Human Resource Management Review

12 (2002) 75 – 80
www.HRmanagementreview.com

Compensation research directions and suggestions

for the new millennium
Herbert G. Heneman III*
Graduate School of Business and Industrial Relations Research Institute, University of Wisconsin-Madison,
975 University Avenue, Madison, WI 53706, USA

1. Introduction

The papers I have been asked to review and comment on are great testimony to the fact that
we have much to learn about employee pay determination, delivery, and impact. Collectively,
the papers provide us intriguing critiques and commentaries about the current state of
knowledge, and they deftly point us toward directions and departures for future research.
While I am fundamentally in agreement with the basic propositions contained within the
papers, I do have some specific comments and suggestions that augment, extend, or
sometimes question those propositions.

2. Power as a determinant of executive compensation

The mere title of this paper resonates well with me, for it suggests a largely missing way of
conceptualizing why and how top managers are paid. Why is the empirical link between top
management pay and organizational performance (however, these variables are measured) so
low? Agency theory leads us to opine that the link is not or should not be weak, but clearly
the data are inconsistent with agency theory propositions. Is power the missing variable that,
when combined with organizational performance, will improve our ability to predict and
explain how top management pay is determined? Like Grabke-Rundell and Gomez-Mejia, I
think that the power path is a fruitful one to go down. I also think we need a more fully
developed theoretical map to guide us than is provided in this paper. Since power (such as ala
Finklestein) and top management pay are both multidimensional, as is organizational

* Tel.: +1-608-263-3461.
E-mail address: hheneman@bus.wisc.edu (H.G. Heneman III ).

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performance, we need to have more fully specified models that indicate which dimensions of
power are related to which dimensions of top management pay, controlling for dimensions of
organizational performance. Ownership concentration might also be involved as a control
variable in the models. So I see the next step as one of model specification to better guide data
collection and model estimation.
A thorny issue that will cloud our attempts to better understand the links between top
management pay and organizational performance is the initial (hiring-in) pay package
provided the manager upon entry to the top management ranks from either an internal or
external route. Since the initial pay package serves as the base or starting point for subsequent
pay package adjustments, top managers with equal ‘‘true’’ performance may have unequal
current pay packages because of differences among them in initial pay packages; in a cross-
sectional analysis, this will result in weak empirical links between top management pay and
organizational performance. So future research must contend with the initial pay package as a
variable when examining determinants of top management pay.
Of course, in some senses, this merely begs the question of how initial pay packages are
determined for top managers. There seems to be a void in our knowledge of how top
managers’ initial pay packages are put together and configured in terms of overall value,
direct–indirect pay proportions, guarantees versus risks, length, susceptibility to amendment,
and penalties for early severance. What role does power play in these key decisions?
For both initial pay packages for top managers, as well as subsequent pay adjustments
(usually upward), matters of perceived equity of pay packages and adjustments for top
managers are unexplored waters. Do top managers think in equity theory terms, such as
assessing their inputs and pay outcomes, choosing comparison others, and resolving
inequities by changing their perceptions and behaviors (including performance)? Do top
managers ever feel inequitably overpaid? How do top managers feel about the widening pay
gap between the highest and lowest paid employees in their organizations — is this
perceived as equitable? How are such equity judgements made? While access to top
managers and direct collection of data from them may prove difficult, surely the results
would be very informative and help us better understand the nature of top managers’ pay as
perceived by them.

