Strategic Reward Systems : a Contingency Model of Pay System Design

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Strategic Management Journal
Strat. Mgmt. J., 22: 777–792 (2001) DOI: 10.1002/smj.170

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College of Business, Arizona State University, Tempe, Arizona, U.S.A. Ecole des HEC, University of Lausanne, Lausanne-Dorigny, Switzerland, and Compensation Development, Firmenich SA, Meyrin, Switzerland

A limited number of studies have addressed the idea of ‘strategic’ reward systems—the matching of compensation systems to a firm’s strategy. Prior research on this topic has been confined to U.S. firms, however, and a number of key questions remain unanswered. Using a sample of 917 employees from two large Swiss financial institutions, we found that pay systems are linked with divisional strategic orientation, but in a different form than prior studies. Additionally, we identify hierarchical position as an important variable in the tailoring of reward systems. Hierarchy has a significant main effect on pay plan design, and an interactive effect with strategic orientation. Copyright  2001 John Wiley & Sons, Ltd.

An organization’s employees provide an important basis for a sustainable competitive advantage: socially complex—i.e., people-based—resources are considered more durable and less susceptible to imitation than other types of assets (Barney, 1991). As such, the strategic management of human resources can play a key role in an organization’s survival. A firm’s compensation plan plays a prominent role in recruiting, motivating, and retaining employees, and thus is central to building a durable advantage. Consistent with this perspective, early compensation theorists (e.g., Salter, 1973) proposed that firms should match their compensation systems to their strategies. The matching hypothesis has been generally supported, with empirical studies of diversification (e.g., Kerr, 1985), type of product market strategy (e.g., Gupta and Govindarajan, 1984), and type of industry (Galbraith and Merrill, 1991). However, many of these early studies

Key words: compensation; contingency theory; managerial discretion; international *Correspondence to: Alain Salamin, Ecole des HEC, University of Lausanne, 1015 Lausanne-Dorigny, Switzerland.

emphasize beneficial strategy–compensation combinations vs. an explicit focus on fit between strategy and compensation (Rajagopalan, 1997). Additionally, there have been mixed results across studies (Balkin and Gomez-Mejia, 1990; Rajagopalan and Finkelstein, 1992), and questions regarding the generalizability of findings to date. We make multiple contributions to existing research on strategic rewards. First, we provide a better understanding of the role that managerial discretion plays in the design of reward systems. Two studies have argued that managerial discretion is a key factor in the matching of pay practices to strategy (Rajagopalan and Finkelstein, 1992; Rajagopalan, 1997). In these papers, a firm’s strategic orientation—measured via the Miles and Snow (1978) strategy typology—is viewed as a proxy for discretion. We confirm those findings, and also suggest that discretion varies substantially across levels of the managerial hierarchy. We also find that, separate from their main effects, strategic orientation and hierarchy have a strong interactive effect on multiple aspects of pay plan design. By testing our hypotheses with 917 employees from two large, Swiss financial institutions, we also provide an important test of the generaliReceived 23 March 1998 Final revision received 6 December 2000

Copyright  2001 John Wiley & Sons, Ltd.


B. K. Boyd and A. Salamin
firms by their degree of diversification, and the corresponding SBU by their growth vs. maintenance orientation. The authors suggested that both corporate and SBU strategies are significant predictors of the pay package design. Moreover, firms pursuing growth strategy placed more emphasis on incentive pay. However, several questions...
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