recent compensation research: an eclectic review

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Human Resource Management Review 14 (2004) 201–227

Recent compensation research: An eclectic review

Steve Werner*, Stephanie G. Ward

Department of Management, C.T. Bauer College of Business, University of Houston, Houston, TX 77204-6021, USA

Abstract

The purpose of this article is to review the literature of compensation and compensation-related issues within

the field of management. After reviewing 6867 articles included in 20 top journals over the past 7 years, 396

articles were found to be within the compensation domain. These compensation-related articles were grouped into

12 categories. Upon synthesis of these articles, we analyze the linkages across these categories and suggest areas

for future research. We conclude with some observations on the current state of compensation research.

D 2004 Published by Elsevier Inc.

Keywords: Compensation research; Equity; Benefits; Determinants

1. Introduction

For as long as organizations have existed, rewards have been recognized as a major motivator of

employees as well as an important tool and expense for organizations. Understanding the construct of

reward systems, its impact upon the organization’s structure, system, strategies, and employees has been

an area of continued intrigue. Although some reviews and meta-analyses on aspects of compensation

have been conducted during recent years, no study has taken an overarching view of the current theories

and empirical research in compensation. We believe that such a study would be useful in helping to unify

this widely diverse area of research.

Although generally in the management domain, aspects of compensation have been studied from many

different perspectives, including those based in organizational behavior, organizational theory, interna-

tional management, industrial/organizational (I/O) psychology, sociology, economics, labor economics,

law, and strategy, among others. Reviews of compensation generally stay within one of the above

1053-4822/$ - see front matter D 2004 Published by Elsevier Inc.

doi:10.1016/j.hrmr.2004.05.003

* Corresponding author. Tel.: +1-713-743-4672; fax: +1-713-743-4652.

E-mail address: [email protected] (S. Werner).

S. Werner, S.G. Ward / Human Resource Management Review 14 (2004) 201–227202

perspectives and focus on a specific aspect of compensation (Gerhart, 2000; Heneman, 1990; Lazear, 1999;

Milkovich, 1988; Rynes & Gerhart, 2000; Welbourne & Gomez-Mejia, 1995). We believe that taking an

eclectic view of the field will help bring these vastly different viewpoints together, giving researchers a

better picture of the entire field of compensation. This, we hope, will aid scholars in integrating their

perspective with other distinct perspectives. Therefore, the purpose of this paper is to comprehensively

review all compensation and compensation-related articles published in top management or management-

related journals for the last 7 years. We believe that this will holistically capture what compensation

researchers consider to be the important areas of theoretical and empirical development of compensation.

The anticipated outcome of this paper will be a new framework, which organizes all compensation research

into unique groupings that allows us to synthesize past research, identify current research issues, and

suggest new and undeveloped areas of compensation research for the future. Consequently, the goal is to

discover where we are and down which paths of compensation we still need to travel.

2. The process of reviewing the compensation research

This review of compensation research shares the goal of other major area review articles, which is to

identify the recent literature on the basic issues so that readers can be brought up to date and guided

towards what research is available to obtain the depth level of understanding the reader desires (Ricks,

Toyne, & Martinez, 1990; Werner, 2002). To narrow the scope of this review, such that it is within the

length of a journal article, we follow Werner’s (2002) method and focus on a recent limited time frame

(specifically from 1996 to 2002 inclusive), and on research published in leading management and

management-related journals. This research is grouped into 12 categories, which were not predeter-

mined. This review focuses on the research within and across each of these categories, beginning with

some descriptive information about our top journals’ compensation research.

3. Compensation research in 20 top journals

Following Werner’s (2002) method, we used the list established by Gomez-Mejia and Balkin (1992) to

identify the top management journals. This list is more comprehensive than most because it includes

journals from related organizational sciences. This list was developed by using previous published rank-

ings and surveying management department chairpersons. Although this list is more than 10 years old, it is

frequently referred to in articles on journal quality (e.g., Johnson & Podsakoff, 1994; Kacmar &Whitfield,

2000; Van Fleet, McWilliams, & Siegel, 2000) and includes all academic journals reported in a more recent

list (Tahai &Meyer, 1999). Also consistent withWerner, we eliminated theHarvard Business Review from

the list because we focus on academic research, leaving a total of 20 top journals. The list, along with the

number of compensation articles published in each journal from 1996 to 2002 is reported in Table 1.

All the articles in these 20 top journals from 1996 through 2002 were examined for compensation-

related content. Both authors independently read the abstracts of all the articles and determined whether

the article could be considered within the domain of compensation research. In cases where we believed

a determination could not be made on the abstract alone, the entire article was evaluated. We used

Milkovich and Newman’s (2002) definition of compensation as ‘‘all forms of financial returns and

tangible services and benefits employees receive as part of an employment relationship.’’ We included

Table 1

Categorization of compensation articles by journal

Journal Total number of articles

Academy of Management Journal 38

Academy of Management Review 9

Administrative Science Quarterly 6

Decision Sciences 2

Human Relations 14

Industrial and Labor Relations Review 114

Industrial Relations 62

Journal of Applied Behavioral Sciences 1

Journal of Applied Psychology 28

Journal of International Business Studies 6

Journal of Management 15

Journal of Management Studies 7

Journal of Occupational and Organizational Psychology 8

Journal of Organizational Behavior 23

Journal of Vocational Behavior 13

Management Science 10

Organizational Behavior and Human Decision Processes 9

Personnel Psychology 12

Psychological Bulletin 5

Strategic Management Journal 14

S. Werner, S.G. Ward / Human Resource Management Review 14 (2004) 201–227 203

articles that were even just marginally related to compensation. That is, we included articles even if

compensation was not the focus of the paper, but where compensation-related constructs were included

in the model or analysis as independent or control variables. When we did not agree on whether the

article should be considered as within the domain of compensation research, we discussed the case until

a consensus was reached. This occurred in 2.4% of the articles examined, of which 56.5% were

subsequently considered within the compensation domain. Thus, the two evaluators agreed 97.6% of the

time. Of the 6867 articles examined, ultimately 396 or 5.8% were classified as within the domain of

compensation. Book reviews and editorials were not included in this sample.

