analyst at Sanford C. Bernstein & Company, also disagrees with Costco’s pay
strategy, complaining that CEO Sinegal ‘has been too benevolent.’ In addition to
being ‘diVerent’ in terms of pay level, Costco also diVerentiates itself with its
relatively egalitarian approach to pay. Jim Sinegal’s total pay package in 2004 was
$ 550 , 000 , an amount much less than those found in his industry peer group
(Costco was 29 th in total revenues among all US companies in 2004 ). According
to Sinegal, this again represents good business sense: ‘I just think that if you’re
going to try to run an organization that’s very cost-conscious, then you can’t
have those disparities. Having an individual who is making 100 or 200 or 300
times more than the average person working on theXoor is wrong.’^1As illustrated in the above passage, executives and other stakeholders consider
compensation policies to be important business decisions. This passage also serves
to illustrate deep-seated disagreement as to what represents ‘best practice’ in com-
pensation management. In the academic literature, there is a similar diversity of
perspectives, opinions, and conclusions. While this chapter will incorporate and
review some of this vast literature, it is not intended to be an exhaustive review of all
compensation research.^2 Instead, the goal of this chapter is to review, summarize, and
discuss academic research as it pertains topay eVectsor consequences associated with
a set of limited, yet fundamentally important compensation policy issues and
decisions:pay level,pay structure, andpay form or payment system. Prior to beginning
the review of relevant research, IWrst provide a brief description of these policy issues.
Pay levelrefers to an organization’s pay position relative to other product/service
and labor market competitors. Broadly,Wrms can lead, lag, or match the market. As
described above, Costco has chosen to be a market leader. What are the likely
implications of this decision? Costco executives believe that organizational eVec-
tiveness will be enhanced, whereas theWnancial analysts quoted above are some-
what less optimistic. This chapter reviews studies that inform this debate.
While pay level refers to ‘how much’ employees are paid,pay formorpayment
system refers to ‘how’ they are paid—the manner in which compensation is
distributed. Most generally, ‘form’ or ‘payment system’ refers to the relative
amount of pay that isWxed, as opposed to variable. As reviewed below, pay-
for-performance is one of the more controversial areas of compensation research.
There has been signiWcant disagreement as to whether paying for performance
enhances or decreases employee motivation and individual and organizational
eVectiveness. In addressing this topic, I review and discuss studies examining the
inXuence of individual and group-based pay-for-performance plans on motivation
and performance.
(^1) Data on Costco, Sam’s Club, and Wal Mart is obtained from Greenhouse 2005 ; Holmes and
Zellner 2004 ; and Zimmerman 2004.
(^2) For a more complete treatment of compensation research, interested readers are especially
encouraged to consult Gerhart and Rynes 2003.
remuneration: pay effects at work 345