3. Understanding pay plan acceptance

Equity and justice issues are very important under aggregate (group) pay systems, and how
these issues are handled may well determine whether employees accept the plan and it
survives. The central premise of Barber and Simmering is that pay plan acceptance and
survival chances will be maximized when the distributive justice preferences of employees
(equitable versus egalitarian) are consistent with the plan’s payout mechanism. In turn,
several contingency factors are identified as potential determinants of equitable versus
egalitarian pay allocation norms and preferences. Presumably, organizational consideration
of these hypothesized factors would allow it to determine whether an equitable or egalitarian
payout to group members would be more likely to be accepted and foster survival of the plan.
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Since acceptance and survival of the pay plan are viewed as key criteria of effectiveness,
we should first address the question of what these terms mean conceptually and operation-
ally. Is acceptance synonymous with satisfaction with the plan and payouts received under
the plan — or is it something beyond this? Does acceptance imply more favorable
behavioral responses (such as performance) of employees than would be forthcoming under
a previous or alternative plan? Is survival the length of time the plan has been in existence
intact, or with modifications? What if a plan is modified or dropped for some employees,
but not others? Without some construct clarity on these terms, we will be hampered in
formulating precise hypotheses about acceptance and survival determinants, and in inves-
tigating these hypotheses empirically.
While Barber and Simmering explicitly chose to focus on only distributive justice in the
allocation of rewards, at the end of their paper, they indicate a need to also consider
procedural justice in these plans for a more complete understanding of them. I concur, and
would like to emphasize that point. A recent review of research has interpreted the admittedly
scant research to suggest that procedural justice perceptions influence pay satisfaction
through their impact on distributive justice perceptions, rather than independent of them
(Heneman & Judge, 2000). If correct, future research on pay plan acceptance must include
both procedural and distributive justice perceptions, alone and in interaction with each other.
For example, will employees accept a group pay plan that meets their preferences for either an
egalitarian or equitable payout if the plan is perceived as procedurally flawed? Will such a
plan survive intact, and if not, will it be modified or discarded?
Another direction for future research is to examine if, and how, the distributive pay
preferences of employees could be changed to be aligned with the type of aggregate pay plan
the organization wishes to use for strategic purposes. Can current employees’ preferences be
modified and exactly how? Or, must the organization seek to acquire new employees whose
preferences are compatible with its strategic imperative?

4. Compensation in the jobless organization

Job-based pay systems have been a staple foundation of pay programs for decades. They
are an outgrowth of task specialization, the grouping of tasks to create jobs, and the use of
internal (job evaluation) and external (pay surveys) factors to price jobs and create job
hierarchies based on relative worth. But when jobs in the traditional sense become less
prevalent, Klaas indicates that we must shift from job-based to person-based pay systems, and
broadbanding and competency-based pay emerge as two new pay forms in the so-called
jobless organization.
Do we now have jobless organizations? I think not, and recommend that we drop this term
from our HR lexicon. Taken literally, a jobless organization is one with no task specialization
and all employees can and do perform all tasks. Few organizations fit this mold. Instead,
many organizations have evolved toward jobs that are more elastic and flexible in the range of
tasks occupants are expected to be competent to perform. I recommend we refer to such
organizations as ‘‘job-less’’ (or job-lite?) rather than ‘‘jobless’’ in order to more accurately
portray the nature of task specialization within them.
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Klaas provides an interesting and carefully reasoned set of propositions about the impact of
broadbanding and competency pay on various administrative (e.g., flexibility) and attitudinal
(e.g., inequity) outcomes. For the most part, I concur with the propositions, but I would offer
two general observations about them. First, they ignore the likely impacts of these new pay
delivery systems on actual job performance, and hence, we are in need of additional
propositions about if and how these pay systems might affect employee performance.
Second, I am struck by the prominence that Klaas accords pay equity impacts in his
propositions, as well as the general implication that such person-based pay systems will likely
increase perceived pay inequities by employees. I concur with this, and think that potential
inequity effects have been downplayed or ignored by those who extol the virtues of person-
based pay systems. Quite simply, both competency pay and broadbanding increase the focus
on assessment and treatment of the individual employee, relative to job-based pay systems
(even those with performance appraisal and merit pay raise systems accompanying them).
Hence, person-based pay systems have the inherent potential to create even greater perceived
inequities of both the procedural and distributive variety than are encountered under job-
based pay systems. Competency-based pay plans, for example, raise serious concerns among
employees about competencies to be measured, nature of the competency assessments, the
reliability and validity of the assessments, and the ‘‘pricing’’ of competency levels such as
skill blocks. Broadbanding systems raise employee questions about how their managers
decide where within the broad pay range employees are placed for base pay determination
purposes, as well as how their managers will decide to move them within these wide bands. If
indeed research confirms these types of inequity concerns, organizations will confront a
quandary. Since research increasingly shows that perceived inequities lead to organizationally
undesirable employee behaviors (Heneman & Judge, in press), will the presumed strategic
benefits of person-based pay systems outweigh the negative attitudinal and behavioral
reactions they foster among employees?

