Based on existing strategic compensation theory, this study examines seven theoretical propositions concerning the link between business-level competitive strategy and pay policy. Canonical discriminant analysis of 261 responses to a national survey show that high-performing firms whose strategy is dominated by Cost Leadership, Innovation, or Differentiation tactics adopt different pay policies. Further analysis shows that inferior firm performance is associated with the lack of fit between pay policy and business strategy. These findings support the need for a contingency approach in the design of pay policy.
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