Can Pay Be Strategic?

Pay is a key element of the employment relationship. In addition to being the largest single operating cost for many firms, pay has been advocated more recently as a means through which organizations can achieve enhanced performance and sustained competitive advantage. Contemporary theories of pay highlight the role of pay as a management tool for the achievement of managerial ends and underline the importance of aligning employee behaviours to the strategic direction of the organization. This is a departure from established patterns of pay management, which emphasized the collective determination of pay and tenure-based pay progression. Pay remains a powerful means of attracting and retaining valued talent, but it is in relation to eliciting behavioural outcomes, discretionary behaviours for example, and performance (individual, team and organizational) that pay offers the greatest organizational advantage. Referred to under a variety of different terms (including new pay, reward management, strategic rewards, dynamic pay and strategic compensation management) but referred to here as strategic pay, these strategic theories of pay reflect a fundamental shift in the philosophy of pay and employment more broadly. Strategic pay has very rapidly come to represent the ‘received wisdom’ within practice, mirroring an equally rapid ascendancy in theory as the ‘new orthodoxy’. Available pay trend data suggests that organizations in the private sector especially are attempting to use pay systems to deliver outcomes of strategic value.

In light of the design-level findings, this chapter — the third and final findings chapter of the company-level analysis — asks specifically how effective the selected strategic pay systems are operationally. Do they achieve the desired outcomes set out in the pay approach, such as attracting and retaining valued talent, encouraging productivity and eliciting desired employee behaviours, including motivation, commitment and loyalty? Are the case study companies realizing what was desired in terms of the approach and what was intended in terms of the design? In short, is pay strategic at the operational level?

Fulfilling one of the key aims of this study, the findings present a grounded perspective on strategic pay in practice, one that in many respects is in stark contrast to the prescriptions of standard theory. Pay within the case study companies is universally valued as a managerial tool for securing competitive advantage, through enhanced company performance. To that end, the case study companies all aspire to use pay strategically. All firms deploy pay practices that would be characterized as both strategic and best practice by conventional standards. However, all of the case study companies have encountered significant difficulties when attempting to use strategic pay systems, with the result that they were perceived often as ineffectual and, in operational terms, nonstrategic. A key finding of the study is a gap, in a significant number of the case study companies, between what they aspire to do strategically, what they intend as policy and what they achieve operationally as pay practice. As a result, pay systems do not necessarily do what they are supposed to do. Why?