Organizational culture and compensation systems

Abstract

Purpose Compensation influences applicants' perceptions of a position's attractiveness, but there has been limited analysis of how different compensation systems might reflect organizational cultures and influence organizational attractiveness. This article seeks to explore these issues. Design/methodology/approach An experiment was conducted in which 288 undergraduates reacted to scenarios describing a company that distributed salaries and benefits based on either merit or on seniority. Individual differences were also measured and analyzed. Analysis of variance and moderated regression were used to test the hypotheses. Findings Relative to seniority‐based compensation systems, the cultures of organizations relying on merit were perceived to be more aggressive, reward‐oriented, and less decisive. Unexpectedly, the psychological contracts of organizations using merit systems were generally perceived to be more relational and less transactional than those using seniority‐based systems. Individual differences were not related to attraction to the organization regardless of its compensation systems. Finally, individuals were least attracted to organizations that distributed both salaries and benefits based on seniority relative to those using a mixed compensation distribution system or one based entirely on merit. Research limitations/implications The sample was composed of undergraduates who responded to a hypothetical job scenario. The scenario only included information about how salary and benefits are allocated. Future research should use more experienced samples that are considering actual positions. Practical implications Findings indicate how information about compensation systems might be used in job descriptions to encourage applicants. Originality/value This study was the first to find that merit/seniority‐based compensation systems for determining salary and benefits reflect different organizational cultures to job applicants and influence job applicants' attraction to organizations.

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