In this chapter, I also review eVects associated with two dimensions ofpay
structure. TheWrst dimension, the extent to which aWrm’s pay structure is relatively
hierarchical orXat (also referred to as ‘pay dispersion’), is speciWcally mentioned by
Jim Sinegal, CEO of Costco. He states that a pay structure in which top executives
make ‘ 100 or 200 or 300 times more than the average person working on theXoor is
wrong’ and intimates that Costco’s egalitarian pay structure promotes organiza-
tional eVectiveness. Another aspect of pay structure is the basis of pay. Along with
research on pay dispersion eVects, I also review a limited number of studies exam-
ining the use of person-based, as opposed to job-based, pay systems. I begin withpay
form, then reviewpay structure, followed by a discussion ofpay leveleVects.
17.2 Effects of Pay Form/Payment
System
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With money, you can make the devil push a millstone.
(Chinese proverb)One of the more interesting—and controversial—issues in compensation has been
delineating the manner and magnitude in which pay inXuences employee motiv-
ation and performance. The focus in this debate has been on whether or not
monetary (i.e. ‘extrinsic’) rewards have ‘incentive eVects’ or positively aVect
employees’ attitudes and performance. While this is undeniably an important
topic, pay policies may also broadly aVect organizational functioning by impacting
the talent level and mix of aWrm’s workforce. This can occur through reward
systems’ inXuence on the entry (i.e. attraction, recruiting, hiring) and exit (turn-
over) of employees. This point is emphasized by Rynes ( 1987 : 190 ): ‘compensation
systems are capable of attracting (or repelling) the right kinds of people because
they communicate so much about an organization’s philosophy, values, and
practice.’ In this section, IWrst review evidence related to ‘incentive eVects’ followed
by a review of research on the inXuence of reward systems on workforce compos-
ition and competence (‘sorting’ eVects).
Incentive eVects. A number of theoretical perspectives have been used to explain
and understand the mechanisms by which monetary rewards may positively inXu-
ence individual and group performance. Chief among these are expectancy theory
(Vroom 1964 ), goal-setting theory (Locke 1968 ), reinforcement theory (Skinner
1969 ), and agency theory (Jensen and Meckling 1976 ). Another theory, cognitive
evaluation theory, or CET (Deci and Ryan 1985 ), has been used to challenge the
basic assumption that pay positively impacts employee performance.
346 james p. guthrie