Strategic Compensation: Utilizing Efficiency Wages in the Public Sector to Achieve Desirable Organizational Outcomes

Given that continued pressure will be levied on public sector organizations to provide higher levels of service while maintaining low costs, the importance of considering an organization's relative position in the regional labor market should not be understated. Using efficiency wage theory as a theoretical foundation, this research examines the use of market-clearing wages as a tool for strategic compensation in the public sector. Two separate survey instruments were distributed to municipalities in the Chicago suburban metropolitan area: A salary and fringe benefits survey and a reputational service quality (RSQ) questionnaire. The primary finding of this research indicates that efficiency wage rates are a significant predictor of increased reputational service quality, suggesting that municipal organizations may be able to leverage their reputation as a tool for increasing economic development and attracting more affluent residents to the community.