Table 1 shows that for the 1996–2002 time frame, Industrial and Labor Relations Review (ILRR) had

the most compensation articles with 114, followed by Industrial Relations (IR) with 62. Thus

interestingly, the two industrial relations journals (ILRR and IR) comprised over 44% of the total

compensation articles in the 20 journals during this time frame. The table also shows that the Journal of

Applied Behavioral Sciences had the fewest compensation related articles with one, followed by

Decision Sciences with two.

Once the articles for this review were identified, we developed a categorization process to provide

an overarching framework based around topical categories that reflected the current research. We

believed that this would help organize an eclectic view of the current state of compensation research

and help identify opportunities for further research. These categories were created post hoc, based on

our initial reading of the 396 articles. Both authors were involved in this process. In defining the

categories, we determined that the categories would be mutually exclusive (i.e., each study would be

included in one and only one category) and that the categories be relatively broad to limit the number

of classifications. The categories intuitively emerged while reading the articles. Specifically, while


reading the articles, most of the categories became evident. In some cases, the large number of articles

within the category (e.g., individual determinants) suggested that further refinement was desirable [in

this case, creating a gender and race determinants category and an individual determinants category

(excluding gender and race)].

Both authors independently classified all articles. In the case where an article could be classified

into more than one category, we chose what we believed was the dominant theme of the article, but

noted the secondary category. We agreed on the primary classification of the article 78% of the time.

We agreed on the primary or secondary classification 89% of the time (i.e., one author’s primary

classification was the other author’s secondary classification). In cases where we disagreed, we

discussed the case until a consensus was reached. Nevertheless, because we used no formal content

coding method (see Weber, 1990), these categories should be treated as a heuristic taxonomy to help

organize the research rather than as a definitive classification (Werner, 2002). This process resulted in

12 categories labeled as environmental determinants of compensation, firm determinants of compen-

sation, job and group determinants of compensation, gender and race determinants of compensation,

other individual determinants of compensation, compensation psychology, organizational justice,

individual outcomes of compensation, firm outcomes of compensation, benefits, international

compensation, and executive compensation. Table 2 lists the categories, the dominant topics, and

number of articles within each category. The most researched topical area is gender and race

determinants of compensation with 47 articles, while job and group determinants of compensation

and international compensation are tied for the fewest number of studies, each with 18. These

categories are graphically depicted in Fig. 1. A brief discussion of the research in each of these

categories follows.

3.1. Environmental determinants

This area of compensation research includes the effects of the legal environment, the business

environment, and industry on compensation (see Fig. 2). Studies of the legal environment have

investigated how the minimum wage, the Fair Labor Standards Act (FLSA), immigration reform,

arbitration statutes, prevailing wage laws, airline and railroad deregulation, State health insurance

regulation, and layoff legislation affect wages, benefits, and employment. Studies of the business

environment have examined how economic factors, technological change, global competition, environ-

mental uncertainty, expected inflation, unemployment risk, and levels of unionization affect wages or

incentives. Industry studies have explored wages in the federal and state public sectors, the steel industry,

the grocery industry, and the health care industry. Other industry studies examined how industry factors,

such as injury risks, employment share, union activity, and productivity affect wages and displacement.

Overall, articles in this topic area generally focus on wages rather than other types of pay or pay systems.

Only one paper on environmental determinants is theoretical.

Almost all of the studies in this area focus on wages, ignoring other aspects of compensation, such as

bonuses, benefits, deferred compensation, and so forth. This lack of focus on total compensation is very

common (Gerhart & Rynes, 2003), but troubling. This is likely due to the availability of wage

information in government and other large databases. Nonetheless, more research on other aspects of

compensation would be welcome. It is also interesting to note that most of the studies focus on the legal

environment or industry factors, with other environmental factors, such as the technological environ-

ment, sociocultural environment, competitive environment, economic environment, political environ-

Table 2

Categorization of compensation articles by topic

Category of compensation research Topics included Number of articles

in top 20 journals

(1) Environmental determinants

of compensation

Legal environment, business environment,

and industry analysis

44

(2) Firm determinants of compensation Firm practices, unionization, and other

firm characteristics

31

(3) Job and group determinants

of compensation

Job factors, job change, and group factors 18

(4) Gender and race determinants

of compensation

Gender wage gap analysis, non-North

American gender gap analysis, gender gap

determinants, and race wage gap analysis

47

(5) Individual determinants

of compensation

Behavioral, experiential, and individual

characteristic determinants

39

(6) Individual outcomes

of compensation

Outcomes of incentive pay (performance,

absenteeism, turnover, and stress) and

outcomes of pay level (performance

and turnover)

27

(7) Compensation psychology Pay satisfaction, motivation, meaning of

money, and reactions to compensation

42

(8) Organizational justice Equity, ethical issues, and procedural justice 31

(9) Firm outcomes of compensation Outcomes of pay (performance and costs),

outcomes of individual incentives

(performance), and outcomes of group

incentives (performance and survival)

