Compensation and Composition: Does Strategic Compensation Affect Workforce Composition?

Theory suggests that strategic compensation can not only serve as a powerful motivational incentive to increase worker performance, but also improve the composition of the workforce through the attraction and retention of high performers and discouragement of lesser performers from entering or staying in the profession. This study tests the compositional hypothesis of employment relationships by studying teacher compensation and incentives. In Tennessee, some school districts developed incentive pay plans that provided teachers with bonus awards, while other districts incorporated incentive pay into their salary schedules. This article uses panel data on individual teachers and a difference-in-differences instrumental-variables approach to examine the impact of those incentive programs on teacher retention. We also draw on detailed strategic compensation plan information, including award payout information, to examine the relationship between type of strategic compensation system and teacher turnover. Our analysis suggests that the strategic compensation programs in Tennessee had a significant impact on teacher turnover in participating schools. Implications for educational research, practice, and policy are discussed.