Internal Wage Structures and Organizational Performance
| Date | 01 March 2003 |
| Author | P. B. Beaumont,R. I. D. Harris |
| DOI | http://doi.org/10.1111/1467-8543.00261 |
| Published date | 01 March 2003 |
Internal Wage Structure s and
Organizational Performance
P. B. Beaumont and R. I. D. Harris
Abstract
This paper considers whether a hierarchical or compressed wage structure is
positively associated with relatively high levels of organizational performance.
To date, there has been little empirical research in this area (especially in the
UK). Thus we present an operational measure of a compressed/hierarchical
wage structure, using UK manufacturing micro-data in five industrial sectors,
and examine its relationship with labour productivity. We find that the wage
compression argument holds in one sector but not for the majority of sectors
and that taking into account other, intra-industry characteristics, namely size
and ownership differences, further weakens the relationship.
1. Introduction
There has been a relatively long-standing debate in the compensation
literature as to whether hierarchical or compressed wage structures enhance
individual and organizational performance (Milkovich and Newman 1999:
64–78; Taylor 2000: 22–7). Unfortunately, this debate has been relatively
little informed by comprehensive and detailed empirical research.
The need for such research has become infused with more importance and
urgency recently as compensation issues have figured quite prominently in
larger discussions and in research concerning the relationship between
human resource management (HRM) policies and organizational perform-
ance (Ichniowski et al. 1996; Pfeffer 1998). This being said, measures of
wage structure have been conspicuous by their absence in these studies.
Accordingly, in what follows we briefly review the essence of the hier-
archical versus compressed wage structure debate, discuss our measure of
wage structure, generate two explicit hypotheses, outline our estimation
model and data source, present our various findings and draw certain
conclusions and implications for further research.
P. B. Beaumont is at the University of Glasgow Department of Business and Management.
Richard Harris is at the University of Durham Department of Economics.
British Journal of Industrial Relations
41:1 March 2003 0007–1080 pp. 53–70
#Blackwell Publishing Ltd/London School of Economics 2003. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
2. The debate: central issues
The hierarchical (or ‘tournament’) model of pay distribution, which is grounded
in neoclassical economics and efficiency wage theory, argues that a relatively
dispersed pay structure will attract talented employees and motivate high
individual performance as a consequence of the substantial rewards on offer
(cf. the tournament model introduced by Lazear and Rosen 1979; see also
Lazear 1998). This view of pay distribution as a network of incentives argues
that enhanced individual employee effort (in both amount and type) will
aggregate up to enhance organizational performance (Bloom 1999: 26–8).
In contrast, the compressed model of pay distribution (cf. Akerlof and
Yellen 1990; Levine 1991) argues exactly the opposite: that greater pay
dispersion will impact negatively on individual and organizational perform-
ance. This is because such arrangements can undermine feelings of internal
equity and damage co-operation and any sense of common purpose across
the work-force as a whole. The theoretical basis for this perspective or
prediction lies in the role of relative deprivation theory, and to a lesser extent
of equity theory, in shaping the notion of distributive justice (Cowherd and
Levine 1999: 303–7).
These differing hypothesized relationships and predictions can, of course,
be reconciled through the adoption of a contingency theory perspective.
That is, the hierarchical model will produce its hypothesized positive relation-
ship with performance in organizational settings where work interdepend-
encies are minimal, while the compressed model will be most effective in a
situation requiring extensive collaboration, team working arrangements and
a co-operative pattern of interaction (Milkovich and Newman 1999: 74–8).
The contents of Table 1 provide a useful summary statement of these two
competing theories.
3. The issue of measurement
The ideal research project would arguably involve precise and detailed
measures of both levels and differentials (see Table 1) for the two competing
TABLE 1
Hierarchical versus Egalitarian Wage Structures
Hierarchical Egalitarian
Levels Many Fewer
Differentials Large Small
Criteria Person or job Person or job
Supports Close fit Loose fit
Work organization Individual performance Teams
Fairness Fairness Fairness
Behavioural Opportunities for promotion Co-operation
Source: Milkovich and Newman (1999: 67).
54 British Journal of Industrial Relations
#Blackwell Publishing Ltd/London School of Economics 2003.
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