26

(10) Benefits Usage of benefits, benefit satisfaction, and

benefit outcomes

33

(11) International compensation International comparisons of compensation

and compensation in multinational enterprises

18

(12) Executive compensation Determinants of CEO pay level, determinants

of CEO pay mix, and CEO pay outcomes

40


ment, labor market, and product market, receiving relatively little attention. Perhaps this occurs because

these macroconcerns are more in the domain of other disciplines, such as economics, political science,

sociology, or marketing. However, as compensation research has included the notion of compensation

strategy (Gerhart, 2000; Gerhart & Rynes, 2003; Gomez-Mejia & Welbourne, 1988; Milkovich, 1988),

greater focus on such macrodeterminants is warranted. Finally, much of this research is atheoretical. For

example, the legal environmental research generally looks at the wage effect of various new laws, legal

reforms, or deregulation. Better theoretical development may go a long way in focusing the research on

timely and critical issues.

3.2. Firm determinants

This area of compensation research includes the effects of firm practices, firm unionization, and

other firm characteristics on compensation (see Fig. 3). A number of studies have looked at how firm

practices (e.g., high performance work practices, strategic orientation, diversification strategy,

Fig. 1. Current themes in compensation research. Arrows indicate linkages receiving little research attention in the top

management journals from 1996 to 2002.


outsourcing, and HR practices) affect wages, incentives, pay dispersion, pay systems, and pay

reductions. The wage premium of unionization has been heavily studied with researchers, including

HR practices, gender and race, and worker displacement as possible mediating and moderating

variables. Other firm characteristics that have been related to wages and pay plans include employee

ownership, firm size, firm size/human capital interaction, profit orientation, information intensity,

ability to pay, predisplacement wage levels, and firm turbulence. Overall, this area of research also

tends to focus on wages and as is the case with environmental determinants, is overwhelmingly

empirical with quantitative analysis.

Because much of this research is from a labor economics standpoint, little research has looked at how

human decision processes (e.g., compensation committee effects, implementation effects, compensation

Fig. 2. Research on environmental determinants of compensation. a = Theoretical paper; b =modeling method; c =meta-

analysis.


strategy formulation, etc.) affect compensation (Heneman, 1990; Milkovich, 1988; Rynes & Bono,

2000; Welbourne & Gomez-Mejia, 1995). Other areas suggested in past reviews that have yet to be

explored include the effects of organizational culture (Gerhart, 2000), firm growth (Lazear, 1999),

factors that affect changes in pay plans (Heneman, 1990), factors that interact to affect pay (Gibbons,

1998), and how some dimensions of pay strategy and HR strategy affect the usage of other pay strategy

dimensions (Gerhart, 2000). Furthermore, there seems to be a disconnect between academic research and

practice trends (Rynes & Bono, 2000), with little research exploring current trends, such as reductions in

the use of stock options and increased variability of pay.

Fig. 3. Research on firm determinants of compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


3.3. Job and group determinants

This section includes articles on how job factors, job changes, and group factors affect

compensation (see Fig. 4). Job factors that have been found to affect job worth include job traits,

job attributes (e.g., supervisory responsibility, shift work, and computer usage), job tasks, job

requirements, job contingency (contract labor), job centrality, job seniority, job payment methods,

and job reengineering. Job displacement has been shown to negatively affect subsequent wage levels

(particularly in the short term and in certain industries) and wage instability, while promotions, not

surprisingly, tended to have a positive effect. With respect to group factors—group size, lack of

quality measures and management participation were shown to affect the use of group incentives.

Again, this area of study tended to focus on job and individual wages, with little research on other

aspects of compensation. Clearly, group factors is the least researched subarea within this topic, with

only two studies.

This area has received relatively little research. Because compensation in the United States is still

generally job based and teams are still frequently used by firms (Milkovich & Newman, 2002), we

believe that there are numerous topics within this area that warrant further research. For example, little

research has looked at pay differences between various groups of employees (Rynes & Bono, 2000).

How should pay differ between production workers, service workers, supervisors, midlevel managers,

Fig. 4. Research on job and group determinants of compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


and so forth? Another group factor that has been suggested, but not currently researched, is the pay

effects of group interdependencies (Jenkins, Gupta, Mitra, & Shaw, 1998).

3.4. Gender and race determinants

This area of research includes studies analyzing the gender wage gap in North American and non-

North American contexts, analyzing determinants of the gender wage gap, and analyzing wage

differentials by race (see Fig. 5). Wage gap analysis includes looking at methodological improvements

in measuring the wage gap, historical analyses, industry analyses, and determinants of the gender

wage gap in executive, veterinarian, and college educated samples. Non-North American gender wage

gap research includes analysis of the gender gap in Mexico, Eastern Europe, Portugal, Japan,

Germany, Russia, South Africa, Taiwan, and a group of developing countries. Factors that have been

found to mediate or moderate the relationship between gender and wages include external labor

market strategies, family importance, education, affirmative action, productivity, promotions, access to

power, marriage, children, training, mentoring, and negotiation skills. Factors that have been found to

mediate or moderate the relationship between race and wages include occupational choice, produc-

tivity, education, labor force attachment, employer monitoring, English fluency, job tenure, and

experience. Other studies have looked at race differences in employment, job search, layoffs,

promotions, performance ratings, full-time wage premiums, union wage premiums, mobility premi-

ums, earnings instability, career length, and employment contacts. As with job and group determi-

nants, this literature largely looks at wages and ignores other aspects of pay, such as pay mix, and

benefits.

