Toward a contingency theory of compensation strategy

This paper develops several propositions that link compensation strategy and the effectiveness of the compensation systenm. The underlying argument is that effectiveness at realizing intended pay strategies depends significantly on the existence of a match between compensation strategies, organization and environment. These propositions are tested in a samiple of 33 high.tech and 72 non-high tech firms or business units in the Boston Route 128 area. Respondents are nmanagers responsible for compensation policies in these firms or business units. The relationships among compensation strategies, organization characteristics and environment are explored. The findings nmay help researchers conceptualize, and practitioners manage, the relationship between reward processes and strategy in organizations. The consistency with which systematic relationships have been discovered between organizational characteristics and strategy at the overall firm level would lead one to expect the existence of a similar relationship with the organization's compensation system. To date, very little work has been done in developing a contingency theory that ties the pay system to the organization's operating objectives and strategies. This is surprising in view of the fact that labor costs comprise more than half of total costs in most organizations, and that pay systems are pivotal in terms of the motivation, attraction, and retention of human resources (Lawler, 1981). As argued by Milkovich and Newman most compensation research tends to emphasize techniques 'where the mechanics become the focus, ends in themselves . . . the purposes of the pay system are often forgotten . . . to date we really do not know enough to recommend [pay] policies under different conditions' (1984: 11). The purpose of this paper is to take some first steps in the development of a contingency theory of compensation strategy at the orgainizational level. The decision to concentrate on the macro

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