Chapter 4: Work, Workers and Organizations

Overview: This textbook chapter examines the social science contributions to compensation administration from both an individual and societal viewpoint.


Economics (Chapter 3) tells us about compensation, but not everything. Other social sciences, particularly Psychology and Sociology, can also contribute to our understanding of compensation. After all, compensation is a deal made between employers and employees. This deal can be seen as a relationship or exchange that takes place. So how both the employers and the employees see this deal is important to whether compensation works for the two parties.


At a macro level the relationship between employers and employees is the social environment in which compensation administration is practiced and can be discussed in terms of work and workers. This section examines the major forces that shape work in our society and the people who do the work. Much of this discussion focuses on how both work and workers are constantly in a state of change.


Defining work is not as easy as it appears. Work is what most of us do to earn a livelihood, but it is also done by members of volunteer organizations. To many of us, work consists of activities performed for others, but this would exclude the self–employed. Perhaps work is best described as sustained activity whose purpose is the accomplishment of goals. If we add "for rewards" (usually pay), this definition would be sufficient for our purposes.

Most of us work both because we have to and because we want to. Our collective survival is no longer dependent on whether we choose to work. Although many projections have appeared about the future of work, few have projected a workless society. The future of work is determined by numerous forces: the goods and services we demand (want and can afford), the number and qualifications of workers, and the technologies available, for example. Rising expectations of workers make relative incomes a driving force. Rising levels of education lead us to expect greater challenges and skill requirements in our jobs. Technologies, however, may constrain the realization of our expectations.

Although rising per capita income might suggest that fewer workers and less work time are available, this has not been the case. The official length of the workweek has remained stable for almost 70 years while the actual hours worked has gone down and recently up. The proportion of the population in the labor force has increased, largely because of the increased participation of women. However, we are working fewer years, because of longer vacations, more holidays, and more part–time employment.

Changes in Work. Today's jobs differ from jobs of the past. The most visible change is the shift toward white–collar and service employment. The proportion of unskilled jobs has declined steadily, and the most boring and punishing tasks have disappeared or are done by machines. True, there haven't been uniform gains in skill requirements, and threats of displacement of low–skilled workers through automation persist.

The growth of the service sector has been the most pervasive change in work. Agriculture, manufacturing, and mining no longer represent the typical workplace in the United States or any other industrial country. The shift toward service employment is in many ways a result of rising incomes and technological advance. The surge of women in the labor force has strengthened the demand for personal services. The growth of the service sector has changed links between work and physical effort. Increasingly, we work with teams and electronic technologies instead of tools and produce reports instead of goods.

Paralleling the growth of the service sector is the change from blue–collar to white–collar employment. Managers and professionals today outnumber unskilled laborers five to one. This growth in professional and managerial jobs reflects in part the size and complexity of organizations. It also reflects the growing importance of research and managerial functions in the use of advanced technologies.

It seems important to recognize that white–collar and blue–collar designations are not necessarily made on the basis of job skills. A wide range of skill levels, work environments, and job attributes occur in both groups. Many blue–collar jobs actually require more skill and provide more challenge than white–collar jobs. Although clerical workers may enjoy a more pleasant environment, the tasks of a skilled factory worker may demand more talent. Many service workers enjoy less status and lower pay than workers on assembly lines.

But structural changes in jobs point in many directions. Professionals and managers historically have high skills and are higher ranking in an organization’s hierarchy. The jobs of clerical workers and many service workers have required less skill and have a lower ranking in an organization’s hierarchy. The evidence of occupational shifts or fluctuations in skill levels fails to prove that there have been either uniform improvements or deterioration in the quality of work. Some jobs are now cleaner, safer, or more interesting, but others offer less freedom and demand fewer skills. Although many more professional and technical jobs exist, so does stifling and menial work.

A driving force behind occupational change is the continuing process of technological innovation. Its impact on work quality fosters continual debate. Many present–day workplaces are safer and more comfortable. Many automated technologies have reduced requirements for physical labor. But skill requirements have not uniformly improved, and automation may even decrease variety and the opportunity for creativity.

It is doubtful that automation will have a uniform impact on the quality of work. The worst jobs may disappear as new machines assume the most dangerous and unpleasant tasks. Computerized technology can offer significant job upgrading, more freedom, more job challenge, but it can also easily do the opposite. Button pushing and machine watching are not very challenging.

The most serious impact, however, is the disparity between skills needed by jobs and those possessed by workers. The skills of workers in declining industries do not fit the skill requirements in new growth areas. It is difficult for unskilled workers to qualify for jobs in an automated society if preferential treatment is given to displaced workers.

The service sector presents a different picture. On one hand there is an increasing demand for relatively unskilled jobs that require little discretion. On the other hand there is an increasing skill demand in professional areas and technical areas that is increasing rapidly.

These realignment problems represent only a part of the occupational shifts and technological changes faced by our labor force due to the growing size and interdependence of today's markets. The movement toward a world economy continues to reshape domestic industries and the occupations within them. Our workforce must adjust to changes in requirements.

As we will see in the following discussion of workers and worker values, demographic and value changes have given our labor force more choices. Also, to a considerable extent, the economic system provides a basis for determining if a job is worth doing: employers decide what they are willing to pay and workers what they are willing to accept. Increasing choice among our labor force means that the work society chooses to accomplish will be determined increasingly by what workers want to do, as well as by what tasks society wants done.


In recent years, projected changes in our labor force have received even more attention than forthcoming changes in work. Much of this attention has focused on demographic changes and their impact. But a spirited debate about whether worker values have changed, whether we have a "new breed" of workers, appears to be continuing.

Demographic Changes. The workforce is shrinking and aging as a result of low fertility and low mortality. Workers are staying employed well beyond the legal retirement age. Women and minority ethnic groups represent greater proportions of the workforce. Also, the type of work assignment like freelance consultants and temporary assignments are increasing. These demographic forces are redefining how organizations are attracting, motivating, engaging, and retaining employees. They need to be an integral part of the business strategy.

Baby Boomers. The so-called baby boom (1946-1964) greatly changed the age structure of the labor force in North America. In the mid-1960s, the number of younger workers began increasing rapidly, almost doubling the normal yearly growth in the labor force. Much of the growth in the labor force of younger workers occurred among the college trained until the 1970s, when the supply of college graduates outstripped demand. This change resulted in a decline in the advantage of obtaining a college education for a time.

The fact that the baby boomers did not reproduce as their parents had created a baby bust generation that again found a good labor market for their skills and started an upward trend in wages for college educated workers.

The baby boomers have had a dramatic effect not only on the numbers in the workforce and the distribution of the workforce but the attitudes toward work and life. They have dominated the society for their whole life and will continue to do so into retirement which is now beginning to occur. As the baby boomers start to retire, they will create a void in the labor market, particularly in managerial and professional areas. The average experience level of the workforce will decline which may adversely affect organizational operations.

Women. An even more important demographic change in the labor force was the extraordinary increase in female participation. In 2013, the United States' 161 million women made up roughly 51 percent of the population. Between 1966 and 2013, women's participation rates in the workforce increased from 31.5 percent to 48.7 percent according to the 2013 EEO-1 Indicators report (Source: EEOC) Much of this growth was accounted for by married women. In more than 60% percent of all marriages today, the husband is not the sole breadwinner. But the surprising statistic is an increase in the average number of hours worked per week by married women from a little over 8 in 1965 to around 21 in 2011 according to Pew Research Institute. (Source: Pew Research)

The explanation for the tremendous increase in the labor force participation of women is not as simple as the explanation for the increase in younger workers. Part of the explanation may be technological: housekeeping consumes less time today. Also, the number of children in the home has declined. Economic need is another explanation. Women provide substantial proportions of family income and are the sole wage earners in a rising percentage of families. Thus, many families could not maintain their economic status without the woman's income.