Interestingly, almost all gender and race research looks at the wage gap. Most of these studies are

from a labor economics perspective using government or other secondary data. Although wage gap

analysis is important, there are a number of other aspects of gender and race determinants that also

deserve research attention. Again, aspects of compensation other than wages should be considered

Fig. 5. Research on gender and race determinants of compensation. a = Theoretical paper; b =modeling method; c =meta-

analysis.


(Gerhart & Rynes, 2003). Does gender or race affect bonuses, other incentives, or benefits? Does gender

or race affect pay and benefit preferences? How do gender and race interact with each other and other

factors? The research has identified numerous factors that moderate the gender and race wage gap effect,


but more complex models are now called for that incorporate not only numerous factors simultaneously

(Gomez-Mejia & Welbourne, 1988) but also nonwage compensation.

3.5. Individual determinants of compensation

Individual determinants of compensation include behavioral, experiential, and individual character-

istics (see Fig. 6). Behavioral determinants that positively affect pay include social skill, task

performance, contextual performance, helpful behaviors, lateral moves, and proactive personality—

while leaves of absence, cigarette smoking, and career gaps have been found to negatively affect pay

level. Experiential determinants of pay include tenure, education, school grades, training, language

proficiency, past injuries, breadth of experience, mentoring, social ties, developmental assignments, and

military experience. Other characteristics that have been shown to be related to pay level include sexual

orientation, mental illness, long-term disabilities, spouse having the same employer, being native born,

Fig. 6. Research on individual determinants of compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


weight, age, and working spouses. Gender and race are frequently included in these analyses as control

or moderating variables. This area of research also primarily used quantitative methodologies.

Again, numerous factors have been identified as influencing individual pay. Some factors that have

yet to be explored but have been suggested by others include past performance of varying durations

(Lazear, 1999), anticipated performance, and political behaviors (Heneman, 1990). However, we believe

that future research should now incorporate these factors into more complex models exploring the

possible interactions among them (Gomez-Mejia & Welbourne, 1988). A laundry list of individual-level

factors that affect pay is useful, but to substantially advance the field, future research needs to develop

models incorporating numerous factors, rather than just adding another one to the list.

3.6. Individual outcomes of compensation

This area of study includes research that looks at the outcomes of pay level and incentive pay (see Fig.

7). Different forms of incentive pay have been found to be related to outcomes, such as job satisfaction,

greater performance (quantity not quality), less turnover for high performers, greater employment

stability, less absenteeism, greater risk taking in decisions, fewer OCBs (for employees low in value

alignment), greater wage procyclicality (being coupled with economic cycles), higher levels of

depression, greater creativity performance, greater unmet job expectations (in work teams), less

willingness to quit, and more somatic complaints. Higher pay levels have been found to be related to

outcomes, such as lower turnover, greater job acceptances, changes in gender roles, and greater

perceived success of experienced workers. Interestingly, only nine studies looked at individual outcomes

of pay levels, while over 70 looked at individual (gender, race, and other) determinants of pay.

Fig. 7. Research on individual outcomes of compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


The research is clear, monetary incentives have a substantial impact on performance (Gerhart &

Rynes, 2003). However, although it has been suggested in past reviews, few studies have looked at how

other factors interact with pay at the individual level to affect outcomes (Opsahl & Dunnette, 1966;

Welbourne & Gomez-Mejia, 1995). Future research should also look at outcomes of pay aspects other

than level and incentives, such as the nature of the pay mix, pay dispersions, and total compensation

(Gerhart & Rynes, 2003). A particular outcome of interest may be the selection effects of different forms

of pay (Gerhart & Rynes, 2003).

3.7. Compensation psychology

This area of study includes research exploring pay satisfaction, motivation, the meaning of money,

and psychological reactions to compensation (see Fig. 8). Studies have looked at pay satisfaction’s

relationship to life satisfaction, gender, referents used, unionization, firm type, turnover intent, positive

affectivity, professional tenure, tier status, commitment, career stage, and organizational citizenship

behaviors as well as measurement issues. The research on motivation shows that individual incentives

are positively related to work motivation, but the strength of the relationship is overestimated and it may

reduce intrinsic motivation in certain specific situations. A number of studies looked at how an

individual’s meaning of money is related to demographic, attitudinal, and behavioral variables. Much of

the research in this area looked at psychological reactions to compensation, including favorability toward

utility analysis, applicant attraction, job choice decision making, employee attitudes, commitment,

perceived organizational and informal support, job and family satisfaction, leader/member exchange,

organizational attraction, meaningfulness of pay increases, collectivism’s affect on reactions, and time

allocation. Again, the research in this area largely uses quantitative research methodologies.

Although compensation has not received the attention it deserves from I/O psychological researchers

in the past (Rynes & Gerhart, 2000), a considerable amount of the current compensation research is

within the I/O psychology domain (compensation psychology, organizational justice, and individual

determinants and outcomes). It is interesting to note that several of the studies were still attempting to

address the issue of how extrinsic rewards affect intrinsic motivation. The studies did still not come to a

consensus with some suggesting that there is no effect (Jenkins et al., 1998), others suggesting that there

is a consistent significant effect (Deci, Koestner, & Ryan, 1999a, 199b), and others suggesting the effect

only occurs in very specific situations (Eisenberger, Pierce, & Cameron, 1999; see Bartol & Locke, 2000

and Gerhart & Rynes, 2003 for an excellent overview of this debate). Although the evidence suggests

that pay level is modestly but consistently related to pay satisfaction (Gerhart & Rynes, 2003), numerous

other questions regarding compensation psychology and pay satisfaction remain. Other factors that have

been suggested but have received little attention include employee satisfaction with and reactions to

changes in compensation plans (Heneman, 1990; Heneman & Judge, 2000), the effects of psychological

contracts regarding pay (Rousseau & Ho, 2000), the reactions to different pay bundles or hybrid

programs (Gerhart & Rynes, 2003; Rousseau & Ho, 2000), and reactions to pay risk (Wiseman, Gomez-

Mejia, & Fugate, 2002).

