Do Formal Salary Systems Really Matter?

Posted: 3 Oct 2004

See all articles by Michael Gibbs

Michael Gibbs

University of Chicago Booth School of Business; Institute for the Study of Labor (IZA)

Wallace E. Hendricks

University of Illinois at Urbana-Champaign - Department of Finance

Abstract

Drawing on a single large U.S. corporation's personnel records for the years 1989-93, the authors analyze an example of the kind of formal salary system used by most large firms. They find that this firm's practices were consistent with most of the important conclusions of prior empirical research on internal labor markets. The system was highly centralized, covering salary levels, salary ranges, raises, and bonuses. Supervisors had little discretion over pay other than through subjective performance ratings. The firm held fairly strictly to the salary rules, leading to observable constraints on pay for employees near the top of the salary range. These constraints, however, apparently did not impose important costs on the firm in the form of increased turnover. Although the system operated without any apparent connection to external factors, the authors conclude that it transmitted external labor market forces with little distortion.

Keywords: Formal salary systems, internal labor markets

JEL Classification: J31, J33

Suggested Citation

Gibbs, Michael and Hendricks, Wallace Edward, Do Formal Salary Systems Really Matter?. Available at SSRN: https://ssrn.com/abstract=598374

Michael Gibbs (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Wallace Edward Hendricks

University of Illinois at Urbana-Champaign - Department of Finance ( email )

219 LIR Building, MC-504
Urbana, IL 61801
United States
217-333-6028 (Phone)
217-333-6028 (Fax)

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