But economics is only a partial explanation of the increased participation rate of women. It does not explain, for instance, why the participation rate increases with overall family income. Perhaps the strongest explanation of the increased labor force participation of women is sociological. Roles for women have been redefined. Of course, women would not have been able to increase their numbers in the workforce without favorable labor market conditions. The expanding labor requirements in the growing service sector made women's increased participation possible. Now our economy is dependent on female labor to meet our needs for a labor force.

Older Men. Another change in our labor force has been the reduced participation of older men. In the past 50 years, the labor force participation of men has dropped about ten percentage points due to earlier retirement. Much of the explanation is economic, a result of improvements in retirement benefits. (Interestingly, older women's participation has increased rather than decreased.) Part of the explanation is attitudinal. Retirement has acquired a more positive social image. The permanence of the reduced labor force participation of older men is in question, however. Inflation, the extension of protected labor market status to age 70 and above by the amendments to the Age Discrimination in Employment Act, the fiscal solvency of Social Security and the downturn in the economy have begun to reverse the trend to early retirement, and the participation rate is again beginning to climb.

African–American. The African American workforce is a demographic that needs to be monitored. As of June 2016, the unemployment rate among this group was 8.6% while it was 4.4% for Caucasians, 3.5% for Asians and 5.8% for Hispanics. (Source: BLS New Release). Unfortunately, this differential among the ethnic groups appears to be explained in part by African American's discouragement with their labor market prospects.

Hispanics. Many are the uncounted among today's labor force primarily due to illegal migrant workers. They are doing nothing more than what their ancestors have done for over a hundred years – working in the North for money to support their families in the South. The migrant workers have contributed to the rapidly growing Hispanic population that now outnumbers African–Americans. By the year 2050, the Hispanic population is projected to be twice that of the African–American population. Together, with other minorities, they will dominate the workforce. It is no secret why Hispanics now hold so many jobs in America. American employers need them.

Tomorrow's Workers. Although these quantitative changes in the American workforce apparently have more than one explanation, it is possible to make some predictions about our future labor force. Predictions based on demographic factors are obviously the most solid.

Youth Shortage. Because of the low birth rates of the 1960s, the absolute numbers of young workers has continued to fall. The average annual growth rate of 16-to 24-year-olds in the labor force is projected to decline by a significant 1.4 percent according to BLS projections. It is expected that, in 2024, the younger age group will constitute 11.3 percent of the labor force, down from its 13.7-percent share in 2014. (Source: BLS Labor Force Projections to 2024)

Prime–age Workers. The 25 to 54 age group is expected to make up 64 percent of the labor force in 2024. As of May 2016 (Source: BLS Job Report) the employment-to-population rate of 25-54 year-olds has increased 3.0 percentage points since reaching a low in 2009 and 2010. The labor force participation rate for this group stopped declining in 2013 and has edged up 0.6 percentage points since hitting its low point since the onset of the Great Recession (December 2007 to June 2009).

A More Educated Labor Force. Today's workers bring more schooling to the workplace than their predecessors. Tomorrow's young people are more likely to go on to college to improve their career opportunities. Because these workers will be in short supply, their potential return from more education will increase.

As Americans in all occupations enter the labor market with more education, these educational gains may outpace skill requirements. Most of the increase in educational levels has occurred independently of the technical requirements of the labor market. There are rational explanations for the continuing rise in educational attainment, though. For the individual worker, education continues to pay off. Although the income advantage of a college degree is not as great as it used to be, it still broadens employment options and enhances individual earning potential. Because employers rely on formal education as a screening device, the growing number of college graduates forces workers to seek higher education in order to compete.

Increased Female Participation. Female labor force participation is expected to increase by all forecasts. The sectors of the economy that tend to hire a relatively large amount of women are likely to grow. As the movement of women into previously male occupations continues, there may be an increased diffusion of women across occupations and industries. It seems safe to predict that self employment and management responsibilities for women will continue to grow. Women may even become a majority of those gainfully employed.

Worker Values. Much recent discussion of workers has been concerned with their attitudes and values. It has been suggested, for example, that today's workers are less work committed, that the usual work incentives have lost their effectiveness and thus a "new breed" of worker has emerged who rejects traditional values. It is useful to identify three kinds of attitudes, which are not completely separable: (1) the importance of work to people (job involvement), (2) what a person wants, needs, or expects from a job (work values), and (3) how much a person likes or dislikes a job (job satisfaction).

Job Involvement. This attitude, which is often called work commitment (more recently referred to as employee engagement), is particularly hard to isolate. It is defined as the person's identification with the job. That is, the degree to which the job is a part of their self identity. Job involvement has been shown to be associated with absenteeism, turnover and the intent to leave. That more and more people want jobs is obvious, but only 13 percent of all working Americans find their work more important to them than their leisure pursuits.1 Wanting a job and being willing to work hard are clearly separable and undoubtedly differ more for some segments of our workforce than others.

Work Values. Work values have been found to vary by occupation, education, gender, and age. Blue collar workers focus on economic factors. White collar workers emphasize such intrinsic factors as interesting work and opportunities to develop abilities somewhat ahead of economic factors. However, the differences between occupational groups are not very great and are associated largely with education level.

Gender has been found to be associated with work values: women have generally ascribed greater importance to social and emotional considerations than men. There is evidence that young workers place more importance than older people on intrinsic factors such as degree of challenge, diversity, and freedom.

D. Yankelovitch wrote that a "new breed" of American worker exists whose work values are different from the traditional definition of a good job: steady work, good pay, comfortable and safe working conditions, and possibly an opportunity to get ahead.2 This new breed takes these things for granted and demands, in addition, freedom, interesting and challenging work, and a voice in what goes on. These people believe they are entitled to a good job. But millions of them who have jobs find the incentive systems so unappealing that they are not motivated to work hard.

According to Yankelovitch, in the 1970s self–fulfillment was severed from success, particularly for the younger, better educated and affluent.3 A small minority rejected success and opted out of the system. Most value success but find it wanting. They assume that self–fulfillment is to be found within. Thus they demand the freedom to express impulses, to enjoy life now. Leisure has become more important than family or work. For the "new" women, a paid job has become a symbol of membership in the larger society and a badge of self–worth. In the new value system, the individual is more than the role. Being recognized as an individual is more important than having interesting work.

These values have persisted even based on Gallup Corporation's Best Workplaces study (2011 to 2012) that highlight organizations with the most engaged workforces. First, there is a strong consensus that a job paid at a fair rate should be guaranteed to everyone who wants to work. Given the demographics of the labor force discussed previously, the competition for jobs, at least in the 2000s, will be fierce. Second, work incentives must be revised to meet the new work values. Employers must recognize that the motivation to take a job and the motivation to work hard are independent and require different approaches. The new values of individualism will require different incentives for different employee groups and perhaps for different individuals. Non-financial rewards have become more important to employees and can be used as work incentives. The most important driver of workforce engagement highlighted the need for business leaders and performance managers who provide feedback, coaching, and career development.

The proponents of the new-breed hypothesis and the traditional view of American workers are probably both partly right and partly wrong, depending on which worker they are talking about.