3.8. Organizational justice

This area of study includes research looking at equity (distributive justice), procedural justice, and

ethical issues of compensation (see Fig. 9). The research on equity looks at outcomes of equity

Fig. 8. Research on compensation psychology. a = Theoretical paper; b =modeling method; c =meta-analysis.


sensitivity (performance, job satisfaction, and intent to leave), equity outcomes (performance, job

satisfaction, turnover, reward allocations, physical health, psychological health, burnout, and job search

intent), and equitable performance standards. The research has found relationships between procedural

justice and perceptions of distributive justice, pay plan understanding, plan effectiveness, organizational

commitment, job satisfaction, intent to stay, performance, innovative work behavior, organizational

citizenship behaviors (moderated by psychological contract breach), and supervisor trust, with the

relationship frequently being moderated by gender. The ethics research focused on the relationship

between compensation-related variables (commissions, incentives, equity sensitivity, and theft) and

various business ethics variables (misrepresentation, self-sacrificing, ethical intentions, ethics programs,

moral development, etc.). Interestingly, ethical issues are the least researched subtopic in this area with

only six studies.

The increased focus on procedural justice is particularly welcome considering the dearth of such

research in the past (Heneman & Judge, 2000). Pay secrecy and pay communication have still not

Fig. 9. Research on compensation-related organizational justice. a = Theoretical paper; b =modeling method; c =meta-analysis.


received much research attention, although Opsahl and Dunnette (1966) suggested its importance

more than three decades ago, and others have since reiterated the need for such research (Bartol &

Locke, 2000; Gerhart, Minkoff, & Olsen, 1995; Heneman, 1990). Although there is some evidence

that pay communication may affect satisfaction and other individual reactions through fairness

perceptions (Konovsky, 2000), there is still a great deal to learn about pay communication and its

outcomes.

3.9. Firm outcomes of compensation

This area of study includes research on the firm-level outcomes of pay, the firm-level outcomes of

individual incentives, and the firm-level outcomes of group incentive plans (see Fig. 10). The firm-level

outcomes of pay include organizational performance (negatively related to pay dispersion—moderated

by individual incentives and interdependence, positively related to skill-based pay), costs (negatively

related to overtime use), financial impact (related to pay level), sales growth (positively related to pay

level), quit level (negatively related to pay level), health and safety improvements (positively related to

pay level), hiring highly qualified employees (related to pay level), ability to learn from other firms

(positively related to similarity of pay practices), and quality (positively related to skill-based pay and

team pay). Firm outcomes related to individual incentives include sales, customer satisfaction, profit,

performance, and revenues. Firm outcomes related to group incentives (including division incentives,

Fig. 10. Research on firm outcomes of compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


gainsharing, and stock-based and profit-sharing plans) are employment variability, performance

convergence, performance (moderated by strategic orientation, interdependence, organizational struc-

ture, product type, and bonuses), continuous improvement orientation, new product development,

investor reactions, and firm survival. The least researched subtopic in this area is the firm-level outcomes

of individual incentives with four studies.

A number of the studies investigated how pay interacted with other factors to affect performance.

Thus, we are seeing more complex and interactive models at the firm level as suggested by Gomez-

Mejia and Welbourne (1988). However, much research is still needed in exploring how pay plans fit (or

have synergies with) numerous environmental, firm, and individual factors leading to desired outcomes

(Gerhart, 2000; Gerhart, Trevor, & Graham, 1996; Gibbons, 1998). Research is also still lacking on how

various components of compensation (different pay mixes) affect each other and workforce behaviors

(Heneman, 1990; Milkovich, 1988), how organizational level pay communication affects pay outcomes

(Heneman, 1990), how compensation affects competitive advantage (Gerhart et al., 1996), and how

different compensation structures lead to different performance outcomes (Gerhart & Rynes, 2003).

3.10. Benefits

This area of study includes research on the usage of benefits, benefit satisfaction, and outcomes of

various benefit plans (see Fig. 11). Research has looked at how factors, such as firm objectives, cost,

unionization, employee characteristics, wages, and expected benefits affect usage of various benefits and

plans (e.g., flexible plans, unemployment insurance, pension plan types, family friendly benefits,

Fig. 11. Research on benefits. a = Theoretical paper; b =modeling method; c =meta-analysis.


workers compensation, health insurance, disability retirement, and early retirement plans). The research

on employee benefit satisfaction has found that its antecedents include age, race, transaction cost factors,

procedural and distributive justice, actual and anticipated benefit usage, benefit choices, desired benefits,

and task interdependence, while greater benefit satisfaction leads to less withdrawal behavior, less

turnover, and greater organizational commitment. Outcomes of benefits and benefit plans (pension type,

health insurance, unemployment insurance, breaks, paid time off, early retirement, and flexible work-

hours) are related to retirement wealth, economic wage pressures, worker mobility, search activity,

productivity, firm performance, and turnover. Note that 11 studies examined the outcomes of benefits,

while over 40 have looked at the outcomes of other pay forms.

The study of benefits seems to be lagging behind practitioner interest in the area. Rynes and Bono

(2000) note that nearly half of the compensation practitioner articles they reviewed focused on benefits.

