Driven by concerns about negative reactions among employees, most firms have traditionally avoided reducing compensation in response to competitive pressures or labor market opportunities. Thus, recent moves by a number of firms to reduce compensation raises questions about why, increasingly, firms differ in their willingness to lower compensation in response to pressures and/or opportunities. Using organizational level data obtained from over 400 human resource managers, this study examines determinants of efforts to reduce compensation—both in real and nominal terms. The results suggest that efforts to lower compensation are related to competitive pressures faced by the firm and to human resource policies and practices. These human resource policies and practices are thought to affect sensitivity to environmental change and the degree to which reductions generate incidental costs for the firm. Implications for theory and practice are discussed.
Get full access to this article
View all access options for this article.
References
1.
Akerlof, G. A., & Yellen, J. C.1990. The fair wage-effort hypothesis and unemployment. Quarterly Journal of Economics, 105: 255–281.
2.
Azariadis, C.1975. Implicit contracts and underemployment equilibria. Journal of Political Economy, 73: 1183–1202.
3.
Baily, M. N.1974. Wages and employment under uncertain demand. Review of Economic Studies, 41: 37–50.
4.
Balkin, D. B., & Gomez-Mejia, L. R.1990. Matching compensation and organizational strategies. Strategic Management Journal, 11: 153–169.
5.
Begin, J. P.1991. Strategic employment policy. Englewood Cliffs, NJ: Prentice-Hall.
6.
Bell, L.1995. Union wage concessions in the 1980’s: The importance of firm-specific factors. Industrial and Labor Relations Review, 48: 258–275.
7.
Blackburn, M., & Neumark, D.1992. Unobserved ability, efficiency wages, and inter-industry wage differentials. Quarterly Journal of Economics, 107: 1421–1436.
8.
Blinder, A. S., & Choi, D. H.1990. A shred of evidence on theories of wage stickiness. Quarterly Journal of Economics, 105: 1003–1015.
9.
Butler, J. E., Ferris, G. R., & Napier, N. K.1991. Strategy and human resource management. Cincinnati: South-Western Publishing.
10.
Bureau of Labor Statistics. 1995. Employment and Earnings, January.
11.
Castrogiovanni, G.1991. Environmental munificence: A theoretical assessment. Academy of Management Review, 16: 677–701.
12.
Dean, J. W. Jr., & Snell, S. A.1991. Integrated manufacturing and job design: Moderating effects of organizational inertia. Academy of Management Journal, 34: 776–804.
13.
Dess, G. G., & Beard, D. W.1984. Dimensions of organizational task environments. Administrative Science Quarterly, 29: 52–73.
14.
Doeringer, P. B., & Piore, M. J.1971. Internal labor markets and manpower analysis. Lexington, MA: D. C. Heath.
15.
Dunlop, J. T.1957. The task of contemporary wage theory. In J. T. Dunlop (Ed.), The theory of wage determination: 3–30. London: Macmillan.
16.
Dunlop, J. T.1958. Industrial Relations Systems. New York: Holt-Drydan.
17.
Dunlop, J. T.1985. Interdisciplinary approach to labor markets and wage determination. Monthly Labor Review, 101: 30–32.
Foulkes, F. K.1980. Personnel policies in large non-union companies. Englewood Cliffs, NJ: Prentice-Hall.
20.
Freeman, R. B., & Medoff, J. L.1984. What do unions do?New York: Basic Books.
21.
Gerhart, B., & Milkovich, G.1990. Organizational differences in managerial compensation and financial performance. Academy of Management Journal, 35: 663–699.
22.
Gerhart, B., & Milkovich, G.1992. Employee compensation. In M. D. Dunnette & L. M. Hough (Eds.), Handbook of industrial and organizational psychology (2nd ed.): 185–223. Palo Alto, CA: Consulting Psychologists Press.
23.
Gomez-Mejia, L. R., & Balkin, D. B.1989. Effectiveness of individual and aggregate compensation strategies. Industrial Relations, 28: 431–445.
24.
Gomez-Mejia, L. R., & Balkin, D. B.1992. Compensation, organization strategy, and firm performance. Cincinnati: South-Western.
25.
Greenberg, J.1990. Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75: 561–568.
26.
Groshen, E. L.1991. Sources of intra-industry wage dispersion: How much do employers matter?Quarterly Journal of Economics, 106: 869–884.
27.
Hambrick, D. C., & Snow, C. C.1987. Strategic reward systems. In C. Snow (Ed.), Strategy, organizational design, and human resource management:94–129. Greenwich, CT: JAI Press
28.
Harris, S.1984. Hewlett-Packard: Shaping the corporate culture. In C. J. Fombrum, N. M. Tichy, & M. A. Dewanne (Eds.), Strategic human resource management: 217–233. New York: Wiley.
29.
Heneman, R.1992. Merit pay: Linking pay increases to performance ratings. New York: Addison-Wesley.
30.