Job Satisfaction and Engagement. How well a person likes his or her job depends on the discrepancy between an individual's work values and what the job provides. According to the Gallup State of the Global Workplace study, only thirteen percent of workers were generally engaged at work for the period 2011 to 2012. Organizations in Gallup's Q12 Client Database with an average of 9.3 engaged employees for every actively disengaged employee in 2010-2011 experienced 147% higher earnings per share (EPS) compared with their competition in 2011-2012. In contrast, those with an average of 2.6 engaged employees for every actively disengaged employee experienced 2% lower EPS compared with their competition during that same time period.(Source: Gallup State of the Global Workplace - download required). Some actions companies can take to improve engagement include:

  • Bring engagement into the company's everyday language
  • Use the right engagement survey tool
  • Focus on engagement at the enterprise and local level
  • Select the right managers
  • Define engagement goals in realistic everyday terms
  • Find ways to meet employees based on their demographics, preferences and needs
  • Coach managers and hold them accountable for their employees' engagement


The concept that best describes the employment relationship is that of exchange––an employment exchange––that economists, psychologists, and sociologists have found useful to conceptualize how people and organizations come together to mutually satisfy their goals. Thus it is useful to think of employment as involving an exchange of work for pay and other benefits. Economists treat employment as an exchange of time, effort, and ability for payment in money or in kind. Psychologists view employment as an exchange of behavior and attitudes for money and other sources of satisfaction. Sociologists approach employment as a broad exchange of tangible and intangible inputs and outputs among people whose behavior influence one another and in turn influences and is influenced by other segments of society. The parties to the exchange most commonly are the individual and the organization. If a union is involved, the exchange is between the union and the organization. The parties do not have to have equal power, but they must be able to influence the other party for the exchange to take place.

Exchange is a double input–output system in that each party is contributing something to the exchange and in return is receiving something. The input of one party is the output to the other, and vice versa. The exchange process works because it is perceptual: each party perceives the value of the rewards received as greater than the contributions made. There can be varying perceptions of the exchange by the two parties. However, the exchange still takes place, because the two parties place different values on what is being exchanged. Individuals enter the employment exchange because they perceive their rewards as greater in value than their contributions. Likewise, the organization enters the exchange because what the organization receives has more value to it than what it contributes.

Exchanges intended to be short–term tend to be carefully specified; continuing exchanges tend to be less well defined. Most employment exchanges are expected to be long–term. Although in some exchanges hours of work and sometimes production standards are specified on one side and pay rates and benefits on the other; in most the definition of work is left to job descriptions, supervision and work rules, and the definition of rewards to starting pay and perhaps benefits. In most exchanges there are long–term expectations by both parties that extra inputs will eventually result in extra rewards.

Often, what we have been calling the employment exchange is referred to as an employment contract.4 The contract is implicit except in the case of a labor agreement. But in all cases, compensation in its various forms (cash, benefits, and non–financial rewards) is central to it. We assume that neither party enters into or continues in the employment exchange unless it perceives that the rewards are equal to or exceed the required contributions. The parts of an employment exchange are:

  • Contributions (anything provided that is recognized and considered relevant),
  • Rewards (anything received that is recognized and considered relevant),
  • A comparison process (comparing rewards with contributions and with some standard), and
  • Results (attitudes and behavior).

Although it is possible to study the employment exchange in terms of rewards, contributions, comparison standards, and results pertinent to both parties, our major focus is on the rewards to employees.

Required Employee Behaviors

Although the employment contract usually leaves the definition of work to job descriptions, supervision, and work rules, it is useful to specify the kinds of behavior organizations require from employees. Organizations require that individuals (1) join and remain with the organization (membership), (2) carry out job assignments dependably, (3) achieve organization objectives beyond the job assignment through innovative and spontaneous behaviors, (4) cooperate with others, (5) protect the organization against disaster, (6) make creative suggestions, (7) carry out self–training, and (8) create a favorable climate.5 Unfortunately, organizations appear to believe that they obtain all these behaviors merely by hiring the employee. Although compensation could be used to encourage all these behaviors, it typically concentrates on the first two. As we will see, organizations would be wise to focus separately in compensation administration on attraction, retention, and performance; it can obtain other specific behaviors through compensation policies and programs.

Perhaps the most explicit statement of the distinction between membership and performance behaviors required by organizations and the quite different sources of these behaviors was made by March and Simon.6 They carefully distinguish the motivation that attracts and keeps organizational members (their term is motivation to participate) from behaviors on the employee's part that lead to productivity (the motivation to perform). Membership motivation results from a favorable inducements–contributions balance. That is, applicants must perceive that what they get from the organization at least balances what they must give to it. Employees must perceive a continuing favorable balance if they are to remain members. The motivation to perform represents a much more complex psychological contract between the individual and the organization involving perceived alternatives, perceived consequences of these alternatives, and individual goals.

Organizations have no choice but to provide membership motivation if they wish to remain organizations. But if providing motivation to perform is too costly or too much trouble, the organization may choose other routes to organizational goals, such as designing jobs so that prescribed job performance is sufficient.


The most visible contribution of behavioral scientists to compensation theory is motivation theory. Motivation theory seeks to explain all kinds of motivated behavior in all kinds of situations, including behavior in organizations. In the following discussion of motivation theory, we will argue that some theories seem to fit better with organization–required behaviors, especially membership and performance.

Most behavior is in some sense motivated. People are strongly influenced by their environment. This means that organizations can influence people's behavior by changing environments and rewards. But motivation is not the sole determinant of behavior. Ability and knowledge of what one is supposed to do combine with motivation in determining behavior in organizations. Also, an organization's tasks vary in their requirements. Thus motivation can make little or much difference in performance, depending on the task. Psychologists studying motivation have focused on two psychological processes: arousal and choice. The first is concerned with why people do anything at all. The second involves the choices they make in what to do. A similar way of classifying motivation theory is to distinguish between content and process theories. Content theories focus on the factors that motivate behavior. Process theories explain how these factors operate.

Content Theories

Content or arousal theories center on needs or drives. Several physiological and social needs have been identified and studied. Need classifications have been offered. A need for competence in mastering the environment is supposedly aroused when individuals are faced with new, challenging situations; it dissipates after mastery. Closely related are curiosity or activity needs: people need and enjoy a stimulating environment, but they differ on this need and become adapted to certain levels of stimulation.

The need for achievement and the work of McClelland on it are well known.7 Individuals have been found to differ in their need for achievement. The need can be increased by training. People with a high need for achievement prefer moderate risks and immediate feedback and enjoy doing tasks for a sense of accomplishment. Productivity is posited to be related to this need.

A second need is that of affiliation. Persons high in this need require harmonious relationships with other people and need to feel accepted in the group. These persons do well in customer relations positions and operate well in a cooperative environment.

A third need is that for power. This need comes in two versions––a personal need and an institutional need. Those with a need for personal power desire to direct others––this often takes on a negative connotation. Persons with a high institutional power need desire to organize others around achieving organizational goals. Thus effective managers may have a high need for power8.

One problem with predicting behavior from individual needs is that people seem to have differing degrees of needs at different times of their lives. Classifications of needs can be considered a response to this finding.

Maslow's hierarchy of needs represents the major attempt to classify needs that are relevant to organizational behavior.10 His classification – physiological, safety, belonging, esteem, and self–actualization – is well known. Maslow argues that these needs constitute a hierarchy. Most normal people move upward in the hierarchy as lower–level needs are satisfied. Thus, the greater the fulfillment of a particular need, the less it is a motivator. Because in American society the first two needs are presumably satisfied, higher–order needs should be better motivators. Empirical tests of the theory have not supported the categories, their order, or the suggestion that one need must be satisfied before the next one is activated. But the implications of the theory that there are higher-order as well as lower–level needs and that different people want different things were major contributions.

Alderfer's ERG theory postulates three categories of needs: existence, relatedness, and growth.16 Although this classification also represents a hierarchy, the theory does not state that one need is more important than another or that only unsatisfied needs arouse behavior. All three motives may be working to some degree at one time, and the growth needs may increase with satisfaction. Although empirical data seem to fit this classification better than Maslow's, little research has been done to test the theory.

