Compensation: Theory, Evidence and Strategic Implications

Citation

Steinbuch, P.I. (2004), "Compensation: Theory, Evidence and Strategic Implications", Leadership & Organization Development Journal, Vol. 25 No. 3, pp. 312-314. https://doi.org/10.1108/01437730410531128

Compensation: Theory, Evidence and Strategic Implications addresses three key areas of compensation:

1. 1.

   pay level – the variability of wage rates across employers;

2. 2.

   pay structures – variability of wages across jobs within a given organization; and

3. 3.

   alternative forms of pay.

Barry Gerhart and Sara L. Rynes do an outstanding job of analyzing conflicting theoretical models and empirical results by using an integrated multi‐disciplinary approach. Drawing on contributions from economics, psychology and management, the authors use cross‐disciplinary results to enhance the readers’ understanding of a complex and often enigmatic subject. Relevant research is discussed in light of actual business practices utilizing different compensation strategies. Particularly noteworthy is the ability of the authors to intrigue the reader by providing juxtaposed real world examples to guide the review and discussion of the associated theoretical and empirical results.

The book is organized around eight chapters. The book moves from a discussion of the less complicated issues of pay and graduates to the more complex and perhaps less tractable examples of how compensation strategies fit into the broader view of organization strategy formulation and execution. Chapter 2 begins with a cogent presentation of the neoclassical economic theory of wage determination and its resiliency to modification until the 1940s by the post‐institutional economists. The neo‐institutionalists addressed limitations of neoclassical theory in explaining wage differences and incorporated institutional (non‐market) factors in explaining wage determination. Gerhart and Rynes do a fine job of examining how neoclassical economists have years later re‐visited and addressed issues presented by the neo‐ institutionalists from a human capital and efficiency wage perspective. Although empirical findings of gender and race differentials in wages and occupational segregation were not their focus and therefore not addressed, these studies complement much of the work cited in the chapter by asking the same fundamental question: “Why are there differences in observed wages?”. The authors conclude that organizational differences in pay setting practices are now central to economics and strategy research.

The broader issue of the effect of pay levels is examined in Chapter 3. Although the predominant focus is on the benefits to employers of offering higher pay, the authors include a review of the relative importance of wages to individuals. Both general and contingency theories are examined from contributions in economics and psychology. The authors contrast the economic view that money is a strong motivator from the psychological view that money plays a much smaller role on individual behavior. A review of the empirical findings in light of these two schools finds economic theory to prevail. The authors briefly discuss possible reasons for gender based differences in pay preferences. Although they did not included estimates of these differences there have been a number of studies that have provided empirical evidence to support the claim that women have attached greater value to working conditions than men. When reviewing the empirical results for outcomes, such as attitude, effort and performance, the authors use utility theory to explain the effect of paying higher wages on the employer.

Chapter 4 examines pay structures within and across organizations and explores theories that may help explain flatter or steeper pay hierarchies. Theories addressed include tournament theory; transaction cost economics, cooperative/egalitarian theories and resource dependence theory. Chapter 5 relies more on psychological theories (expectancy, goal setting, social cognition and equity theory) than economics (agency theory) to provide rationale for the incentive effects of alternative pay delivery systems. The chapter is concluded with a discussion extending pay delivery systems to the effect on the composition of labor. Chapter 6 analyzes pay for performance programs. Pay strategies in the context of the overall organization are examined in Chapter 7. Chapter 8, the conclusion, provides a nice outline of some of the major findings of the book and is solid in terms of its focus on recommendations for further research.

The literature review is comprehensive, up‐to‐date and integrated into an especially synchronous and relevant presentation of findings. The authors do an excellent job of charting the evolution of theoretical contributions and presenting new theories in light of their origins. Gerhart and Rynes synthesize theory and empirical results into an understandable analysis of the literature, while at the same time critically evaluating each area in light of future research needs. The authors painstakingly and thoroughly review the empirical findings. They pay particular attention to the obedience of these findings to the theories presented in the previous chapters. Gerhart and Rynes effectively compare and contrast the economic and psychological perspectives from a non‐partisan approach and suggest that both fields may benefit from incorporating each other's perspectives into future research. They are consistent throughout in their assertion that the complexities of compensation can not be entirely explained by one discipline. While (Elliot and Sandy's (1998) article “Adam Smith may have been right after all: a new approach to the analysis of compensating differentials,” in Economics Letters suggests researchers are still turning to their own disciplines to answer some very fundamental questions, Gerhard and Rynes, provide a refreshing wide‐angle view and deliberately encourage a multi‐disciplinary approach. The book is a must‐read for graduate students in labor economics, psychology, human resources, organizational behavior and management. In terms of scope, relevance and approach Compensation: Theory, Evidence and Strategic Implications is well suited for both the academic and practitioner audience and is invaluable reading for anyone interested in compensation issues. I recommend this book without reservation.