2 • Compensation

her financial situation. Most employers believe that how people are paid affects people's behaviors at work,
which affect an organization's chances of success. Compensation systems can help an organization achieve
and sustain competitive advantage.1

Q COMPENSATION: DEFINITION, PLEASE?

How people view compensation affects how they behave. It does not mean the same thing to everyone. Your
view probably differs, depending on whether you look at compensation from the perspective of a member
of society, a stockholder, a manager, or an employee. Thus, we begin by recognizing different perspectives.2

Society
Some people see pay as a measure of justice. For example, a comparison of earnings between men and
women highlights what many consider inequities in pay decisions. The gender pay gap in the United States,
after adjustment for differences in education, experience, and occupation, narrowed from 36 percent in 1980
to 13 percent in 2006. But this measure masks tremendous variations. For people age 21 to 35 who live alone
and have no children, the gap is close to zero. (Of course, this constitutes a very small segment of the labor
force.) The gap even varies by region of the country. In California it is 13 percent and in Wyoming it is 44
percent. The differences among states reflect in part variations in the occupations and industries found in each
state and in the age composition of each state's labor force. Although newer evidence points to individual
choices as an important cause, the gap still persists.3
Benefits may also be seen as a reflection of justice in society. Almost 46 million people in the United
States (16 percent of the population) do not have health insurance.4 Eighty percent of these are employees
(or dependents of employees) working in small businesses. Wal-Mart reports that its health care costs are
growing faster than any other expense—by 15 percent each year, and that costs for care of employee spouses
are far more expensive than costs for care of Wal-Mart employees.5 Some users of online dating services
provide information on their employer-provided health care insurance. Dating service "shoppers" say they
view health insurance coverage as a sign of how well a prospect is doing in a career.6

1 Edward Lawler III, Treat People Right! How Organizations and Individuals Can Propel Each Other into a Virtuous Spiral of Success
(San Francisco: Jossey-Bass, 2003); David Ulrich and Wayne Brockbank, The HR Value Proposition (Boston: Harvard Business
School Press, 2005); Barry Gerhart and Sara Rynes, Compensation: Theory, Evidence, and Strategic Implications (Thousand Oaks,
CA: Sage, 2003).
2 Thomas Li-Ping Tang, et al., "The Love of Money and Pay Level Satisfaction: Measurement and Functional Equivalence in 29
Geopolitical Entities Around the World," Management and Organization Review November 2006.
3 U.S. Department of Labor, Bureau of Labor Statistics, "Highlights of Women's Earnings in 2005," Report 987; Francine D. Blau and
Lawrence M. Kahn, "The U.S. Gender Pay Gap in the 1990s: Slowing Convergence," Industrial Relations Section, Princeton University
Working Paper 508, March 2006; Paula England, "The Gender System: What's Changing? What's Not? " Alice Cook Memorial Lecture,
Cornell University, Ithaca, NY, March 22, 2006; Warren Farrell, Why Men Earn More: The Startling Truth Behind the Pay Gap—and
What Women Can Do About It (New York: Amacom, 2005); June O'Neill and Dave O'Neill, "What Do Wage Differentials Tell Us About
Labor Market Discrimination," NBER Working Paper No. 11240, April 2005; C. Sommers, "Where the Boys Aren't," The Wall Street
Journal, July 3, 2006, p. A10; Ben A. Barres, "Does Gender Matter?" Nature 442, July 13, 2006, pp. 133-136.
4 Carmen DeNavas-Walt, Bernadette D. Proctor, and Cheryl Hill Lee, Income, Poverty, and Health Insurance Coverage in the U.S.,
Current Population Reports, U.S. Department of Commerce, August 2005.
5 Michael Barbara, "Wal-Mart to Expand Health Plan," New York Times, February 24, 2006.
6 John F. Heliwell and Haifang Huang, "How's the Job? Well-Being and Social Capital in the Workplace," NBER Working Paper No.
11759, November 2005.