McGregor's theory X–theory Y11 and Herzberg's motivators and hygienes12 flow from Maslow's higher–and lower–order needs. The empirical evidence does not support Herzberg's conclusion that only the motivators provide job satisfaction and motivated employees. Hygienes and motivators don't operate in the same way for everyone. Moreover, his results are influenced by his method of data collection. But Herzberg's work contributed to an understanding of the conditions that lead to job satisfaction and the reasons that different people are motivated by different rewards.

An evaluation of these content motivation theories based on needs would probably focus on their limitations. Empirical studies have provided only modest support for them, and the proportion of the variance in performance explained has been low.

Process Theories

Process or choice theories explain the operation of motivation, or the factors that influence an individual to choose one action rather than another. Process theories can be subdivided into cognitive and non–cognitive approaches. Cognitive theories see behavior as involving some mental process. Non–cognitive theories see behavior as caused by environmental contingencies.

Cognitive Theories. The major cognitive theories are equity theory, goal–setting theory, and expectancy theory. All of them focus on perceptions of the outcomes that flow from behavior.

Equity Theory. This theory suggests that motivated behavior is a form of exchange in which individuals employ an internal balance sheet in determining what to do. It predicts that people will choose the alternative they perceive as fair. The components of equity theory are inputs, outcomes, comparisons, and results. Inputs are the attributes the individual brings to the situation and the activities required (investments and costs). Outcomes are what the individual receives from the situation. The comparisons are between the ratio of outcomes to inputs and some standard. Results are the behaviors and attitudes that flow from the comparison.13 In Adams's application of the theory to organizations, the comparison is with co-workers. But other standards of comparison, including oneself in a previous situation, seem equally probable. The idea is that people look at their inputs and the payoff they receive and compare the latter with what they think their comparison standard is getting. If a state of equity exists – that is, if they perceive the situation to be in balance (fair) and are then comfortable with the situation, no negative change is predicted to occur.

When inputs are seen as too great relative to outcomes, under–reward inequity is experienced. To remove this inequity people can: (1) reduce their inputs (actually or perceptually), (2) increase their outcomes (actually or perceptually), (3) change their comparison standard, or (4) leave the situation. If outcomes are too great compared with inputs, a state of over–reward inequity exists. To correct this situation the individual may (1) increase inputs, (2) decrease outcomes, or follow step 3 or 4 above. Empirical tests of equity theory have in general accorded with predictions regarding over and under reward. In addition, perceptions of inequity have been shown to be related to job satisfaction, commitment and turnover considerations.14

But equity theory, at least as stated by Adams, contains several unsolved problems. Little is known, for example, about how people select a comparison standard. It is also difficult to define inputs and outcomes. How people combine inputs and outcomes and how these factors change over time are likewise unexplained.15

Also, the definition of equity employed by individuals has been challenged. Salaried employees have been found to prefer equality rather than equity; hourly employees prefer equity.16 In some cases, people follow a winner–take–all strategy. Finally, equity ratios and resolution strategies have been found to vary with culture, family orientation, and personal values.

A number of studies of equity in operating organizations have been made by Atchison and Belcher.17 These studies use concepts from both streams of equity theory introducing an instrument that reliably measures the perceived importance of a rather large number of potential rewards and contributions. It also measures the perceived discrepancy between the existing rewards and contributions and respondent preferences. In addition, it measures comparison standards and preferred response to perceived inequity.

The rationale of these studies has been to test the validity of equity theory as an aid in designing organization compensation programs. Although they are subject to the limitations of survey research, the results support equity theory and its components and yield suggestions for improving compensation programs. People can and do perceive a large number of inputs and outcomes as relevant. They can compare what exists and what they want. Both the rewards desired and contributions seem to be culturally based and to vary occupationally and demographically. From the studies it seems useful to classify outcomes as (1) extrinsic rewards, (2) intrinsic rewards, and (3) rewards provided by the organization that it is not aware of providing. Likewise, inputs can be usefully classified as (1) job–related contributions, (2) performance–related contributions, and (3) personal inputs – contributions that are not obviously required by the job but that individuals believe are relevant to the organization.

We lean heavily toward equity theory as a useful explanation of membership motivation. If individuals perceive the situation as equitable, they are likely to join the organization and continue their membership. An individual's decision that equity exists seems to represent the attitudinal counterpart of March and Simon's inducements-contributions balance.

Organizational Justice. Compensation administration consists of a myriad of decisions about who gets what in terms of rewards in the organization. Equity theory deals with perceived fairness or justice of these decisions in the organization. A broader concept than equity theory covering this is organizational justice. This concept has a number of parts, the major one being distributive justice. Equity theory is pretty much the same thing as distributive justice which looks at what the person is paid and whether this is perceived as fair. A second important aspect of organizational justice is the concept of procedural justice. This concept is concerned with the perceived fairness of the procedures and means by which the outcome was arrived. That is how the decision was made.18 Both distributive and procedural justice have been shown to have a major effect on job satisfaction, more so with distributive justice than procedural justice.19

Recently, a third aspect of organizational justice has been discussed, that of interactional justice. This form of justice is a more personal one relating to how the person is treated when told of the organizational decision. The focus of this aspect of justice is on such things as the truthfulness of explanations, whether a justification is presented and how the person is treated.20

Goal–Setting Theory. In goal–setting theory the crucial factor is the goal. A goal is the object or aim of an action, and thus what the person's goals are affects what he/she achieves.21 To be useful for motivation in organizations goals must be clear and challenging. It is not enough to state to the employee "do your best." The desired end state must be clearly defined. Microsoft states this in goal–setting training, writing that goals statements are to be "SMART" (i.e., Specific, Measurable, Achievable, Results–based, and Time–specific).22 The more specific the goal, the greater its impact. In addition, goals are to be challenging, just how challenging is a question. At the extreme are goals that are called "stretch goals," ones that the employee cannot see being achieved at the moment.23 Hard goals, when accepted, are postulated to be better than easy ones. Participation in goal setting should increase commitment and acceptance but does not always do so. Individual goal setting should be more effective than group goals because it is the impact of goals on intentions that is important. The theory claims that goals work because they have a number of properties. The first is that they are directive–– they keep the employee's behavior on the path. Second, they energize the employee to take action. Third, employees with specified goals are more persistent in their work. Fourth, particularly when the goals are difficult they encourage innovative behavior. Improving the probability of success in achieving goals can be achieved in a number of ways. The first is through commitment. Incentives or rewards can facilitate acceptance or commitment to a goal, but the relationship has its problems. For instance, in using bonuses the most effective would be an all or nothing bonus, but this may turn off some people before they start and over the long term de–motivate those who came close but didn't meet the goal. These problems can be overcome by having degrees of goal achievement with lower bonus levels, but these do not have the same intensity of commitment.24 A second factor is self–efficacy. This is defined as people's beliefs about their capabilities to produce a designated level of performance. People with high self–efficacy will achieve more than those with low self–efficacy. A third factor is feedback. People need a stream of information about how well they are moving toward the goal. The final factor is complexity. This is one of those factors that at the extremes is not as motivating as in the middle ranges. Too simple is not a challenge and too complex is too confusing to the person.25

Expectancy Theory. This theory argues that people choose the behavior they believe will maximize their payoff. It states that people look at various actions and choose the one they believe is most likely to lead to the rewards they want the most. The elements in the theory are expectancies that certain outcomes will occur and the valence (anticipated satisfaction) of those outcomes. Although the formal elements are expectancies and valences, in most formulations expectations are divided into two types: expectancy (the expectation that effort will lead to performance) and instrumentality (the expectation that performance will lead to reward).

