Setting base pay rates: integrating compensation practice with human capital value creation and value capture

Abstract

Compensating employees is one of the costliest activities for an organization. In fact, the average employee compensation cost is approximately 36 dollars per hour worked; wages and salaries alone account for 68 percent of the money spent on employee compensation (Bureau of Labor Statistics, 2017). Beyond cost, compensation matters to employees. Voluntary turnover has a relationship of r = −0.15 with pay satisfaction according to meta-analysis findings (Williams et al., 2006), and the economic status of most individuals is tied to their compensation. The human capital literature has acknowledged the importance of compensation (e.g., Harris and Helfat, 1997), and compensation has figured prominently in frameworks on human resource configurations (Lepak and Snell, 2002). For example, internally equitable pay, externally equitable pay, and various pay bases have been central factors in empirical work on human resource configurations (Toh et al., 2008). Coff (1997) noted that focusing on employee pay perceptions, such as pay satisfaction and internal comparisons, is a potential human capital retention strategy. Yet, the nuances of compensation relevant to compensation researchers have rarely been sufficiently integrated with the nuances of the strategic human capital literature. Compensation design involves many strategic choices, such as decisions about job evaluation, merit pay, and market matching (Balkin and Gomez-Mejia, 1987; Gerhart and Rynes, 2003). One strategy of practical importance often neglected by compensation researchers is base compensation determination, i.e., the approaches used to designate "the cash compensation that an employer pays for the work performed" (non-contingent pay; Milkovich et al., 2014: 14). This neglect is in spite of base pay being one of the largest components of compensation for many jobs, especially those jobs of most employees (i.e., non-executives; Bureau of Labor Statistics, 2017). Perhaps this lack of attention is due to a myth that base pay is determined completely by market forces, and thus cannot be a source of competitive advantage (i.e., above average performance, as defined by Barney and Wright, 1998). Research over the last two decades on strategic human capital militates against the myth that base pay is not relevant to competitive advantage. For example, Coff examined firm coping strategies for human capital management dilemmas. Within this investigation, Coff explained, "pay differentials within the firm may be more important than the pay relative to the labor market. This, in turn, implies that firms can increase pay satisfaction without competing with other employers" (1997: 383). Decisions around base pay are not simply market and cost concerns, and these decisions may relate to competitive advantage through human capital value creation and capture (i.e., respectively, increased use value and decreased costs associated with human capital, as defined by Chadwick, 2017).

The other side of the coin: An integrative review connecting pay and health.

“…Studies of pay on health must consider theoretically the complexity of what it means to be highly paid versus low paid. Measuring mediators or controlling for status and/or job responsibility as potential confounds could help a clearer picture emerge from studies in this area since pay level is typically tied to organizational hierarchy and responsibility (Conroy, 2020).…”

“…Studies of pay on health must consider theoretically the complexity of what it means to be highly paid versus low paid. Measuring mediators or controlling for status and/or job responsibility as potential confounds could help a clearer picture emerge from studies in this area since pay level is typically tied to organizational hierarchy and responsibility (Conroy, 2020). Studies about low wages often address pay level in a narrow range; for example, a study of a living wage manipulation does not include health effects of high pay, only of higher-than-minimum pay.…”

Contingencies in the effects of job‐based pay dispersion on employee attitudes

“…Once this is done, pay is linked to the jobs, often through a systematic job evaluation process. For example, according to WorldatWork (2020), 84% of the organizations in the United States have an established method for evaluating jobs, partly because internally developed job evaluation approaches have the potential to contribute to the creation and capture of human capital (Conroy, 2019). The goal of job evaluation is to compare jobs internally and/or externally to create a pay structure that is consistent, fair, and equitable for all employees.…”

Pay practices and safety organizing

“…Thus, in highly interdependent nursing work, it is likely that nurses will reciprocate the investment of higher pay with greater information sharing and collaborative problem-solving (Preuss, 2003). Whereas average pay represents how nurses on the team are valued generally, minimum pay focuses on the treatment of the lowest status nurses and how they and their work are valued (Conroy, 2019). Safety organizing and high reliability are especially reliant on those with lower formal status, sharing their insights and expertise regarding latent threats and emergent problems (Weick & Sutcliffe, 2015).…”