Rewarding Excellence: Pay Strategies for the New Economy

Edward E. Lawler III · 2000

In the new economy where human capital is the chief source of competitive advantage, organizations must abandon traditional job- and seniority-based pay in favor of reward systems that pay the person, reward excellence, and tie compensation to performance.

Rewarding Excellence makes the case that in a globalized, knowledge-driven economy, an organization's reward system is one of its most powerful—and most underused—levers for competitive advantage. Drawing on four decades of research, Edward E. Lawler III shows why traditional bureaucratic pay practices that reward jobs, seniority, and hierarchy fail in today's environment, and lays out a blueprint for reward systems that attract, retain, develop, and motivate excellent individuals. Treating employees as human capital investors rather than job holders, the book details how to pay people for their skills and knowledge, how to design pay-for-performance systems that actually motivate, how to conduct meaningful performance appraisals, and how to reward individuals, teams, and whole organizations. It offers practical guidance on team-based pay, 360-degree appraisals, stock options, gainsharing, goalsharing, and skill-based pay—and shows how to align all of them with business strategy to create high-performance organizations.

The model it argues

A causal framework in which reward system design levers (person-based pay, performance-based pay, market position, reward openness, employee involvement) and contextual conditions (work interdependence, environmental change) shape psychological and behavioral states (motivation, satisfaction, line of sight, skill development) that drive outcomes (attraction, retention, organizational performance / competitive advantage). Grounded in the book's Star Model and expectancy theory.

Key ideas

Person-Based Pay (Skill/Knowledge/Competency): The practice of basing compensation on the value of an individual's skills, knowledge, competencies, and market value rather than on the worth of the job they currently hold.
Performance-Based Pay: The degree to which compensation is tied to performance through variable pay mechanisms rather than fixed base pay or merit increases.
Market Position of Rewards: How an organization's reward levels for given skills and individuals compare to the external labor market.
Reward Information Openness: The degree to which pay information, market data, and reward administration practices are communicated openly versus kept secret.
Employee Involvement: The extent to which information, knowledge, power, and rewards are distributed to lower organizational levels and employees participate in business and reward decisions.
Work Interdependence: The degree to which work tasks are interdependent and team-based versus independent and individually measurable.
Environmental Change and Competition: The intensity of competition and rate of change in the business environment driven by globalization, knowledge growth, and global capital markets.
Line of Sight: The perceived connection between an individual's behavior, a performance measure, and the allocation of valued rewards.