Containing Compensation Costs: Why Firms Differ in their Willingness to Reduce Pay

Abstract

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.