Competitive strategy and the design of strategic business unit General Manager compensation systems

Robert H Meehan, Pace University


The purpose of this study was to identify the relationships between business unit level competitive and growth strategies and the design of strategic business unit General Manager pay systems. Previous research suggested that different patterns of pay plan designs would be associated with Porter's generic strategies and the parent's growth strategies. Another purpose of the study was to assess the effectiveness of pay plan designs, rarely addressed in prior research. A final objective of the study was to offer a contingency theory of compensation that offered a theoretical framework for strategic business unit General Manager pay plan design. One hundred four strategic business units comprised the sample. These units represented 19 of the 20 manufacturing Standard Industrial Code categories. Only business units with $25 million or more in sales revenues and at least 250 employees were invited to participate. Generally, the data did not support the proposed relationships between generic and growth strategies and overall pay plan design. There was partial support for the proposed relationships between growth strategy and pay plan design including salary increase and incentive award determination methodologies. The results did support the concepts: that the evolution of common policy and design standards have become primary drivers of plan design; that organization complexity (i.e., type of diversification, the extent of resource sharing, work culture, and differing corporate and business unit agendas) leads to common play plan designs; and that the linkage between business strategy and pay plan design is driven by the actual goals more so than by the strategy for achieving those goals. Three effectiveness factors emerged: competitive effectiveness, the extent to which the competitiveness of the plan supported business objectives; performance rewards, the extent to which the performance rewards process supported business objectives; and process effectiveness, the extent to which the procedural justice in the system contributed to supporting business objectives. The analysis revealed several relationships between the effectiveness factors and pay plan design. Those relationships suggest an emphasis on short-term incentives over long-term, a substantial portion of total pay in incentives, and ensuring that pay is competitive with the market. Thus, while the present research found limited support for the propositions initially set forth, it did fulfill its second purpose, to identify relationships between pay plan design and effectiveness. It also identified several potentially powerful determinants of pay plan design that were more influential than business strategy.

Subject Area

Management|Business community

Recommended Citation

Meehan, Robert H, "Competitive strategy and the design of strategic business unit General Manager compensation systems" (1996). ETD Collection for Pace University. AAI9718276.



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