Playing the external market : efficiency wage as a means for strategic compensation in the public sector
Davis, Trenton J.
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This research focused on the development of a model that predicts improved organizational outcomes associated with higher wage rates or, more narrowly, efficiency wages. The model is premised on efficiency wage theory, namely, that higher wages will translate into improved service quality, lower turnover or quit rates, fewer employee accountability control mechanisms, and, ultimately, lower wage costs. Through an empirical analysis involving municipalities located throughout the Chicago suburban metropolitan area (SMA), the major theoretical underpinnings associated with efficiency wage theory were tested. Two separate written survey instruments were distributed to municipalities in the Chicago SMA: a salary and fringe benefits survey and a reputational service quality questionnaire. Generally speaking, the surveys provided a broad array of quantifiable data pertaining to a municipality’s pay strategy, current wage levels, and perceived level of performance. In addition, a case study analysis demonstrating how an actual efficiency wage system functions in a publicsector organization was conducted. The findings of this research indicate that efficiency wage rates are a significant predictor of increased reputational service quality. Municipal size (population) and affluence (per capita income) were also found to be associated with service quality. In addition, higher wages were found to be a significant predictor of wage costs per employee; however, this relationship was not in the expected direction. No definitive evidence was found in support of the hypotheses regarding accountability control mechanisms. One implication of this research is that highly regarded municipalities may be able to leverage their reputation as a tool for increasing economic development or attracting more affluent residents to the community. Municipalities may also be able to use their reputation as a vehicle for attracting and retaining employees to the organization. This research concludes with a discussion of the future of public-sector compensation and the potential for a model based on efficiency wage rates to be utilized in pursuit of improved organizational outcomes. A research agenda for following up on what has already been completed is also provided.