The earliest statement of expectancy theory was made by V.H. Vroom, who developed a model both to predict choice of occupation and how much effort will be expended on the job.26 In this model each expectancy is multiplied by its valence and the products are summed. The theory predicts that the individual will choose the alternative with the highest expected return. Later formulations, by E. Lawler, summed the product of expectancy (E -> P) and the sum of the products of each instrumentality (P -> 0) and its valence (V). Therefore, a person will behave in whatever way results in the highest score in this equation: (S[(E -> P) X S[(P -> 0)(V)]]).27 This means that there is only one probability of effort leading to performance but several possible outcomes from performance, each with a separate valence.

Expectancy theory has been tested extensively.28 The usual approach is to obtain expectancies, instrumentalities, and valences by questionnaire or interview and to relate these responses to self–reported or measured choices, such as occupational choice, job satisfaction, effort, or performance. It has been found that expectancy theory can do an excellent job of predicting occupational choice and job satisfaction and a moderately good job of predicting effort on the job. Expectancy theory implies that the anticipation of rewards is important as well as the perceived contingency between the behaviors desired by the organization and the desired rewards. The theory also implies that since different people desire different rewards, organizations should try to match rewards with what employees want.

Although these implications suggest that following the requirements of expectancy theory will lead to performance motivation in organizations, organizations should be aware of possible difficulties. For example, employees may not want more of the rewards offered by organizations. Or they may believe that in order to get more of one reward (pay) they must give up another reward (security or pleasant social relationships). Again, employees may not believe that good performance does in fact lead to more desired rewards, and convincing them may require more changes than the organization is prepared to make. Or employees may not believe that performance always reflects their efforts. Many factors that are beyond employee control may affect performance. For example, poor selection and training of employees, even with maximum effort, results in poor performance.

It should be apparent that the possibility of securing performance motivation through the application of expectancy theory varies by employee group and the technology of the organization. Although for most people more money is better, there may be some who don't value it highly. Some employees may want other rewards the organization doesn't want to provide (autonomy for a file clerk, for example). In some jobs, the relationship between effort and performance is beyond the control of employees. For many types of employees (and in many organizations) the relationship between performance and rewards is, in fact, very low thus making it impossible to convince employees that high performance leads to high rewards.

Finally, it should be noted that the components of expectancy theory are beliefs that require a good deal of information and a rather complex cognitive process in determining action. Some employee groups do want the rewards the organization has to offer, do want to believe that greater effort results in improved performance, and do want to believe that better performance leads to greater rewards. For such groups expectancy theory seems the preferred route to performance motivation. But for groups who lack these beliefs because of lack of information or whose behavior is guided by habitual actions or by what they see others do, a non–cognitive approach would seem superior.

Non–Cognitive Theories. Non–cognitive theories do not dwell on what goes on in the person's head. Instead, they claim that it is the environment that determines the behavior of the person. Therefore, to control behavior, one must control the person's environment.

Behavior Modification. This theory of operant conditioning is such an approach. The components of the theory, which is based on the work of Skinner, are the ideas of reinforcement and environmental determinism.29 Human beings are assumed to emit two types of behavior: respondent and operant. Respondent behaviors are controlled by instincts and direct stimulation; sneezes are an example. Operant behaviors are emitted in the absence of any apparent external stimulation. But whenever an operant behavior is followed by a consequence that changes the likelihood that the behavior will recur, the event or consequence is called a reinforcer. Consequences that increase the frequency of behavior are called positive reinforcers. Ones that decrease the frequency are negative reinforcers. When it is discovered that a consequence serves as a positive or negative reinforcer for a particular behavior, the frequency of the behavior can be manipulated by using the reinforcer. Skinner argues that no cognitive processes are involved. The behaviorist believes that operant behavior is caused by environmental events. Current behavior is caused by the history of their reinforcement.

These reinforcements can be done in a number of ways and can have a dramatic impact on the strength and rate of the response. There are two basic types of reinforcement schedules, continuous and partial. In continuous reinforcement, the desired behavior is reinforced every single time it occurs. Generally, this schedule is best used during the initial stages of learning in order to create a strong association between the behavior and the response. Once the response is firmly attached, reinforcement is usually switched to a partial reinforcement schedule. As stated, in partial reinforcement the response is reinforced only some of the time. Learned behaviors are acquired more slowly with partial reinforcement, but the response is more resistant to extinction. There are four schedules of partial reinforcement:

  1. Fixed Ratio Schedules are those where a response is reinforced only after a specified number of responses. This schedule produces a high, steady rate of responding with only a brief pause after the delivery of the reinforcer.
  2. Variable Ratio Schedules occur when a response is reinforced after an unpredictable number of responses. This schedule creates a high, steady rate of responding. Gambling and lottery games are good examples of a reward based on a variable ratio schedule.
  3. Fixed Interval Schedules are those where the first response is rewarded only after a specified amount of time has elapsed. This schedule causes high amounts of responding near the end of the interval, but much slower responding immediately after the delivery of the reinforcer.
  4. Variable–interval Schedules occur when a response is rewarded after an unpredictable amount of time has passed. This schedule produces a slow, steady rate of response.

Implementing a behavior modification program involves a number of steps.30 The first one is specifying the behavior to be changed. Next, its present frequency (the base rate) must be measured. Then various outcomes contingent on the desired behavior are administered and changes in frequency observed. Most programs include frequent reports and feedback. The result is a determination of the rewards that work best and the best reinforcement schedule. Operant conditioning and approaches based on expectancy theory are similar. Both argue that the contingency between the behavior and the reward is crucial. The major difference is the presence or absence of mental processes – cognition.

Recently the issue of whether behavior modification (learning) is, in fact, entirely non-cognitive (environmental). A theory called social learning theory proposes to bridge cognitive and non–cognitive motivation theory. This theory suggests that behavior can come from three sources:

  1. beliefs or perceptions (expectancy theory),
  2. reinforcement (operant conditioning), or
  3. learned from the experiences of others (Modeled).31


In summary, motivation theory contains directives for compensation policies and programs. Although, for reasons given, we prefer equity theory as an explanation of membership motivation and operant conditioning and expectancy theory as explanations of performance motivations, all of the theories carry useful precepts. The need theories, for example, show that different people want different things from the employment exchange. Clear, specific, agreed–upon goals are important motivators. Equity theory shows that pay and pay programs must be perceived to be fair if they are to work as intended. Operant conditioning and expectancy theory show the importance of the contingency between performance and reward. Note that all the approaches require that management know what performance the organization needs and wants. That there is some validity in each of the approaches suggests that combining them should increase performance. Equally important, organizations may chose those approaches that fit their employee groups and their situation.


Sociologists study the relationships between and among individuals and how these relationships channel behavior. Much of the work of sociologists has implications for compensation programs. For example, sociologists have studied the process by which people learn the rewards to expect from work and the expected behavior at work. They learn the former as a result of the socialization process that occurs in the family and in school.32 As a consequence, when individuals start a new job they have a reasonably good idea of what rewards to expect. When they join a particular organization, they learn the rewards offered by that organization. Pay is only one of a long list of rewards available in organizations.


To sociologists, motivation is built into the social system. We learn that it is highly appropriate to earn a living, "get ahead," and provide financial and other security for one's family. By the time people go to work, they carry these fundamental motivations appropriate to being an employee. When they join an organization they have already learned the appropriate channels in which their behavior can be directed. These motivations are given specific form in the organization. Forces outside the organization shape work behaviors and the pattern of social relationships inside the organization. For example, the meanings assigned to work are influenced by group identifications. The various demographic groups have different values regarding the importance of their work and its impact on their personal goals.

Labor Markets

Sociologists study labor markets and occupations in order to show the different expectations of different occupational groups and the social forces that create these expectations.33 That a typical organization is drawing members from several different sociological labor markets helps to explain some of the problems faced by organizations in maintaining consistent internal pay relationships.

