The terms "best fit" and "best practice" are used in strategic human resource management and applied to the specific policy area of reward systems. Each approach attempts to explain the way that HR policies in general and reward policies in particular can lead to greater organizational effectiveness.
The "best fit" perspective claims that a firm's reward system should be aligned to support the organization's business strategy in order to achieve competitive advantage. "Best practice" advocates claim that there is a bundle of HR policies including the reward system that lead to highly motivated and committed employees who are the key to an organization's competitive advantage. There is a lack of clarity about the specific characteristics of either perspective as applied to pay model.
Lawler (1995, p. 14) states that all organizational systems must start with business strategy because "…it specifies what the company wants to accomplish, how it wants to behave, and the kinds of performance and performance levels it must demonstrate to be effective." Business strategy, driving individual and organizational behaviors, is the touchstone for the development of the reward strategy.
The contingent nature of the reward system is emphasized by Lawler (1995, p. 14) when he states, "indeed the 'new pay' is not a set of compensation practices at all, but rather a way of thinking about the role of reward systems in a complex organization…it argues against an assumption that certain best practices must be incorporated into a company's approach to pay." Indeed, he contrasts the reward system for a traditional management style with one that fosters employee involvement. The correct fit for the former includes a reward system that is job-based with merit pay while for the latter it is skill-based with bonuses based on business success.
Schuster and Zingheim (1993, p. 6) also follow a contingent approach but argue that "Merit pay and traditional performance appraisal...
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