Content area
Full Text
In this study, the Boudreau and Berger (1985a) retention/acquisition model is modified in order to develop a utility model that can be used to assess the impact of alternative pay level policies. This paper then demonstrates how the model could be used to assess the financial impact of alternative pay level policies for an organization whose current policy is to match the market. In demonstrating this, estimates of the effect of pay level on employee and applicant behaviors are presented. The utility model is then used to translate these effects into financial terms and compare them against the wage costs associated with alternative pay level policies. Finally, break-even analysis is used to suggest how decision makers might use utility results when making decisions about pay level policy. The implications for pay level policy and the role of utility analysis in compensation decision making are discussed.
Faced with heightened competitive pressures, increasing numbers of organizations are questioning and, sometimes, modifying their pay level policy (Lawler, 1990). In some cases, organizations have lowered their pay level position in the belief that lower wage costs will more than offset any effect this would have on its ability to attract and retain qualified employees. Other organizations have rejected this approach, arguing that the costs of providing competitive or even above market wages are offset by the benefits of a more qualified workforce.
Although decisions about whether to lead, match, or lag the market may have significant implications in terms of costs and productivity, such decisions are often driven by untested assumptions about the financial effects of pay level policy. No doubt, significant research has examined the effects of pay level on employee and applicant behavior. Pay level has been found to be positively related to acceptance rates (Williams & Dreher, 1992), negatively related to turnover (Freeman, 1980; Freeman & Medoff, 1982), but unrelated to applicant pool characteristics at least in some occupations (Williams & Dreher, 1992; Krueger, 1988; Tannen, 1987). However, unless the effects on employee and applicant behavior can be translated into financial terms, it is difficult to systematically weigh the impact of pay level policy on workforce quality against its impact on wage costs.
The purpose of this study is to extend existing utility models so as...