ABSTRACT
Compensation is defined to include all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. Accordingly, the compensation subsystem focuses on how such returns are used to enhance the human capital available to the firm and to encourage desired employee attitudes and behaviors. Numerous researchers have applied different theories to explain the link between organizational compensation practices and performance and the way in which a wide variety of contingency factors can moderate such a relationship. Underlying the compensation subsystem in many organizations is likely to be a set of assumptions about how rewards may be used to motivate employee participation, contributions, development, and retention. Milkovich and Newman identified a number of basic policy decisions that underlie all compensation subsystems and that shape subsequent system-related decisions. Firms focusing on the latter have market-driven pay systems, which are strongly based on what competitors pay.
