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Remuneration and Performance Management System Essay

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The correct remuneration and performance management system is an ongoing discussion as it plays an integral part in organisations. Pfeffer (2005) argues that wage compression and symbolic egalitarianism is the best practice to gain competitive advantage, however other theorists advocate a ‘best fit’ model depending on the organisational strategic plan. This essay explores these arguments by demonstrating how culture, the job, and organisational context are inter-related and affect a firm’s reward system. Ultimately showing it is the way these multiple factors align that influence the reward system and promote organisational efficiency, rather than the egalitarian stance of Pfeffer (2005).

An organisations internal pay structure can affect the way employees perform to the business strategy. A workers performance not only depends on the pay level they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues wage compression, the act of reducing the size of the pay differences among employees, improves productivity. To gain competitive advantage, organisations need to acknowledge not only hierarchical wage compression (between management and employees) but also the differences between individuals at similar levels. Narrowing pay discrepancies promotes a sense of community and a common fate, leading to greater efficiency by diminishing interpersonal competition and increasing collaboration (Pfeffer, 2005). Pay compression thus advocates equity theory; if internal factors and external competitiveness are aligned, employees perceive their pay to...


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Kraft, K. (1994). Wage differentials between skilled and unskilled workers. Weltwirtschaftliches Archiv, 130(2), 329-349.
Lallemand, T., Plasman, R., & Rycx, F. (2004). Intra-firm wage dispersion and firm performance: Evidence from linked employer-employee data. Kyklos, 57, 533-558.
Lazear, E. (1989). Pay equality and industrial politics. The Journal of Political Economy, 97 (3), 561-580.
Milkovich, G., Newman, J., & Gerhart, B. (2011). Compensation (10th ed.). Singapore: McGraw-Hill.
Pfeffer, J. (2005). Producing sustainable competitive advantage through the effective management of people. Academy of Management Executive, 19 (4), 95-108.
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