Hills, F. S., Bergmann, T. J., & Scarpello, V. G.1994. Compensation decision making. New York: The Dryden Press.
31.
Hyclak, T., & Johnes, G.1992. Wage flexibility and unemployment dynamics in regional labor markets. Kalamazoo, MI: W. E. Upjohn Institute.
32.
Jacoby, S. M., & Mitchell, D. J.1990. Sticky stories: Economic explanations of employment and wage rigidity. American Economic Review, 80: 33–37.
Kahneman, D. J., Knetsch, J. L., & Thaler, R.1986. Fairness as a constraint on profit seeking: Entitlements in the market. American Economic Review, 76: 728–741.
35.
Kaufman, R. T.1984. On wage stickiness in Britain’s competitive sector. British Journal of Industrial Relations, 22: 101–112.
36.
Klaas, B. S., & Ullman, J. C.1995. Sticky wages revisited: Organizational responses to a declining market-clearing wage. Academy of Management Review, 20: 281–310.
37.
Kochan, T. A., & Katz, H. C.1988. Collective bargaining and industrial relations. Homewood, IL: Irwin.
38.
Kochan, T. A., Katz, H. C., & McKersie, R. B.1986. The transformation of American industrial relations. New York: Basic Books.
39.
Koberg, C. S.1987. Resource scarcity, environmental uncertainty, and adaptive organizational behavior. Academy of Management Journal, 30: 798–807.
40.
Lawler, E. E. III. 1990. Strategic pay. San Francisco: Jossey-Bass.
41.
Lazear, E. P.1979. Why is there mandatory retirement?Journal of Political Economy, 99: 275–295.
42.
Leonard, J. S.1989. Wage structure and dynamics in the electronics industry. Industrial Relations, 28: 251–275.
43.
Liebenstein, H.1966. Allocative efficiency vs. X-efficiency. American Economic Review, 56: 392–415.
44.
Loewenstein, G., & Sicherman, M.1991. Do workers prefer increasing wage profiles?Journal of Labor Economics, 9: 67–94.
45.
Milkovich, G. T., & Newman, J. M.1996. Compensation. Boston: Irwin.
46.
Neumark, D., & Sharpe, S.A.1996. Rents and quasi-rents in the wage structure: Evidence from hostile takeovers. Industrial Relations, 35: 145–179.
47.
Okun, A.1981. Prices and quantities: A macroeconomic analysis. Washington DC: The Bookings Institution.
48.
Podgursky, M.1986. Unions, establishment size, and intra-industry threat effects. Industrial and Labor Relations Review, 39: 277–284.
49.
Reynolds, L. G.1951. The structure of labor markets. New York: Harper & Brothers.
50.
Rousseau, D. M.1989. Psychological and implied contracts in organizations. Employee Rights and Responsibilities Journal, 2: 121–139.
51.
Schuler, R.1989. Strategic human resource management and industrial relations. Human Relations, 42: 157–184.
52.
Schwab, D. P.1980. Job evaluation and pay setting: Concepts and practices. In E. R. Livernash (Ed.), Comparable worth: Issues and alternatives: 49–77. Washington DC: Equal Employment Advisory Council.
53.
Shapiro, C., & Stiglitz, J. E.1984. Equilibrium unemployment as a worker discipline device. American Economic Review, 74: 433–444.
54.
Smith-Cook, D., & Ferris, G. R.1986. Strategic human resource management and firm effectiveness in industries experiencing decline. Human Resource Management, 25: 441–458.
55.
Staw, B., & Szwajkovski, E.1975. The scarcity-munificence component of organizational environments and the commission of illegal acts. Administrative Science Quarterly, 20: 345–354.
56.
Summers, L. H.1988. Relative wages, efficiency wages, and Keynesian unemployment. American Economic Review, 78: 383–388.
57.
Ulman, L.1992. Why should human resource managers pay high wages?British Journal of Industrial Relations, 30: 177–212.
58.
Wallace, M. J., & Fay, C. H.1988. Compensation theory and practice (2nd ed.). Boston: PWS-Kent.
59.
Walton, R. E.1985. Toward a strategy of eliciting employee commitment based on policies of mutuality. In R. E. Walton & P. R. Lawrence (Eds.), Human resource management: Trends and challenges: 35–65. Boston: Harvard Business School Press.
60.
Weber, C. L., & Rynes, S. L.1991. Effects of compensation strategy on job pay decisions. Academy of Management Journal, 34: 86–109.
61.
Wheeler, H. N.1985. Industrial conflict: An integrative theory. Columbia, SC: University of South Carolina Press.
62.
Wholey, D. R.1985. Determinants of firm internal labor markets in large law firms. Administrative Science Quarterly, 30: 318–335.
63.
Williamson, O.1985. The economic institutions of capitalism: Firms, markets, relational contracting. New York: Free Press.
64.
Yellen, J. L.1984. Efficiency wage models of unemployment. American Economic Review: Papers and Proceedings, 74: 200–205.