Internal Labor Market. The internal labor market is a useful benchmark in comparing sociological labor markets because organizations are assumed to fill all promotions from within the organization. They will generally only hire for entry-level jobs. A job hierarchy is a rationally organized hierarchy of positions designed without reference to the individuals who occupy the positions. It is insulated from external labor markets because its labor supply is recruited at the bottom of the hierarchy and promoted from within through training and experience. The labor-supply problems in internal labor markets involve primarily the individuals it cannot train itself - professionals, for example. Labor demand is also controlled by the organization.

In theory, wage determination in a bureaucracy is an administrative decision based on the principle that the rank order of wages follows the rank order of training and experience required by positions. Both qualifications and pay for positions with similar work and responsibility must be equal. Non–financial rewards, such as tenure, are further rewards for membership. In practice, few large organizations are sufficiently closed to fit the theory. Some occupational groups cannot be trained internally and must be brought in from outside. In these cases, economic forces, historical accidents, and political pressures operating in external labor markets may force the organization to pay the new entrant at a rate that varies from the rational calculation of the worth of his or her qualifications. Even the requirements that differences in qualifications be reflected in differences in pay may be difficult to follow in large organizations with many occupations.

Professional Labor Market. Once it becomes apparent that few organizations can operate as closed labor markets, the characteristics of sociological labor markets from which the organization must recruit members become important. Perhaps the market that differs the most from the closed labor market is the market for professional services. In theory, each professional is unique and the value of his or her service is immeasurable. Supply is fixed in the short run and may decrease with increased demand if professional societies increase admission standards. Demand is highly variable. This fixed supply and varying demand permit professionals to fix their price and determine its basis. Historically, the basis has been the client's ability to pay. More recently, some professional associations have adopted a policy of standard minimum prices and restricted price competition. Professional work is defined by professional training and professional norms. Because some professionals are independent practitioners and some are employees of varying sizes and types of organizations, the fit of the model varies. But all professionals seem usefully defined as those with theoretical, research-based training, usually strongly controlled by the profession itself.

Specialized Trade Labor Market

Next to the professional market, the labor market least within the control of the organization is the specialized trade labor market. In theory, the labor supply of a trade is fixed and the demand is variable. Identification is with the trade rather than the employer. Because fluctuating labor demand and a fixed labor supply could mean fluctuating wages and cutthroat competition, trade unions emerge to distribute work, control labor supply, and bargain the price. Specialized trade control of the conditions of sale of trade labor serves to preserve the system of selling labor in standardized units and to prevent the employer from modifying either the system or the attractiveness of work. The trades determine the contents of craftwork, decide who is qualified to do it, and try to collect a standard rate for all levels of it.

Specialized trade labor markets are essentially local, and trade controls operate locally. This feature of the specialized trade labor market is the most useful distinction between it and professional labor markets. The building trades, with their tradition of apprenticeship and often a highly homogeneous membership in terms of ethnic, racial, and religious backgrounds, represent the best fit with the trade model.

Semiskilled Labor Market. The market for semiskilled labor, in theory, is a close fit with the closed labor market model. Labor supply depends on the local labor force. Demand and competition for workers are determined by employers, who design the jobs, provide training, and promote from within. In practice, however, many semiskilled workers are represented by unions, and thus labor supply and wages are determined by collective bargaining.

As in closed labor markets, jobs are designed by the organization and employees are affiliated with the organization. But wages are not determined solely by employee qualifications, even in the absence of a union. Custom strongly affects wages for the semiskilled in that wage changes are usually determined with reference to wages previously paid and to wages paid by other employers in the industry or area. Wage differentials among jobs in an organization are also influenced by custom. These differentials, although assumed to be related to the skill required, are at least as likely to be correlated with skill that used to but is no longer required by the job, group power, or seniority of the job incumbent. Transfers and often promotions are based on seniority. Perhaps the most important characteristic of semiskilled work is that the job is designed by the employer. This often means that the worker is not hired for the job but is assumed to be trainable for the jobs that exist in the organization. But even if semiskilled workers are not represented by unions, the impersonal conditions of closed labor markets seldom prevail. Work groups always arise and influence organization decisions. In very small organizations, semiskilled workers are often key employees.

Unskilled Labor Market. The market for unskilled labor, if such labor is defined as requiring no skill or training, has almost disappeared. But casual labor is still employed. The supply of unskilled labor is highly variable. Demand is fairly constant in the long run but highly variable in the short run. Minimum wage laws and public opinion prohibit the wide range of wages that could be possible in this labor market.

White–Collar Labor Market. The market for white–collar workers has some similarities to the closed labor market model. The organization designs the job, often hires entry-level candidates, and promotes from within. Workers are typically affiliated with the employer. The requirement for impersonal and organizationally rational decisions is no more likely here than it is with semiskilled workers. In fact, many clerical workers today have jobs hardly distinguishable from semiskilled factory jobs. They run machines to produce a product, and their contacts are limited to other employees and supervisors. One possible difference for these workers is that a good portion of their basic skills are acquired in school.

A second type of white–collar worker – receptionists and salespeople – have contacts with customers and clients. This seems to be the type that is expanding. Because social interaction is a large part of these jobs and success or failure depends on the way the interaction is handled, such jobs are difficult to standardize.

Managerial Labor Market. The market for managers is the most diverse of the sociological labor markets. In some ways, it is a close fit with the closed labor market model. Affiliation is with the organization, and success is defined by the organization. There is a strong tendency to hire entry-level candidates and promote from within. Pay is geared to status in the organization. But the rational–impersonal dimension of the closed labor market model is not met, especially at higher levels of the organization. Although the organization designs junior-level managerial jobs, above this level the manager is expected to have a voice. Like the second type of white–collar worker, managers must interact with various external stakeholders. Interactions with superiors, peers, and subordinates also influence the definition of managerial work.

Unique Services Labor Market. Although there is a strong tendency to fill managerial positions by hiring entry-level candidates and promoting from within, higher levels of management may be treated as a market for unique services. In such markets the supply is one individual and the value of the service is difficult to measure. This market is only partially like the market for free professionals, in that the price is set by individual bargaining. Sociological analysis of various labor markets emphasizes the different forces operating in each. The typical large employer deals with all these markets and must reconcile their various forces in designing compensation policies and programs.

Social Stratification

Processes of social stratification locate an individual within the social system and thus should influence the determination of who gets what rewards. Status differences have been found to rest primarily on occupations.34 Occupation is not only the most meaningful indicator of status but is indicative of and closely related to other measures of status, such as education and income. A number of characteristics of occupations have been found to contribute to their position in status rankings. One is based on the nature of the work performed – whether it involves manipulating physical objects, symbols, or other people. In general, manipulation of physical objects provides the least status and manipulating symbols the most. But occupations involving social manipulation (such as manager) also carry high status. Occupations involving solely technical expertise (artist, writer, scientist) generally have lower status than occupations involving both technical expertise and people.

The U.S. Dictionary of Occupational Titles (DOT) used to base occupational level on measures of manipulation of data, people, and things.35 The Department of Labor has replaced the DOT with the online database O*NET. ERI has developed a software database version of the original DOT. Called the enhanced Dictionary of Occupational Titles (eDOT), it provides job descriptions for over 25,000 position titles. Users may select from 7 editions that are designed for the following types of analyses: vocational rehabilitation, Social Security disability benefits, career development, transferable skills, Workers' Compensation, hiring, job analysis, job evaluation, and salary administration.

