• Realize that most of the best em-

• Realize that most of the best em- ployees want strong pay-perfor- mance relationships. On average, the ability to earn a lot of money for outstanding performance is a com- petitive advantage for attracting, motivating, and retaining high-per- forming employees. This is not to say that organizations cannot attract good employees without high-con- tingency systems; clearly, a number of well-known firms have done so (e.g., SAS software). However, in such cases, the absence of contin- gent pay is compensated by a strong culture emphasizing other values and benefits (in SAS’s case, family- friendliness, as well as high general pay levels and benefits). In addition, there are also a number of organiza- tions that thrive on high company- based (versus individually based) contingent pay, such as Southwest Airlines or Nucor Steel. These com- panies are able to attract high per- formers who also hold relatively strong collectivist values.
• Evaluate current pay systems with respect to the strength of pay-per- formance relationships. Although most nonunionized and nongovern- ment employees are ostensibly paid on the basis of merit, examination of most companies’ pay systems re- veals little differentiation in raises between average and superior per- formers. Pay-performance contin- gencies are generally limited by such practices as setting job grade ceilings and paying for nonmerit considerations (e.g., external equity adjustments or matching competing offers) out of the “merit” pay budget. Similarly, pay-performance contingencies should also be evalu- ated at the supra-individual level: Are there gain-sharing or profit- sharing programs? If so, are the pay- outs large enough, immediate enough, or frequent enough to make a difference to how hard peo- ple are willing to work? (For exam-

ple, deferred profit-sharing plans that are designed as substitutes for defined benefit pensions are un- likely to have a motivational effect.) Finally, examine how closely pay-in- crease budgets mirror changes in organizational performance levels. Many employees have become quite used to being told that the annual increase budget will be very modest due to limited ability to pay (i.e., low corporate profitability). How- ever, the reverse is often not true, with raise pools remaining modest even in years of high profitability and the remaining money being al- located elsewhere.
• Examine whether executive pay is moving in the same direction, and at roughly proportionate rates, as employee increases. Evidence from the past 30 years reveals quite con- vincingly that in the typical corpora- tion, the ratio between executive and nonexecutive compensation has increased to a very substantial de- gree. Not only has the earnings gap between executive and nonexecu- tive employees exploded over the past several decades (Bok, 1993; Crystal, 1991; Frank & Cook, 1995; Shulman, 2003), but there are also many examples of disproportionate increases in executive pay in the face of poor organizational perfor- mance (Samuelson, 2003; Useem,
2003). Because how people feel about their pay is a result of com- parative processes, organizations with huge variance between execu- tive and employee pay practices are likely to be populated with workers eagerly awaiting opportunities to move to other organizations. (An important side note is that workers are often accepting of very high ex- ecutive pay, such as Bill Gates at Microsoft or General Electric under Jack Welch, so long as the fruits of strong organizational performance are also passed on to lower layers of the organization.)

Evaluating the Effectiveness of Pay
Systems

After following the general design principles outlined in the preceding section, how can an organization evaluate the success of its compensation policies and practices? One of the most important suggestions to emerge from the reviewed research is that one needs to track employee behaviors as well as em- ployee attitudes. On the behavioral side, there are at least three outcomes that are likely to be heavily affected by compensation practices: attraction, retention, and perfor- mance. Each of these outcomes should be closely monitored to detect problems with the compensation system.
For example, with respect to attraction, is a company’s job acceptance rate higher or lower than those of other companies in its area or industry? If lower, are applicants accepting positions with higher or lower starting salaries? In addition, what types of applicants and em- ployees are being lost—the most desirable or the least? Similar questions should be asked about retention. (A good example of monitor- ing turnover by employee performance levels can be found in Trevor et al. [1997].) Also, in both cases, outcomes should be tracked in re- lation to previous years, as well as to bench- mark firms or competitors. Different results suggest different kinds of solutions.
Similar kinds of tracking should be done with respect to employee performance. Be- cause most firms do not have objective mea- sures of individual performance, perfor- mance outcomes must often be tracked at team, department, or plant levels. Of partic- ular interest are changes in performance as- sociated with major changes in HR practices, such as shifting from individual to team pro- duction or from merit pay to gain sharing.
Although assessing employee behaviors is crucial to evaluating effectiveness, there are still reasons to monitor employee attitudes as well. In particular, changes in satisfaction or importance levels are often leading indica- tors of subsequent changes in behavior. As such, employee surveys can still be a valu- able part of the evaluative arsenal.
Previous research has shown that re- sponses to employee surveys (e.g., which

items are rated as more “important” or “sat- isfying” than others) can be heavily depend- ent on such things as the precise wording and format of the questions asked (Lawler,
1971). Therefore, managers should use highly similar surveys from year to year and pay considerable attention to changes in re- sponses to key questions having to do with pay importance, pay fairness, and pay satis- faction. If the implicit contract regarding pay level, pay-for-performance, or any other as- pect of pay has changed (due either to actual changes in practice or to a changing market or workforce conditions), a good survey should be able to capture this.
In particular, the responses and reac- tions of the top performers should be care- fully monitored. Of course, employee survey data are typically anonymous, so direct links to performance data may not be feasible. However, self-reported performance on em- ployee surveys can be used. Additionally, the turnover rates of high performers can be compared to those of other employees.
Employers can also be more proactive in anticipating and heading off certain prob- lems (e.g., eroding pay levels) by using salary surveys to benchmark their pay level and other pay practices against other organiza- tions. Finally, realizing that people may not always be forthright in exit interviews about their reasons for leaving, one should ask di- rectly what they will be earning in their new job as a way of gauging the extent to which pay might be a determining factor.

Conclusion

Money is not the only motivator and it is not the primary motivator for everyone. How- ever, there is overwhelming evidence that money is an important motivator for most people. Further, there is ample evidence that surveys asking people to rank order money and other motivators do not accurately re- flect the important effects that changes in pay levels or the way pay is determined actu- ally have on people’s decisions to join and leave organizations. Likewise, the often- modest survey rankings are at odds with be- havioral evidence on the powerful effects that monetary incentives have on the goals