Congruence between Pay Policy and Competitive Strategy in HighPerforming Firms

Based on existing strategic compensation theory, this study exam-ines seven theoretical propositions concerning the link between busi-ness-level competitive strategy and pay policy. Canonical discriminant analysis of 261 responses to a national survey show that high-perform-ing firms whose strategy is dominated by Cost Leadership, Innovation, or Differentiation tactics adopt diflerent pay policies. Further analysis shows that inferior firm performance is associated with the lack of fit between pay policy and business strategy. These findings support the need for a contingency approach in the design of pay policy. The idea that pay policies have strategic impact has become a major theme within the compensation literature since the mid- 1980s. Notable volumes concerned with compensation strategy include Lawler’s Strategic Pay (1991), Schuster and Zing-heim’s The New Pay (1992), and Gomez-Mejia and Balkin’s Compensation, Organizational Strategy, and Firm Performance (1992). This strategic perspec-tive on compensation is based on the fact that organizations differ in pay policie