Compensation objectives and business unit pay strategy

This study investigates the effects of attraction, retention, and incentive objectives on business unit pay strategies in 173 European business units. Compensation theories provide conflicting implications regarding the use of various pay practices to achieve these objectives. We find that the positioning of cash pay levels relative to the labor market, the provision of benefits, and the breadth of employee eligibility for cash incentive plans and equity grants vary with the compensation objectives being pursued. Our evidence also suggests that some of these pay practices are complements while other are substitutes. Our ability to tie firms' objectives to elements of pay provides more direct evidence on how compensation policies are formed. Moreover, our evidence highlights the need to consider multiple compensation objectives when setting and studying pay strategies.