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ABSTRACT. Compensation systems are an integral part of the relationships organizations establish with their employees. For many years, researchers viewed pay systems as an efficient way to bring market-like labour exchanges inside organizations. This view suggested that only economic considerations matter for understanding how compensation systems effect organizations and their employees. Advances in organizational research, particularly those focused on issues of justice and fairness, suggest that the fully understanding the outcomes of compensation systems requires examining their psychological, social, and moral effects.
Introduction
Compensation has always been viewed as a centrally important element in almost any employment relationship (Milkovich and Newman, 2005). Early efforts to study compensation we dominated by economic views of compensation systems. The pervasive view at that time was that optimal compensation systems met the "fair day's wage for a fair day's work" criteria. Employment relationships were viewed, for the most part, like market transactions for labour that had been brought inside the skin of a firm or organization. According to this view, the key for managers and others who design pay systems is to ensure that pay accurately reflected the economic value contributed to the firm by a worker. Here, fairness is expressed only in economic terms. Since that time, management scholars have developed a much richer understanding of what fairness means to employees and how perceptions of fairness affect their attitudes and behaviors (Folger and Cropanzano, 1998). We know that the meaning of fairness for employees goes well beyond economic issues; it also incorporates issues related to trust, work relationships, and ethics.
We now know that compensation systems are much more than simply mechanisms for bringing market transactions for labour inside an organization. To be sure, compensation systems can help create effective economic exchanges of labour (which is given by workers) for financial remuneration (which is given by the employing organization). But, compensation systems also play important social and symbolic roles in organizations and through these roles pay systems effect a variety of important outcomes such as the nature of work relationships, employee commitment, and performance. Research on high-performing organizations strongly suggests that great organizations are those that create and nurture relational exchanges that are based upon trust, mutuality, care, and respect (Rousseau, 1995). Summarizing this literature, O'Reilly and...