Compensation Objectives and Business Unit Pay Strategy

56 Pages Posted: 17 Dec 2008 Last revised: 8 Nov 2013

See all articles by Joseph J. Gerakos

Joseph J. Gerakos

Tuck School of Business at Dartmouth College; Dartmouth College - Tuck School of Business

Christopher D. Ittner

University of Pennsylvania - Accounting Department

Frank Moers

Maastricht University School of Business and Economics; European Centre for Corporate Engagement (ECCE)

Date Written: October 28, 2013

Abstract

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 the various pay elements can be complementary or substitute means for achieving the various compensation objectives. 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.

JEL Classification: J33, H24, H25, J40, M40

Suggested Citation

Gerakos, Joseph J. and Ittner, Christopher D. and Moers, Frank, Compensation Objectives and Business Unit Pay Strategy (October 28, 2013). Chicago Booth School of Business Research Paper No. 08-24. Available at SSRN: https://ssrn.com/abstract=1316434 or http://dx.doi.org/10.2139/ssrn.1316434

Joseph J. Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

Frank Moers

Maastricht University School of Business and Economics ( email )

Maastricht

HOME PAGE: http://www.maastrichtuniversity.nl/sbe

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

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