to pay-level policy decisions and concluded thatWrms must determine the ‘Wnan-
cial impact that pay level has on turnover (both quantity and quality), applicant
pool characteristics, acceptance rates, selections costs, and equity reactions and
then compare the sum total of these eVects to discounted wage costs’ ( 1996 : 136 – 7 ).
Pay level eVects: summary. Based on available evidence, it seems reasonably clear
that higher pay levels are attractive to both prospective and current employees.
ApplicantsWnd above-market employers appealing and current employees are less
likely to depart. Thus, higher pay levels put employers in a strong position vis-a`-vis
labor market competitors. Whether or not this translates into competitive success,
however, is not straightforward. As Brown et al. ( 2003 ) point out, there are
diminishing returns to increasing wages—and specifying the inXection point will
likely prove challenging. In addition, the problem an above-market employer will
face is a challenge shared by any ‘employer of choice’—they will be attractive toall
members of the labor market. Thus, rigorous and valid selection systems should
moderate the relationship between above-market pay strategies andWrm success.
Combining other pay design elements may also prove beneWcial. SpeciWcally,
utilizing strong pay-for-performance elements in tandem with above-market wages
may magnify the ‘eYciency’ advantage with the beneWts of ‘sorting.’ This may help
explain Brown et al.’s ( 2003 ) results, where high pay dispersion coupled with above-
market wages yielded superior proWtability. That is, if the wage dispersion was the
result of paying for performance, then the combined beneWts may have been in
place. Moreover, if the pay dispersion resulted from a pay-for-performance system
perceived as ‘legitimate,’ thenWrms may beneWt from both sorting eVects and
employees’ perceptions of equity and justice (Shaw et al. 2002 ). These notions
are inferred from previous research and require empirical examination.
Costco’s executives believe that higher employee pay is ‘eYcient’ in the sense that
high wages attract and retain a talented, committed, and productive workforce.
However, studies are needed to verify the validity and generalizability of this claim,
including research examining the causal pathway between pay levels, applicant and
employee attitudes, intermediary outcomes such as absenteeism, turnover, prod-
uctivity, and, ultimately,Wnancial success.
17.5 Conclusion
.........................................................................................................................................................................................
This brief review of extant compensation research highlights what makes this topic
so interesting—despite a plethora of studies, there are many fundamental issues
that remain unresolved. Stated another way, it is not clear what constitutes ‘best
practice’ in many aspects of compensation policy and practice. In each of the areas
358 james p. guthrie