For example, Heneman and Cohen (1988) found that supervisors' own salary increases were important determinants of the raises they gave others, whereas Markham's results (1988) suggest that the performance of one's work group as a whole may also influence one's pay. Similarly, Bartol and Martin (1989, 1990) suggest that under certain conditions, pay can be influenced by an individual's political connections, perceived likelihood of leaving, and organizational changes in business strategy.
Recent psychological evidence with respect to pay discrimination suggests mixed conclusions, depending on whether one relies primarily on inferential or direct studies. Specifically, the inferential studies all suggest gender and/or racial variance in pay outcomes, even after controlling for a wide variety of variables (Brett & Stroh, 1997; Dreher & Ash, 1990; Dreher & Cox, 1996; Gerhart & Rynes, 1991; Lyness and Thompson, 1997), whereas the direct studies of decision processes do not (Mount & Ellis, 1987; Rynes et al., 1989).
As indicated earlier, the dominant preoccupation (to the extent that there has been one) of psychological pay determination research has been the attempt to detect bias or discrimination in pay-setting. Although the individual studies in this area have generally been competently performed, as a whole, this body of work is somewhat disappointing.
Other features of this literature potentially limit its generalizability to actual pay decisions. For example, most studies have used either student subjects, subjects from a single organization, or samples where respondent and organizational characteristics are confounded by having only one respondent per organization. This last characteristic makes it impossible to disentangle individual from organizational determinants of pay, with the result that presumed individual differences in pay-related decisions (as in Viswesvaran & Barrick, 1992) may in part represent differences in subjects' organizational policies (see, for example, Weber & Rynes, 1991). In addition, the within-subjects policy capturing studies have had very small sample sizes (n = 12-36), further raising the possibility of sampling bias as a source of nongeneralizability.
To this point, we have discussed the contributions and limitations of psychological pay determination research largely on its own terms. However, it is also useful to consider how this literature relates to a number of features of the current pay environment. In the remainder of this section, we evaluate this literature in relation to three bases of comparison: changes in actual pay practices over the relevant time period (1986-1998), developments in other disciplines, and concerns of compensation practitioners.
Changes in Practice. There have been at least two major changes in actual compensation practices over the reviewed time period. First, there has been a dramatic increase in the diversity of pay strategies and specific compensation practices used by employers (see Chapters Five, Six, and Seven). Changes include increasing diversity with respect to fixed versus variable compensation, individual versus higher-unit compensation, and pay for the person or pay for skill versus pay for the job.
Developments in Other Disciplines. Compared with I/O psychology, other disciplines (most notably economics and strategic management) have been considerably more interested in questions of pay determination. For example, in the management literature, a review of Administrative Science Quarterly and Academy of Management Journal from 1986 through 1996 turned up fifty-five studies where pay was treated as a dependent variable. Practitioner Concerns. To compare psychological pay determination research with issues of concern to compensation practitioners, we reviewed five years' worth (1992-1997) of articles appearing in the American Compensation Association Journal and Compensation and Benefits Review. This review yielded a total of 207 articles.
The other chapters in this volume make it abundantly clear that differences in pay practices are associated with differences in attitudinal, behavioral, and performance outcomes at multiple organizational levels. In a world of increasing competition, then, one would expect that executives would design pay practices to be consistent with empirical results concerning pay outcomes. And yet, as with other areas of human resource management (see Johns, 1993; Terpstra & Rozell, 1993), many organizations have not have adopted the types of pay practices that appear to be associated with higher firm performance, such as paying most or all employees at least in part on the basis of firm performance or minimizing differences in rules for pay allocation between executives and other employees (see Pfeffer, 1993; Reichheld, 1996).