Strategic Pay: Aligning Organizational Strategies and Pay Systems
Edward E. Lawler III · 1990
Edward Lawler argues that pay systems, when strategically aligned with a company's business strategy and management style, can be a powerful and lasting source of competitive advantage rather than merely a cost of doing business.
Strategic Pay reframes compensation from an unavoidable expense into a strategic lever for organizational effectiveness. Drawing on thirty years of research and consulting, Lawler shows how pay systems shape motivation, attraction and retention, culture, organizational structure, and cost flexibility. He walks through the full menu of pay-for-performance options (incentive pay, merit pay, gainsharing, profit sharing, employee ownership), the choice between paying the job versus paying the person (job evaluation versus skill-based pay), how to set total compensation levels and mix, and the critical process issues of participation and communication. Through two contrasting case studies—a traditional manufacturer and a global technology company—he demonstrates that there is no single right pay system; the right design must fit the organization's strategy and the behaviors it needs. The book equips general managers, not just compensation experts, to make pay choices that win acceptance and deliver real performance improvements.
The model it argues
A causal framework in which pay design levers and management style (conditions) shape employee psychological and behavioral states (motivation, beliefs about pay-performance link, skill development), which in turn drive organizational outcomes (performance, attraction/retention, culture, structure, cost competitiveness). Effectiveness depends on fit between pay practices and business strategy.
Key ideas
- Strategy-Pay Fit
- The alignment between an organization's pay practices/principles/processes and its business strategy, management style, and required behaviors.
- Pay-for-Performance Design
- The degree to which significant current pay is contingent on measurable, influenceable performance.
- Base Pay Basis (Job vs. Person)
- Whether base pay derives from job worth or from person's skills/market value.
- Total Compensation Level
- The overall amount and market position of total material rewards relative to comparison markets.
- Compensation Mix
- The composition of total pay across base, at-risk, benefits, and perquisites, including individual choice.
- Process Participation and Openness
- The degree of employee involvement in pay design/administration and openness of pay information.
- Perceived Pay-Performance Link
- Employees' belief that significant pay changes are credibly tied to their performance.
- Performance Motivation
- Motivation to exert effort toward valued performance behaviors driven by valued, achievable, contingent rewards.