Another indicator of occupational status is prerequisites for entry relative to education and experience. Another is whether the tasks are performed by an individual or a group, with the former carrying higher status. Occupations involving supervision have higher status than those whose occupants are individual contributors. Occupations of higher responsibility have higher status; responsibility for social and symbolic activities yields higher status than responsibility for physical objects. Work situations are also status indicators, with factories carrying lower status than an office or research laboratory. Within a community, business organizations in different industries carry different statuses, as do other organizations. Even public employment, private employment, and self–employment are status indicators, with self–employment the highest, private employment next and public employment the lowest.

Because the status of an occupation is related to the rewards of incumbents of that occupation, social stratification theory would seem to be useful in designing pay structures within organizations. Unfortunately, although a number of determinants of occupational status have been proposed, a coherent theory has not been agreed upon. The functional theory of stratification proposes as variables the differential importance of positions in society, variations in the requirements of positions, and differences in the kinds of abilities needed in these positions, but does not suggest measurements or weights.

Work Groups

Work groups form as a result of the organization of work, develop attitudes and norms, and influence the behavior of group members and the reward structure of organizations. Semiskilled jobs are the most susceptible to group actions. Uncertainty about the value of the job because these jobs are not well defined in external labor markets and ambiguity of status and skill requirements make for successful pressures to follow group norms. These group pressures are an important influence on the rewards and status of jobs. The semiskilled worker adopts an occupational orientation in spite of the ambiguity of semiskilled work and behaves as if he or she belonged to a highly specific occupational group. Work groups rank certain jobs as more important or desirable and expect these jobs to carry higher pay. Over time, group pressures force a correlation between job rank and pay. The union and management respond to these pressures.

Reference Groups

Reference group theory argues that individuals take the values and standards of other individuals and groups as a frame of reference in evaluating themselves and their situations. The choice of reference groups is influenced by rationality and tradition. Comparisons take on a moral tone, yielding "what is right." Reference group theory argues that individuals and groups who are subordinate to the same authority use one another as reference groups. But workers in large–membership groups such as a union are likely to use abstract groups such as skilled workers. In an open society, the choice of reference groups is broader than in a more rigid society, where intragroup comparisons are more likely. Unions and probably employers can modify the choice of reference groups, but only in the direction perceived to be legitimate. Consequences of efforts to change reference–group comparisons, however, may not coincide with intentions.

Social Norms

Workers apparently have feelings about which factors employing organizations should pay for; these feelings are a function of group norms. An early study presented respondents with an organization chart representing direct and indirect supervision, provided a salary in one of the boxes, and asked respondents to supply the others.36 The results showed that the respondents utilized both indirect and direct supervision and number of subordinates as compensable factors. Studies find a somewhat lower distance between management levels (20 percent) and reveal that the input factors related to jobs and training was higher for the upper organizational level. Subordinates see the performance factors as higher for the subordinate level.37 All these findings suggest that there are cultural values concerning the employee contributions that organizations should pay for.

A summary of sociological contributions to compensation theory would show that sociologists have not offered a wage theory. But sociological concepts of motivation, labor markets, social stratification, work groups, reference groups, and social norms seem useful in understanding compensation issues. In addition, sociologists have carefully developed the concept of behavior as an exchange.38


Compensation administration is practiced within organizations. For this reason, it may be said that the organization's goals and its incumbents represent the most pertinent environment of compensation administration. Organizations may be classified as private for–profit, not–for–profit, and government entities. Although there are differences among these types of organizations in cost structures and accounting practices, these differences are of degree and are becoming smaller.39 As a result, these differences appear to be among the least important to compensation administration. On the other hand, maturity, size, number of businesses units, number of organization levels, centralization versus decentralization decisions, technology, information and control systems, and management style of organizations have substantial effects.40

Economic conditions place limits on organizations. These limits, however, vary among organizations and over time. An organization's compensation and benefit levels have maximum and minimum limits, which are set by its position in the product and labor markets. The organization could not go below the minimum and hold enough employees to meet organization goals, and it cannot exceed the maximum for budgetary reasons. But these limits are not clearly defined unless the organization believes it is close to either limit and in danger of being pushed beyond it. Furthermore, these limits depend on the period under consideration. The organization can exceed either limit for short periods, but for longer periods the range between them is narrower. The maximum and minimum levels are determined by different forces, and there is not necessarily a connection between them. The maximum is set by conditions in product markets and the organization's ability to operate within them in terms of costs and prices. The minimum is determined by conditions in labor markets, which result in part from supply and demand for labor, but at least as much from customary relationships, legal pressures, union pressures, and pressures from other organizations.

Other organizations affect employer wage decisions in two directions. Some organizations in the community exert downward pressure to keep the employer from "upsetting the market." Other organizations in the industry may exert upward pressure to forestall "unfair competition" in wages. Thus an organization in a high–wage industry in a low–wage community must somehow balance these opposing forces. Social, legal, and union environments affect an organization through the kinds of employees it hires and retains. Although some organizations are seriously restricted in at least some compensation decisions by the environments in which they operate, the typical organization has a good deal of leeway in compensation decisions. It can adjust its compensation administration system according to its structure and incumbents.

Organization Size

An organization's size can serve to free or restrict its compensation decisions. Small organizations with limited economic resources, may restrict the range of compensation levels. The flexibility permitted by small size may be an advantage in most other compensation decisions. Pay relationships may be less important because each member can arrange his or her contract with the owner. Unique pay arrangements with individuals may be worked out to attract needed individuals. Pay increases may be closely tied to performance visible to all members. Profit sharing and gainsharing plans may have performance-motivation effects in small organizations, but not in large ones. Communication regarding pay may be more open.

Large organizations, on the other hand, may have more economic slack and thus be less restricted in determining wage levels. In other compensation decisions they are typically more restricted. More attention must be paid to internal pay relationships. The possibility of conflict between internal equity and external competitiveness becomes more severe. More serious is the difficulty of relating pay to performance. Lower-level managers in large organizations have the information on performance, but permitting them to make pay decisions often promotes inconsistency. A common result appears to be that large organizations need to relate pay to performance more, but use this relationship less than small organizations. Communication of the pay system is probably also vulnerable to differences in organization units. Large organizations have difficulty integrating the differentiated units that come with increased size. Thus, seeing that the pay system aligns with other systems is a continuing challenge.

Organization Age

The age of an organization may be associated with its size, because almost all organizations attempt to grow. Age may also be considered an independent influence. New organizations may be designed around a homogeneous workforce, a particular management style and non–traditional pay systems. With increasing age and diversity of the workforce, new and different pay plans may be required. Just as product life cycles dictate different management approaches, organization life cycles require different pay systems. This is evident in internet technology companies. (A standard practice was to ascertain competitive rates, increase that amount by 20%, pay ½ that total in direct compensation, and award stock options of that exercise value.)

Multiple Businesses

Although product markets drive the maximum wage levels, organizations engaging in several businesses often have only one compensation system. Perhaps the major reasons are their desires for a consistent approach and more ease in transferring employees. Whereas an organization in a single business can have a single pay system regardless of location, a multiple–business enterprise would be unwise to do so. The needs of each business should determine the pay system parts such as wage levels, base pay structure, variable pay and benefits. This influence often becomes important when an organization diversifies into a new business. Attempting to use the same pay system in the new business may cause serious equity and performance problems. Most assuredly it will cause one group or the other to be over or underpaid.

Perceived inequities can probably occur if more than one business is operated out of a single installation. Moving to separate systems seems a better solution than trying to operate with one pay plan.

Number of Management Levels

Just as large organizations (greater number of jobs, more divirsified jobs, more incumbents) require different compensation systems, so do more management levels. More attention to job and pay relationships is usually called for in multiple–level organizations. At least in management jobs, reporting level has been found to explain almost 90 percent of the variance in pay.41 Also, jobs at different management levels require different measurements for variable pay plans.

