Compensation Objectives and Business Unit Pay Strategy

This study investigates the effects of attraction, retention, and incentive objectives on business unit pay strategy. Economic and psychological theories argue that differences in compensation objectives should lead to variations in organizations’ pay strategies, including decisions regarding the level of pay relative to its labor market and the emphasis on different compensation elements. However, compensation theories provide conflicting implications regarding the use of various pay practices to achieve these objectives. Data from 173 European business units (each belonging to a different firm) indicate that the importance of attraction, retention, and incentive objectives are all positively related to the provision of higher relative cash pay levels, but that the proportion of workers eligible for variable cash pay is only associated with incentive objectives. Although compensation theories highlight the potential use of benefits for attraction and incentive purposes, the units in our sample primarily provide benefits for retention purposes. Broad-based stock option grant eligibility is positively associated with incentive and attraction purposes, but negatively associated with retention objectives, despite claims that options' vesting provisions enhance their retention advantages. Stock grant eligibility is also positively associated with incentive objectives, but has little relation to either attraction or retention objectives. Further tests indicate that, although some of the pay elements seem to be complements or substitutes, this does not drive our results regarding the impact of the compensation objectives on pay elements. National labor market, regulatory, and tax differences influence the use of the various pay elements, but do not subsume the influence of the organization’s internal attraction, retention, and incentive objectives.