TO LEAD, LAG, OR MATCH: ESTIMATING THE FINANCIAL IMPACT OF PAY LEVEL POLICIES

In this study, the Boudreau and Berger (1985a) retention/acquisition model is modified in order to develop a utility model that can be used to assess the impact of alternative pay level policies. This paper then demonstrates how the model could be used to assess the financial impact of alternative pay level policies for an organization whose current policy is to match the market. In demonstrating this, estimates of the effect of pay level on employee and applicant behaviors are presented. The utility model is then used to translate these effects into financial terms and compare them against the wage costs associated with alternative pay level policies. Finally, break-even analysis is used to suggest how decision makers might use utility results when making decisions about pay level policy. The implications for pay level policy and the role of utility analysis in compensation decision making are discussed.