Compensation: Theory, Evidence, and Strategic Implications
Barry Gerhart, Sara L. Rynes · 2003
An interdisciplinary, research-based examination of how organizations decide pay level, pay structure, and pay basis, and how those compensation choices affect individual and organizational outcomes.
Compensation costs comprise the majority of operating expenses in most economies, yet managers and scholars disagree fundamentally about what pay practices actually work. Drawing on economics, psychology, management, and sociology, Gerhart and Rynes integrate theory with empirical evidence across the three central compensation decisions—how much to pay (pay level), how to differentiate pay within organizations (pay structure), and how to pay (pay basis)—to reveal what is known, what is contested, and what remains to be discovered. The book debunks influential misconceptions (e.g., that money is a weak motivator or that extrinsic rewards reliably undermine intrinsic motivation), reinterprets prominent findings on pay dispersion and merit pay, and connects micro-level motivational and sorting processes to macro-level strategy and firm performance. With careful attention to effect sizes, practical significance, and the distinction between incentive and sorting effects, it equips researchers and advanced students to design better studies and helps practitioners understand the risks and opportunities of alternative pay strategies.
The model it argues
A causal/path model in which compensation design levers (pay level, pay structure, pay basis/incentive intensity, pay mix) operate through psychological and behavioral states (motivation, perceived equity, sorting/workforce composition) to influence individual and organizational outcomes (attraction, retention, effort, productivity, firm performance), conditioned by strategic and contextual fit, risk, and group size.
Key ideas
- Pay Level
- The average level of compensation an employer provides across jobs, considered relative to product market and labor market competitors.
- Pay Structure
- The variability of pay within an organization across job levels and families, including the steepness of differentials.
- Pay Basis / Incentive Intensity
- How pay is delivered and how strongly it is tied to performance, including behavior- vs. results-based measures and the strength of pay-performance linkage.
- Individual vs. Group Basis of Pay
- The degree to which rewards are tied to individual versus collective performance.
- Work Motivation / Effort
- The direction, intensity, and persistence of goal-directed work behavior elicited by compensation.
- Perceived Equity / Fairness
- Employees' perceptions of distributive and procedural fairness of pay relative to chosen comparison standards.
- Workforce Sorting / Composition
- Changes in workforce ability, personality, values, and quality produced by attraction, selection, and attrition in response to pay practices.
- Strategic Fit / Alignment
- The degree of alignment of pay strategy vertically (with business strategy), horizontally (with other HR practices), and internally (across pay dimensions).