5. Pay increase satisfaction

The rise of variable pay as a component of employee compensation, and the numerous
forms in which it is delivered, represent significant new ways employees may experience
changes in their pay above and beyond the typical ‘‘raise.’’ These new forms of pay delivery
may engender new forms of pay satisfaction that are currently unmapped conceptually and
untested empirically. As Heneman, Greenberger, and Fox suggest, measures of pay satisfac-
tion such as the Pay Satisfaction Questionnaire (PSQ) (Heneman & Schwab, 1985) are
deficient due to the absence of scales reflecting new variable pay realities.
At the time the PSQ was developed, most employees experienced pay changes in the form
of ‘‘raises’’ based on individual merit, seniority, and cost of living; pay changes delivered via
other types of variable pay systems were uncommon. Consequently, the PSQ contained a
‘‘raise’’ scale comprised of four items, and the scale has been found to exhibit reasonable
psychometric properties supporting its construct validity (see Heneman & Judge, 2000). The
PSQ ‘‘raise’’ dimension, however, seems incapable of capturing satisfaction with variable pay
forms such as profit sharing, gainsharing, bonuses, and stock options. Because of this,
 H.G. Heneman III / Human Resource Management Review 12 (2002) 75–80 79

Heneman et al. suggest that ‘‘it is time to reformulate the pay raise dimension to be consistent
with changes in pay systems.’’ Their proposal involves eliminating the current raise scale of
the PSQ, changing terms from pay ‘‘raise’’ to pay ‘‘increase,’’ and hypothesizing six new
dimensions of variable pay increase — amount, opportunity, form, requirements, possibility,
and rules.
It is indeed time to move ahead and begin a fuller exploration of employee satisfaction
with variable pay. The Heneman et al. proposal is a thought-provoking initial foray in this
direction. As they and others begin the process, however, there are several recommendations
and cautions I have to offer.
First, it may be premature to simply eliminate the existing raise dimension of the PSQ. The
term ‘‘raise’’ probably has a common meaning among employees — connoting an increase in
their base pay; use of raises is still a very prevalent practice, and as noted, the psychometric
properties of the raise scale are acceptable. We should hypothesize and test for new scales, as
well as determine their correlations with the raise scale in our construct validation efforts.
Second, we should use the term ‘‘variable pay changes,’’ rather than ‘‘pay increases’’ to
better emphasize our concern with variable pay. Moreover, the term ‘‘increase’’ may have
meaning for employees very similar to ‘‘raise,’’ and since variable pay may go either up or
down, it is more accurate to refer to ‘‘changes’’ rather than ‘‘increases’’ in variable pay.
Third, before rushing into instrument development and testing, a more qualitative
approach should guide us. We should first talk about variable pay with variable pay
recipients to determine whether they view their variable pay in equity terms (the predominant
theory of pay satisfaction), who their comparison others are, whether they prefer pay changes
that are not built into their base, and what is a just noticeable or meaningful change in
variable pay. Such information may both sharpen and expand our conceptions of variable pay
change satisfaction.
Fourth, we need to determine if all forms of variable pay can be meaningfully clustered
into a single category, and scale, on the assumption that employees experience a simple,
overall satisfaction with all forms of their variable pay. I hypothesize that this undimension-
ality will not hold up empirically since each form of variable pay may deliver very different
pay change amounts in any time period. Again, conversations with employees would be a
useful starting point.
Fifth, it is important that the distinction between distributive justice (what a person is
paid) and procedural justice (how a person’s pay is determined) be maintained. When the
PSQ was developed, this distinction was not fully recognized and in retrospect, it can be
seen that the two types of justice were co-mingled in the raise and structure/administration
scales (but not the level and benefits scales). Researchers must be careful to separate the two
constructs at the time of scale identification and writing of items. For each form of variable
pay, it would be useful to construct two scales — one for amount of pay change received,
and one for how that pay change was determined. It will then be possible to empirically
determine if separate scales emerge for each justice type, both within and between the
various forms of variable pay.
Finally, researchers should be careful not to confuse variable pay change satisfaction with
preferences for types of variable pay, or perceived opportunities for participating in various
types of variable pay programs. Preferences and opportunities for participation are simply
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anticipating expressions; they do not reflect the actual experiencing of variable pay changes.
Nonetheless, research on variable pay preferences is very sparse and a step-up in this research
is desirable in order to help organizations better choose the types of variable pay plans most
likely to be satisfying to current and prospective employees (Heneman & Judge, 2000).

References

Heneman, H. G. III, & Judge, T. A. (2000). Compensation attitudes. In: S. L. Rynes, & B. Gerhart (Eds.),
Compensation in organizations: current research and practice (pp. 61 – 103). San Francisco: Jossey-Bass.
Heneman, H. G. III, & Schwab, D. P. (1985). Pay satisfaction: its multidimensional nature and measurement.
International Journal of Psychology, 20, 129 – 142.