Compensation: Theory Evidence and Strategic Implications - A Book Review

Compensation: Theory Evidence and Strategic Implications
By Barry Gerhart and Sara L Rynes
Sage Publications India Pvt. Ltd. New Delhi, 2008; pp. 310; Price: Rs. 295 ISBN: 978-81-7829-920-4

Organizations are becoming more concerned with positioning employee compensation as a strategic human resource management function in order to gain competitive advantage. The increasing competitive- ness of the labor market and turnover of employees has resulted in a nightmare in compensation planning. Apart from this, the growing demand of the employees and competitive salaries offered by multinational companies has almost resulted in a compensation war in certain industries. Compensation represents the largest of all expenses in most organizations. With such high stakes on the table, there is enormous demand for innovative business practices and the need to have a closer look at the compensation management system for more effective business results. This book by Barry Gerhart and Rynes provides answers to many compensation related issues being faced by management and generates thought provoking questions that will force the managers to have a relook at their compensation system, evaluate and improve upon it and motivate the researchers to work on the research gaps highlighted in the book.

Barry Gerhart is a Professor of management and human resources and the John and Barabara Keller distinguished Chair of Business, School of Business, University of Wisconsin. His major fields of interest are human resource management and strategy, compensation and business performance. Sara. L. Rynes is the John F Murray Professor and Chair of Department of Management and organizations at the University of IOWA.

This book forms a part of the series, Foundations for Organization Science. FOS books are education aids for mastering the core theories, essential tools and emerging perspectives that constitute the field of organization science. Authors for this series are encouraged to write the books as they teach to pass on their craft knowledge to the next generation of scholars. This book does full justice to this objective by integrating theory with empirical evidence for each of the three compensation decisions covered in this book: pay level, pay structure and pay delivery systems. Theories and practices about both the outcomes and determinants of pay have been reviewed. The book incorporates theories and evidence from multiple disciplines primarily economics, psychology, management and sociology to cover the multiple facets of a complex theme like compensation. For example, economics tend to focus on average or general effects and psychology on individual differences
and variations in outcomes. As the book takes a broader outlook in areas where previous research has been misinterpreted, it seeks to understand not only what has been learnt from previous research but provides directions for further research.

The book has been divided into a total of eight chapters. Chapter one presents the enigmas of compensation and covers the major objectives and outline of the book.

Chapter two and three discuss the most general pay decisions made by the organization -that of pay level. Chapter two tries to answer the question as to why do some companies pay more than the others. Here the author also provides examples of executive compensation strategies at various companies like Coca- Cola, Ford and Procter & Gamble. This chapter brings out that studying both the determinants and effects of pay level is a complex enterprise as it is difficult to apprehend that a pay level higher than average is intentional or unintentional and strategic or not. Also because pay levels are typically studied separately from pay form (benefits) and pay basis (incentives, stock options), it is not clear whether high compensations reflect higher total compensation. The chapter also provides additional notes under the heading ‘resource’ where it presents discoveries made by post intuitionalists that do not accord with the neo classical theories like imperfect mobility of labor, weak links between labor supply and pay rates, pay rates based on relative rather than absolute rates and others.The author points out an interesting question whether managers actually employ efficiency wage concepts or are concerns about equity and fairness more important in the decisions about pay level and the fact that this issue remains under examined gives a direction to researchers to look into this area.

Chapter three moves further to discuss as to what do employers get for higher pay. While the previous chapter brought out that pay level for the same job varies across organizations and geographic areas with reasons for the same, this chapter reviews empirical evidence regarding the variance in pay levels and outcomes, in the light of motivational theories. This chapter provides a storehouse of research done in the linkages between pay and outcomes, pay satisfaction, attraction and retention, employee effort and performance and pay level and overall utility as it shares the findings of many research studies and also points the existing gap in literature.

In chapter four, the author first illustrates the difference between pay level and pay structure with the help of an example. The chapter also discusses in brief, the main administrative tool job evaluation for establishing pay rates that allows to deviate pay to some extent from those based on the external market. Theories of differences in pay structure like internal labor markets that provided the first systematic explanation as to why an employer might choose to have an internal pay structure that differs from the external market have been covered. Other sub themes that have been given due coverage by the author in this chapter includes the transaction cost economies, tournament theory and work life incentives. Each of the theories covered offer a slightly different explanation as to why pay structures may vary across employers. Some of the reasons brought to light are differences in monitoring costs, skill specificity and the need for cooperation and team work. Pay basis refer to decisions of organizations of how to pay.

In chapter five, an attempt has been made to cover several theories that differ in their disciplinary background (psychology versus economics), their focus (incentive versus sorting effects) and their emphasis on psychological mechanisms or mediators. The intensive review in the light of existing literature brings out the strengths and weaknesses of each of the discipline psychology and economics from the perspective of understanding pay basis and its effects. Hence the author points out the need for further theorizing, blending the economic and psychological approaches to the greatest extent possible.

Pay for performance programs is the theme covered in the sixth chapter where the author gives special attention to behavior-oriented performance measures and results oriented performance measures. Besides focusing on the broad policy issues in the pay programs, the authors provide discussion on the specific pay programs like merit pay, individual incentives, profit sharing, stock plans and gain sharing. The following chapter reviews models and evidence relevant to the role of compensation strategy in the formulation and execution of an organization’s strategy and vice-versa.

The last chapter briefly outlines some of the major conclusions and areas of controversy that emerge from the book while suggesting five substantive topics for future research and methodological recommendations that apply across substantive areas.

Overall the book does an efficient work in summarizing the current status of theory and research on compensation and its effects on individuals and organizations. As the book draws from multiple disciplines in the hope of directing researchers to relevant work in areas other than their own, the book not only reviews theory but supports it with relevant research studies and evidence from current practices of various companies on the link between pay decisions and effectiveness.

Specifically, the detailed analysis regarding the integration of economic, psychological and management perspectives offer rich insight in this area. The book is an invaluable tool for those trying to understand the complexities associated with compensation and how pay strategies influence the success of organizations. In sum, the authors Barry Gerhart and Sara Rynes do full justice to the questions they try to answer relating to pay level, pay structure and the pay delivery system.

As the book presents a compendium of theory, current practices and research evidence, it lives up to the title of the book “Compensation: Theory, Evidence and Strategic Implications”. The book is a useful guide to not only student community but also compensation management consultants and organizational development specialists.

© Naqvi Farah (2010). “Compensation: Theory Evidence and Strategic Implications” by Barry Gerhart and Sara L Rynes. South Asian Journal of Management. Vol 17, No3, pp. 124-126.

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