However, for the academic articles reviewed here, only 8.3% looked at benefits. This may be because the

conventional academic wisdom is that benefits are not related to firm outcomes in any meaningful way

(Gerhart & Rynes, 2003), although firms take numerous different approaches to benefits signifying their

belief in its importance. Some specific areas that deserve greater focus include looking at employee

reactions to new benefits, changes in benefits, changes in coverage, and changes in cost (Heneman &

Judge, 2000).

3.11. International compensation

This area of study includes research comparing aspects of compensation among two or more

countries (comparative studies) and research investigating the compensation plans of multinational

enterprises (MNEs; see Fig. 12). Comparative research generally looks at compensation (wage

inequality, union wages, pay allocations, wage systems, incentives, gender wage gap, and reward

expectations) in the United States versus other countries (e.g., Canada, Russia, Japan, South Korea,

and China); however, some studies have compared Canada with Australia and Eastern with Western

Europe. The comparative research generally finds that there are substantial and important differences

in the compensation practices and pay allocation decisions between U.S. and foreign firms. The MNE

compensation research has looked at compensation of foreign subsidiaries, internal joint ventures,

licensing partners, expatriates, and Maquiladora, as well as how pay plans relate to MNE valuations

and country cultures. The MNE research shows that for firms doing business in foreign companies,

compensation is much more complex than domestic compensation. This complexity is greater because

of different mixes of workers (expatriates, locals, and third-country nationals), differences in host

country conditions, differing national cultures, and the introduction of exchange rate risk. We find it

interesting that this topic area is the least researched of all areas. Especially when one considers that

any of the areas and subareas of compensation could be analyzed comparatively or from a MNE

perspective.

Although international compensation issues have received relatively little attention, scholars have

begun noting that an abundance of interesting research questions remains (Gerhart, 2000; Heneman &

Judge, 2000; Werner, 2002). Issues that warrant future research attention include the transference of U.S.

compensation theories, national differences in pay satisfaction reactions to various pay plans, national

differences in the importance of pay, pay reactions by locals to expatriate pay, national effects on

compensation strategies, and geographical and cultural distance effects on global pay strategies (Gerhart,

2000; Heneman & Judge, 2000; Werner, 2002).


Fig. 12. Research on international compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.

3.12. Executive compensation

This area of study includes research analyzing the determinants of executive pay levels, the

determinants of executive pay mix, and executive pay outcomes (see Fig. 13). The studies almost

always focus on CEO pay. Studies have found that executive pay levels are affected by firm

performance, firm size, innovation (in high-technology firms), social capital, organizational levels, past

pay, managerial discretion, external directorate networks (for highly diversified firms), external versus

internal successors, information-processing demands, international experience, ownership structure,

functional position, human capital, firm growth, comparison peers, firm usage of popular management

techniques, risk, market comparisons, acquisitions (when not monitored), and the use of consultants.

Other studies have found that an executive’s pay mix is affected by the ownership of institutional

investors, risk-taking propensity of the CEO, firm strategy, firm context, gender, firm specific risk,

power, managerial discretion, option spread, board stock holdings, and firm internationalization. Studies

on the outcomes of executive pay have found that executive pay is related to subsequent firm


Fig. 13. Research on executive compensation. a = Theoretical paper; b =modeling method; c =meta-analysis.


performance, strategic changes, acquisition and divestiture propensity, use of shark repellents, strategic

refocusing, option repricing, and the use of stock repurchase programs. Note that outcomes of executive

pay has been explored by only eight studies while four times as many studies have looked at the

determinants of executive pay.

The studies on CEO and other executive pay almost always rely on secondary data, probably

because of the difficulty researchers have getting data from CEOs themselves. Thus, there is a paucity

of research focusing on behavioral and attitudinal aspects of CEO pay (Gomez-Mejia & Wiseman,

1997). Furthermore, secondary data variables are frequently used as proxies for constructs, such as

power, independence, risk, discretion, and so forth. Thus, an exploration of the construct validity of

the various measures used would also be welcome. For example, Tosi, Werner, Katz, and Gomez-

Mejia, factor analyzed 46 size and performance measures used in CEO pay research and found 3 size

factors and 8 performance factors, suggesting numerous differences among various measures used to

assess the same constructs. Finally, the executive pay literature has been dominated by research on

CEOs. Recent studies looking at non-CEO executives and top management pay are a welcome

addition to the literature (Carpenter & Sanders, 2002; Carpenter & Wade, 2002; Henderson &

Fredrickson, 2001). Clearly, more research on how CEO pay factors relate to non-CEO executive and

top management pay would be fruitful.

4. Exploring linkages between compensation areas

Although much of the research reviewed fits well within only one of the compensation areas, many

studies explore linkages between areas. A number of the areas are related in different ways. First, for

some areas, variables in one area are included as control variables in another (e.g., gender and race are

frequently included as control variables in many of the studies of pay determinants). Second, there is

overlap between some areas. For example, many of the issues in the organizational justice literature are

related to compensation psychology. Third, for some areas, different levels of analysis involve

aggregation of lower levels. For example, firm level turnover and absenteeism is measured by

aggregating individual levels of turnover and absenteeism. However, many of the areas are relatively

unrelated, providing an opportunity for some innovate cross-area explorations. Although many of the

compensation areas shown in Fig. 1 are linked to others by some research, some have received

considerably less attention (as represented with arrows) than others. Examining the linkages between the

areas will help integrate this large body of research and hopefully provide a further framework to help

future researchers identify potential research areas that have not received much attention in top

management journals recently.

