ORGANIZATIONAL DIFFERENCES IN
MANAGERIAL COMPENSATION AND FINANCIAL PERFORMANCE
After doing researches for 14,000 top and middle level managers and 200 organizations, managerial compensation decisions are made regarding base pay, bonus pay, and eligibility for long term incentive. Findings indicate that contingent pay was associated with financial performance, but base pay are not.
The study examined both the determinants and consequences of organizational differences in pay level and pay mix among a national group of top and middle level managers. There are three components determine the level of compensation, such as pay mix, or the extent of variable pay, in terms of the relative amounts of short-term bonuses, long-term incentives, and base salary in an individual’s pay.
Determinants of Compensation:
Employee and Job Characteristics: Consistent with Human capital theory, there is empirical evidence that the number of years of education and labor market experience have explained much of the variance in their pay levels.
The higher in an organizational performance hierarchy a job is the greater potential impact on organizational performance its incumbent is likely to have.
Level of base pay is positively related to an employee’s human capital investment and level of job responsibility. Pay mix is positively related to an employee’s human capital investment and level of job responsibility.
Organizational Variables: More recent examinations of organizational differences in pay levels have sought to mprove on the early case studies by more systematically estimating the relative influence of organization, job, and employee on pay. Organizations exhibit differences in levels of base pay with employee’s personal and job characteristics controlled. Organizations exhibit differences in pay mix employees’ personal and job characteristics controlled.
Industry:
As for pay mix, and industries with a high variation in product demand and a high ratio of labor costs to revenues, a high percentage of variable pay may be likely.
Organizational size: Fixed costs of any kind introduce financial risk, because of various resource, small firms may therefore pay lower base salaries than large firms.
Financial Performance: Organizational effects on base pay are related to differences in industry, size, and financial performance. Organizational effects on pay mix are related to differences in industry, size, and financial performance.
Strategy:
Organizational differences in base pay not explained by personal and job characteristics are stable over time, suggesting that organizations have different base-pay-level strategies. Organizational differences in pay mix not explained by personal and job characteristics are stable over time, suggesting that organizations have different pay mix strategies. Organizational effects on pay mix are larger and less attributable to industry, size, and financial performance than organizational effects on base pay. Organizational differences in pay level not explained by personal, job, or specific organizational characteristics correlate with stated pay level policies.
Consequences for Organizational Performance:
Pay Level: Pay level may have its most direct effect on employee attraction and retention. In term of cost objectives, perhaps the most visible impact of a high-pay-level strategy is the increase in short-run labor costs it entails. High pay level is positively associated with organizational performance.
Pay mix: Organizational and unit incentive plans are often seen as a means of making labor more a variable than a fixed cost. The proportion of pay that is variable is positively associated with organizational performance.
Method:
Analyses and Measures:
Organizational effects on individual pay: Job characteristics measures were the number of reporting levels between a company’s board of directors and a job and the number of management levels the job’s incumbent supervised. Organizational effects were measured using a dummy variable for each form. Specific organizational characteristics were size, measured as firm sales, business unit sales, and total employees; return on assets; and industry membership, measured as a company’s two-digit Standard Industrial Classification code. Stability and convergent validity:
Stability was examined by average residual by correlating these 1981 and 1985 adjusted averages.
Convergent validity was examined by average residual based on base pay plus bonus as the dependent variable, with self-reported pay level policy.
Consequences for organizational performance used some formulas.
Results:
Organizational Effects on Individual Pay: An adequate short-term cash flow and incentives that encourage a long-term perspective enhance long-term investments to achieve growth. Although use of long-term incentives is consistent with these needs, short-run (typically annual) bonuses, in contrast, would not be helpful in protecting short-term cash flow or encouraging a long-term orientation. We have little knowledge about organizational differences in or the possible performance consequences of many other potentially strategic aspects of compensation.