Centralization vs. Decentralization

The degree of centralization influence the pay system because it determines the level at which performance information is gathered, the point where important decisions are made, and the technical competence of decision makers. If only centralized measures are available, measuring manufacturing plant or other business unit performance may be impossible. If decisions are made at corporate levels, unit managers cannot be rewarded for unit performance. If the internal resources and infrastructure to measure and reward performance does not exist at the local level, variable pay plans won't work.

Information Systems

The information system of an organization often determines if a pay for performance or variable pay plans are appropriate and, if so, the level at which they must operate. These types of plans require a good performance–measurement system. Equally important, the organization level to which these measurements apply (individual, group, plant, or organization) determines the appropriate type of plan.

Influence Systems

Whether an organization is authoritarian or is open to substantial influence by its members has a strong effect on its pay system. Because authoritarian organizations limit information to members and member trust is unlikely, severe limits are placed on the pay system. Pay information will be secret or limited. Employee input in pay decisions will be unlikely. As a consequence, pay decisions must be objectively based to achieve employee acceptance. In contrast, organizations permitting more member influence on decisions are more likely to exhibit employee trust in management. In such organizations more pay information will be provided to employees. Also, employee participation in committees making pay–related decisions is more likely. Because employee acceptance is the ultimate test of the equity of a compensation system, such organizations have more leeway in choosing a pay system that fits the organization.

Organization Members

Pay systems must fit the people who work in the organization. People differ in capabilities, needs, and values. As mentioned in our discussion of technology, they also differ by occupation. They differ in age, gender, and family situation. For the illegal immigrant workers in the fields and factories, they also differ by nationality.

Employees also differ in reward preferences, attitudes toward work, and involvement in work groups. These differences affect the appropriateness of a compensation system. Members of different occupational groups expect to be treated differently. Age, gender, and family differences often result in different reward preferences. Attitude and value differences may encourage or discourage a variable pay plan or the form it takes.

Perhaps even more important to pay systems are forthcoming changes in workforces. As suggested earlier, the workforce is becoming more heterogeneous. This means more differences in values, lifestyles, and family situations. In turn this means greater differences in preferences for and attitudes about compensation. Another suggestion that flows from the workers' rising expectations noted earlier is that people are placing more importance on pay. If this is true, pay–system design and operation become even more crucial.

Still another suggestion flows from what appears to be an increase in awareness of employee rights. It appears that workers are becoming increasingly conscious of their right to a fair process of pay, promotion, and dismissal decisions. This means additional attention to the equity of compensation systems.

Organizational Technology

The technology of an organization has a strong influence on its pay system. Technologies differ in job design and the kind of job incumbents associated with it. Jobs in the different technologies vary in cost structures, measurability of performance, interdependence and thus need for cooperation, and number and level of skills needed.

Organizations engaged in process production (as opposed to mass production and unit production) usually have lower labor–cost ratios and thus more freedom in decisions on wage levels.42 But in process technology (such as chemical plants), operations are much more interdependent and individual performance is much more difficult to measure. Thus, process industries, although in a position to pay well, are limited in designing pay to motivate performance at the level of the individual. Plans measuring performance at the level of the group, plant, or company may, however, be more effective. On the other hand, organizations in process industries often have relatively few employees and thus enjoy the advantages of small size.

Unit or mass production usually requires less interdependence. Thus, these two types of production environments often permit paying for individual performance. Appropriate variable pay plans, however, usually differ between unit and mass production.

Service industries can usually be classified in the same way and would seem to be subject to the same variables. Many service organizations specify high interdependence among employees. In some service industries, identifying performance may require more effort. But many service organizations are small and enjoy the advantages that this entails. Also, many have high proportions of highly skilled jobs.

Another useful way of classifying technologies for pay–system purposes emphasizes the different types of employees as typical rank–and–file members.43 Obviously, organizations composed chiefly of semiskilled production workers, skilled workers, engineers and other professionals, or technically trained managers would call for quite different pay systems. For example, the first two would be expected to resist variable pay plans and the latter two will demand them.

Communications Policy

The Internet brings an organization's information to an employee's fingertips at work, at his/her home and on-the-go with mobile devices and the prevalence of free wifi. The Internet Age also requires decisions regarding:

  1. purposes of the compensation and benefits communication system
  2. extent of communicated data
  3. who will practically control and oversee compensation communications
  4. intended goals of this communication
  5. ability to react to positive and negative results of massive new communication

If one accepts that the Internet is affecting compensation management, it would only be logical to define what an organization wishes to achieve using this technology. Equally logical would be to outline a set of measurement standards with some oversight as to their achievement.

Compensation Policy

Perhaps the most important aspects of the organizational environment are an organization's intentions and its goals with respect to compensation (See chapter 6). What the organization intends to do about rewards and what goals it seeks to accomplish with the pay system tells managers and employees what to expect. It should also provide stability, consistency, and the credibility the compensation system needs in order to work. Organizations should probably determine and state their policies in the following areas:

  1. philosophy and purposes of the compensation system
  2. communication
  3. who will make what compensation decisions
  4. intended market position
  5. intended equalization or differentiation of organization units (together with the rationale)
  6. intended mix of cash, benefits, and long-term incentives
  7. the basis of individual pay decisions
Because there is no objectively correct answer to pay issues, each organization must design its own compensation system to fit its situation. Carefully considering these strategic issues and taking and stating a position on them tells members what to expect and decision makers what to do.


In most areas of management today, there is a greater concern with the environment. Compensation is no exception. In the past two chapters we have examined the major aspects of the environments that affect the manner and outcome of compensation decisions. In this chapter we have looked at the psychological, social, internal organizational and technical environments.

Work and workers have changed dramatically in the past fifty years. We are no longer a manufacturing nation but a service society. Work demands higher levels of skill, and workers indeed have more skills. However, there is a great deal of controversy as to whether the skill level is keeping up with the demand. The changes in the workforce are creating major changes in compensation administration and the management of human resources within the organization.

The largest part of this chapter has been about motivation theory and how it applies to compensation administration. Motivation theory contains directives for compensation policies and programs. Although, for reasons given, we prefer equity theory as an explanation of membership motivation and operant conditioning and expectancy theory as explanations of performance motivations, all of the theories carry useful precepts. The need theories, for example, show that different people want different things from the employment exchange. Clear, specific, agreed–upon goals are important motivators. Equity theory shows that pay and pay programs must be perceived to be fair if they are to work as intended. Operant conditioning and expectancy theory show the importance of the contingency between performance and reward. Note that all the approaches require that management know what performance the organization needs and wants. That there is some validity in each of the approaches suggests that combining them should increase performance. Equally important, organizations may chose those approaches that fit their employee groups and their situation.

One of the least considered influences on compensation decisions is the organization itself. The size, age, type of business, management structure and philosophy, technology, and power structure all influence the compensation program that the organization requires. There needs to be a fit between the type of organization and the type of compensation program. It can be seen from these environmental factors that the organization is limited in the type of compensation program that it develops. In contrast to that, different organizations, since they are in different environments, can be expected to have different compensation programs.

The changes in technology have led to different compensation systems for different types of workers. Some respond well to variable pay systems, others resist them.

The Internet has simplified employer–employee communication. Now employees can answer their own compensation and benefits questions by logging onto their organization's website from anywhere. This increased communication requires special attention to what data is offered and who has access to it.


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Internet Based Benefits & Compensation Administration

Thomas J. Atchison
David W. Belcher
David J. Thomsen

ERI Economic Research Institute

Copyright © 2000 - 2013

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HF5549.5.C67B45 1987 658.3'2 86-25494 ISBN 0-13-154790-9

Previously published under the title of Wage and Salary Administration.

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