4.1. Determinants and outcomes of compensation linkages

A number of studies looking at the determinants of compensation have included variables at

different levels of analysis. For example, Kessler and Katz (2001) included environmental (wage

laws), firm (unionization), and individual (race) variables. Others exploring multiple levels include

Thurston (1997) (environment, job, and individual), Budd and Nho (1997) (firm and individual),

Delery, Gupta, Shaw, Jenkins, and Ganster (2000) (firm and individual), Holzer (1998) (job and

individual), Pergamit and Veum (1999) (job and individual), and Cawley, Heckman, and Vytlacil


(1999) (job and individual). Studies looking at outcomes of compensation have also included multiple

levels (e.g., Bloom, 1999, individual and group; Afzar & Danninger, 2001, firm and individual; and

Brown, Fakhfakh, & Sessions, 1999, firm and individual). Thus, within each of the broader

classifications of determinants and outcomes, there are a number of cross-level studies as has been

suggested by others (Gerhart & Rynes, 2003; Rynes & Gerhart, 2000; Welbourne & Gomez-Mejia,

1995). However, few studies (e.g., Sicherman, 1996) include both determinants and outcomes.

Looking at determinants and outcomes within the same study provides several advantages beyond

looking at only one side of the equation. First, it allows researchers to control for variables that have

been found to affect compensation, identifying indirect effects. Second, it helps establish larger causal

models that incorporate the relationships of more variables. Last, it helps identify underlying processes

and cybernetic models that will contribute to our knowledge of compensation’s effects within a system

(Gerhart & Rynes, 2003).

4.2. Compensation psychology and organizational justice linkages

Because much of the justice literature is built on foundations of psychological theories, some of the

research in these two areas overlaps each of the areas. For example, the equity and procedural justice

literature incorporates the pay satisfaction construct (e.g., Brown, 2001; Scarpello & Jones, 1996).

Furthermore, a substantial number of studies looking at compensation psychology (the entire subarea of

reactions to compensation) and organizational justice have included individual and firm outcomes in the

analysis (e.g., Bloom, 1999; Brockner & Wiesenfeld, 1996; Fields, Pang, & Chiu, 2000; Lynn, Cao, &

Horn, 1996; Werner & Mero, 1999). However, fewer studies (Konovsky, 2000) have looked at how the

determinants of compensation relate to aspects of compensation psychology and organizational justice.

This is particularly true of environmental, firm, and job factors (several studies have looked at individual

factors; e.g., Lum et al., 1998; Shaw, Duffy, Jenkins, & Gupta, 1999; Smart, 1998). Such research could

look at how pay interacts with environmental, firm, and job factors to determine pay and justice

perceptions as well as the direct effects of these factors.

4.3. Executive compensation linkages

The three areas set apart in Fig. 1 (executive compensation, international compensation, and benefits)

can be considered special cases of the framework. Because they focus on a clearly distinct component of

compensation (benefits) or a distinct context (executive or international), we believed that they

warranted their own categories. Much of the executive compensation literature focuses on pay level/

mix determinants. Although the determinants are most frequently at the firm level (e.g., Balkin,

Markman, & Gomez-Mejia, 2000; Tosi, Werner, Katz, & Gomez-Mejia, 2000), some studies have

looked at environmental (Ezzamel & Watson, 1998), job (Conyon, Peck, & Sadler, 2001), and individual

determinants (Lyness & Thompson, 1997). Outcomes of CEO pay are generally investigated at the firm

level (Anderson, Banker, & Ravindran, 2000; Carpenter, 2000) and less so at the individual level (Miller

& Wiseman, 2001). Surprisingly, few studies look at the compensation psychology or organizational

justice issues of CEO pay (exceptions include Gomez-Mejia & Wiseman, 1997; Conyon et al., 2001) or

the increased inequality between employees at the top and bottom of the organization (Rynes & Bono,

2000). Such research could look at how CEO pay affects the reactions, equity perceptions, pay

satisfaction, and justice perceptions of employees and CEOs themselves. When one considers the


current climate of accounting scandals, we believe that this is a particularly important area for future

study that has received little recent attention in the top management journals.

4.4. International compensation linkages

Many of the international studies make international comparisons of pay determinants (e.g., Budd,

1996; Kidd & Shannon, 1996; Zhou & Martocchio, 2001) or look at international factors that affect

pay (e.g., Clark, Herzogg, & Schlottmann, 1998; Feliciano, 2001; Schuler & Rogovsky, 1998).

Others look at justice issues (e.g., Giacobbe, Miller, & Victorov, 1998; Mueller, Iverson, & Jo,

1999) or firm outcomes (e.g., Mishra & Gobeli, 1998; Roth & O’Donnell, 1996). Few studies have

looked at international aspects of CEO pay (exceptions include Carpenter, Sanders, & Gregersen,

2001; Sanders & Carpenter, 1998), individual outcomes, and compensation psychology (as noted by

Heneman & Judge, 2000). Thus, although the entire area of international compensation appears to be

relatively underresearched, we believe that these three cross-areas are especially viable areas for

future research.

4.5. Benefits linkages

The benefits research looks at determinants of benefits usage at both the firm and individual levels

(e.g., Barringer & Milkovich, 1998; Clark & Pitts, 1999; Dulebohn, Murray, & Sun, 2000), firm or

individual outcomes (e.g., Carlin, 1997; Davidson, Worrell, & Fox, 1996), or benefit satisfaction/fairness

(Blau et al., 2001; Parker & Allen, 2001). Thus, the two most obvious areas that have received little

attention in the top journals are international aspects of benefits and the benefits of CEOs. Such research

might include international comparisons of benefits, benefit strategies for multinationals, and determi-

nants and outcomes of CEO benefits.

