The correct remuneration and performance management system is an ongoing discussion as it plays an integral part in organisations. Pfeffer (2005) argues that wage compression and symbolic egalitarianism is the best practice to gain competitive advantage, however other theorists advocate a ‘best fit’ model depending on the organisational strategic plan. This essay explores these arguments by demonstrating how culture, the job, and organisational context are inter-related and affect a firm’s reward system. Ultimately showing it is the way these multiple factors align that influence the reward system and promote organisational efficiency, rather than the egalitarian stance of Pfeffer (2005).
An organisations internal pay structure can affect the way employees perform to the business strategy. A workers performance not only depends on the pay level they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues wage compression, the act of reducing the size of the pay differences among employees, improves productivity. To gain competitive advantage, organisations need to acknowledge not only hierarchical wage compression (between management and employees) but also the differences between individuals at similar levels. Narrowing pay discrepancies promotes a sense of community and a common fate, leading to greater efficiency by diminishing interpersonal competition and increasing collaboration (Pfeffer, 2005). Pay compression thus advocates equity theory; if internal factors and external competitiveness are aligned, employees perceive their pay to be fair and exert maximum effort (Milkovich, Newman, Gerhart, 2011). From this perspective, compressed pay is seen as a motivational tool to incentivise as there is no added value for an individualistic nature, but rather a collective tendency.
Pfeffer (2005) also argues that wage compression helps to de-emphasise pay, creating employees who are not driven by money but who value organisational attributes like people and work that is exciting and personally rewarding. By equalising pay, it draws attention to intrinsic forms of motivation. If pay is less salient, it means motivation to work is achieved through employee-engagement, satisfaction, and commitment which will improve efficiency and performance as the lower levels will feel valuable. Endorsing an equal structure means there is a range of returns employees can receive rather than monetary; the psychological relational returns (learning opportunities, employment security), and transactional total compensation returns (benefits such as work/life balance, allowances) (Milkovich, Newman, Gerhart, 2011).
However, the validity of Pfeffers’ argument is contestable. Although compressing the pay structure supports fairness and equality, it could have an adverse...