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A review of compensation management practice in leading multinational firms
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Compensation is a key element of the employment relationship and, in addition to being the
single greatest operating cost for many organizations, it has been advocated by some recently
as a tool for enhancing organizational performance and sustained competitiveness.
Contemporary approaches to compensation emphasize the importance of aligning employee
behaviors to the strategic direction of the organization. Such approaches – broadly labeled
strategic compensation, have become widely adopted by organizations. Yet our understanding
of the nature of strategic compensation management is limited. Though strategic pay has
been the subject of considerable academic and practitioner attention, it is argued that orthodox
theories of strategic pay have a number of important shortcomings. Moreover, it is argued
that there is much empirical evidence with which to challenge the received wisdom of
strategic approaches to compensation. In exploring the use and effectiveness of strategic
compensation in leading organizations, the findings of the study that forms the basis for this
paper reveal that many organizations experience profound managerial difficulties when
attempting to use compensation strategically. As a result, realised compensation practice
often reflects neither what was desired strategically nor intended as policy. Often reflecting a
poor fit for the organization, negative outcomes of strategic compensation systems include
high costs, a greater administrative burden and industrial conflict manifest in a demotivated
and disengaged workforce. More significantly still, the mismanagement of strategic
compensation systems may induce undesirable employee behaviours resulting in unintended
consequences that are often discreet and therefore difficult to remedy. In this sense,
compensation clearly is important, but not as the value-creating activity purported by
exponents of strategic compensation. Rather, it is a business risk that requires careful
management and good governance to ensure that it does not diminish or consume more value
than it creates. Theoretically, the study highlights a number of limitations of managerialist
accounts of strategic compensation, and points instead to the importance of additional
powerful, but currently underdeveloped, theory. Contingency and neo-institutional accounts
of firm behaviour are seen in light of the empirical data to be particularly relevant and worthy
of further research to enable a greater understanding of this important economic and social
aspect of organizational behaviour.
Trevor, J. - Personal Name
NONE
A review of compensation management practice in leading multinational firms
Management
English
2008
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