Pay Strategy: Resolving Tension between Institutional Conformity & Organizational Differentiation.

AuthorShivhare, Amita


Attracting, motivating and retaining the best talent are the biggest obstacles to the growth of Indian industries. In the past few years, Indian e-commerce startups have provided high compensation, including equity compensation, to attract top engineering and data science talent. Earlier, in the high growth phase of the Indian IT industry (1990s/2000s), IT service companies and multinational software product companies provided relatively high wages for Indian employees to leverage their engineering talent. Compensation practices are crucial for organizations in order to attract, motivate and retain competent employees (Gerhardt & Milkovich, 1992; Lawler, 1995). Organization's pay strategies vary with respect to pay level and pay mix and are highly influenced by the internal structure that determines pay distribution. Pay strategies adopted by different organizations are either based on their business needs or are aimed at gaining institutional legitimacy. Where some organizations follow market pricing, matching their competitors for its pay distribution, other organizations assign their pay distribution based on the uniqueness of different jobs and skills required for performance (Balkin & Gomez Mejia, 1990). The constraints enforced by institutional factors of coercive, mimetic and normative isomorphism (DiMaggio & Powell, 1991) on pay strategy decisions have been looked into. Such constraints leave little freedom of choice in incorporating elements of the organization's idiosyncratic characteristics in designing pay strategy. Government regulations on basic salary levels for labor might limit variations in salary in certain segments, for instance.

However, Lawler (1990: 5) argued against "vanilla, me-too flavor that provides no competitive advantage" while designing the organization's pay strategy and instead suggested that specific organizational features be utilized in making such decisions. While institutional pressures force organizations to become more similar in order to acquire legitimacy, Scott (2008) advised organizations to be bold and courageous and adopt nonlegitimacy practices for better performance. Further, drawing from Resource Dependence Theory (Pfeffer & Salancik, 2003), it can be argued that an organization's behavior is determined by the criticality of the resources it needs. Specific job characteristics may make certain employee characteristics more salient for the organization. The resulting dependence relationship would then make specific job characteristics play a crucial role in determining pay strategy. It has been documented that a specific employee group comprising mainly executives, sales representatives, scientists and engineers influences the pay strategy decision by using their relative power (Balkin& Bannister, 1993).

Being owners of unique and critical skills they hold specialist positions in organization vis-a-vis other employees who possessed general capabilities, as their expertise is very much essential for organizational performance. Scholars have so far examined pay strategy decisions either abiding by institutional conformity for gaining legitimacy (Eisenhardt, 1988), or formulating pay strategy based on their business conditions (Balkin& Gomez Mejia, 1990). Moreover, all current studies examined the categories of workers for differential payments based on the job or skills (Gomez-Mejia, Berrone & Franco-Santos, 2014), individual performance (Gerhart & Fang, 2014), group performance (Kehoe & Wright, 2013), seniority (Larkin, Pierce & Gino, 2012), or short-term- and/or long-term-orientation (Wowak & Hambrick, 2010).

However, the impact of job characteristics based classification on establishing pay strategy seems underexplored in research. It is in this context that the collar based pay strategy decision-making holds promise. This paper attempts to study how different types of workforce--such as blue-collar, white-collar, pink-collar and gold-collar can influence the pay strategy decision. The paper addresses the question how workforce characteristics--in terms of collar classification--acts as a key determinant of selecting a pay strategy by either conforming to institutional legitimacy or differentiating it with the unique value proposition offered to its employees. It explores the relationship of employee type with determination of an organization's pay structure through either institutional conformity or competitive non-conformity of organizations. It argues that a third strategy for firming up pay structure would be for the organization to strike a balance between institutional conformity and the idiosyncratic value proposition offered to its employees. The article draws from Institutional Theory and Resource Dependence Theory for supporting the propositions.

Pay Strategy

Compensation practices in an organization work as the foremost constituent of its controlling mechanism. Compensation practices can facilitate an array of objectives, specifically the kind of employees the organization is looking at attracting, motivating and retaining (Lawler, 1995).

A pay strategy is a statement of organizational values and ideas that provides basic rules for management's expectations and returns (Milkovich, 1988). It represents a compensation decision model that is critical to organizational performance. Organizations differ in their compensation policies and practices depending on their employee's characteristics. Compensation policy would then be influenced by the type of workforce they have, right from the upper echelons of executives to the middle level managers, from research & development to production, from finance to administration, from engineers to sales people.

It is commonly believed (Newman, Gerhart &Milkovich, 2017) that determination of an organization's pay strategy falls within the domain of managerial action. However, this view seems simplistic as it ignores the larger forces at work which would constrain the latitude available to an HR Manager. It can be appreciated that both the internal objectives as well as the external forces of various government regulations and labor market characteristics would eventually drive the organization pay strategy decision. Not surprisingly, such influences would further constrain the freedom available to organizations in deciding upon a distinctive compensation policy (Lawler, 1990).

Differentiation Strategy

It refers to an organization being different or perceived to be different in its approach by offering unique products and services that outperform its competitors in...

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