5. Observations on the current state of compensation research

This review has attempted to provide a comprehensive compilation of 7 years worth of research.

Much has been learned through this research and our understanding of compensation has been furthered.

Nevertheless, many opportunities for advancement still exist. While writing this review, a number of

observations about the current state of research and the opportunities still available came to mind. These

observations concern the research methods, relationship assumptions, the lack of interdisciplinary

research, and a pervasive North American perspective.

First, the compensation research reviewed here is largely quantitative and empirical, reflecting the

dominant methods currently in management (Scandura & Williams, 2000). Of the 396 studies, 7 (1.8%)

are meta-analyses, 8 (2.0%) use modeling methods, and 18 (4.5%) are theoretical. Most surprisingly, we

did not identify any as entirely qualitative. Although qualitative research would not be expected to be

prevalent in a well-established field (Wright, Lane, & Beamish, 1988), we believe that qualitative

research can contribute to even well-established fields. This sentiment echoes that of others (e.g.,

Gomez-Mejia & Welbourne 1988; Heneman & Judge, 2000) who have suggested over the years that the

field would benefit from comprehensive case studies, interviews, and participant observation. Whether it

is the difficulty of doing qualitative research or the difficulty of publishing it, which has limited its use, is


not clear. However, we believe that qualitative research can be very useful in theory building and can be

a viable contributor along with quantitative research in addressing important compensation issues.

Second, we noticed that quantitative analysis almost always used data techniques that explore linear

relationships. The strong probability that determinants and outcomes of pay may have curvilinear

relationships has been suggested more than 35 years ago (Opsahl & Dunnette, 1966). Pay would be an

especially important area to determine curvilinear affects because doing so would allow companies to

optimize returns on compensation. Researchers also need to better determine causality by looking at

process variables and longitudinal data (Gerhart & Rynes, 2003; Heneman, 1990; Rynes & Gerhart,

2000). We found that in our sample of those who had empirical data, 29 were laboratory studies, 331

used field data, and 2 used both. Although laboratory studies can provide useful information, we concur

with Rynes and Gerhart (2000) that field data should continue to be the focus of most future research.

Third, although we are beginning to see some interdisciplinary research (see Gibbons, 1998,

psychology and economics), most studies are still discipline specific. Although this is not uncommon

(Locker, 1994; Rynes & Bono, 2000), we believe that the field would benefit with substantially more

cross-disciplinary research. Gerhart and Rynes (2003) state ‘‘Perhaps the most important step for future

theorizing would be to blend the economic and psychological approaches to the greatest extent

possible.’’ We believe that our discussion of linkages across the different areas may help provide

guidance towards blending economic, psychological, and other perspectives. It is not surprising that

generally, labor economists examine environmental factors, lawyers look at the legal environment,

strategists look at firm outcomes, and psychologists explore compensation psychology. Theoretical

perspectives have ranged from the sociopsychological (expectancy theory, need theory, operant

conditioning, social dilemma, equity/justice theory, cognitive evaluation theory, goal-setting theory,

and social cognition theory) to organizational (structural theory, contingency theory, social field theory,

resource-based theory, and institutional theory) to economic (agency theory, prospect theory, winner take

all markets, macroeconomic theory, internal labor markets, work–life incentives, and transaction cost

economics; Gerhart & Rynes, 2003; Gerhart et al., 1996; Opsahl & Dunnette, 1966; Rynes & Bono,

2000; Welbourne & Gomez-Mejia, 1995). Yet, few have explored compensation from a multitheoretical

perspective. We hope our framework will help researchers consider other perspectives and perhaps

incorporate them in their research. Additionally, because we focused only on management journals,

perspectives from legal, accounting, finance, economic, sociology, and other disciplines’ journals have

not been fully incorporated into our framework. Considering the views of these disciplines and

incorporating them into this framework would be a viable goal for future research.

Finally, the vast majority of the reviewed research was published in North American journals, authored

by academics from North American universities, and uses North American samples. In our reviewed

studies that had empirical data, 285 used North American samples, 63 used non-North American samples,

and 14 used both. Thus, nearly 80% used only North American samples. Therefore, it is quite likely that

this research (like in many other areas) suffers from a North American perspective bias. Only one subarea,

‘‘non-US gender gap,’’ focused on issues outside of North America. Furthermore, of the nine international

comparative articles, only one (Blanchflower & Freeman, 1997) did not include a North American

country. This raises the question of whether the findings and theories of the bulk of the reviewed studies

can be generalized to a global context. Thus, we believe that future research should consider a global

perspective and incorporate the applicability of the research to non-North American contexts.

The framework introduced here was not intended to be the definitive classification system of

compensation research. Numerous studies provide linkages between different categories, and some


subcategories could stand on their own. This framework was presented to help researchers identify

interesting areas that have received little attention in top management journals, to help researchers

integrate their perspectives with others, and to help scholars get a better understanding of the domain of

compensation. Although the literature-derived categories are quite general and predictable, limiting how

enlightening in and of themselves they can be with respect to future research directions in compensation,

this also has a positive aspect suggesting that they are intuitive and have face validity. Furthermore, their

generality is evident in their possible application to other areas, such as training, suggesting that they

may provide an organizing tool to other areas. Those seeking less generality can explore the subtopics

and get more specific categorizations. Although much has been learned about compensation, clearly

many opportunities are available to further our knowledge of the field.

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