Strategic Human Resource Management Literature Emphasizes The Potential Of Pay To Secure Strategically Desirable: Strategic Human Resource Management Assignment, NUI, Ireland

Abstract

Strategic human resource management literature emphasizes the potential of pay to secure strategically desirable employee outcomes for the employer. Strategic pay, in contrast with pluralist models of pay determination, assumes an absence of collective bargaining constraints. This article analyses the process of determination of non-unionized managerial, professional and technical pay in seven leading consumer goods firms that claim to use pay as a strategic tool. It demonstrates that implemented pay practice is often remote from what is aspired to strategically. Despite the absence of collective bargaining constraints, there remain unavoidable obstacles to the ability of management to implement pay systems aligned to strategic goals. These constraints impose fundamental limitations on the use of pay as a strategic tool.

Introduction

 Pay is the single largest operating cost for most organizations. More than envisaging pay as merely the cost of hiring labor, however, strategic human resource (HR) management literature emphasizes its potential to secure strategically desirable employee outcomes for the employer. Strategic pay refers to the main financial measures, including base pay, incentives, and benefits, and excluding non-financial pay measures such as career progression and personal development, through which organizations seek to secure employee outcomes of strategic value, including enhanced performance and other desirable behavior (Huselid 1995; Lawler 1990). There is evidence that in large private sector firms especially, firms are attempting to use pay strategically following the decline of collective bargaining as the dominant mode of pay determination (Chartered Institute of Personnel and Development 2007; Cully et al. 1999: 232; Kersley et al. 2006: 193; Watson Wyatt Worldwide 2007).

There is, however, limited understanding of how firms select and implement strategic pay systems. Nor is it obvious how effective these payment systems are in practice. Furthermore, the wider literature suggests reasons to question the assumptions underpinning the use of pay as a strategic tool.

This article seeks to redress the lack of research on how contemporary pay systems in non-union environments are managed in practice. It does so through an empirical study of the managerial, professional, and technical employee pay practices of seven high-performing multinational firms operating in the global fast-moving consumer goods (FMCG) sector. It considers three basic questions. How are firms attempting to use pay systems? How are these pay systems selected? How are they managed operationally?

The article is organized as follows. First, key aspects of strategic pay theory are summarized. Additional literature that addresses potential limitations of pay as a strategic tool is outlined. The research approach is described. The findings are set out in five subsections.

The first subsection provides a description of the stated pay practices of sample firms. The second subsection analyses the differences in approach to pay system management between sample firms and the reality of the perceived impact of those systems within each firm. The third, fourth, and fifth subsections provide detailed qualitative accounts of the process and determinants of, respectively, sample firm pay strategy, pay design and pay implementation. The final section discusses the implications of the findings for theory and practice.

Pay as a strategic tool

 Models of pay fixing based on collective bargaining envisaged the determination of pay levels and practices to be through a process of more or less formal negotiation between management and employee representatives. But the widespread decline of collective bargaining, and the rise of managerially determining pay at the workplace level or higher in private sector employment, has largely negated this premise (Cully et al. 1999: 242). By contrast, strategic HR management assumes that management has both the right and the ability to determine pay strategies and practices free from constraint (Devanna et al. 1984: 35; Lawler 1984: 128). Pay is instead seen as a management tool to be used to secure strategically desirable employee outcomes in the form of enhanced performance and behavior complementary to the competitive stance of the firm (Barney 1996: 469; Lawler 1990; Milkovich and Newman 1999; Schuler and Jackson 1987: 210; Schuster and Zingheim 2000).