Faculty compensation is a critical management tool for increasing faculty productivity, improving cost efficiency, and enhancing an institution's public image. Factors that determine faculty compensation include academic rank, faculty productivity, discipline market pay, ability to obtain external grants, seniority or length of service, service in administrative positions, professional service, and graduate teaching and guidance. The best predictor of salary within an institution and within any rank are an individual's years of experience, with the number of articles published the second best predictor. The digest includes a discussion of the three types of faculty compensation systems used in the U.S. and describes the ideal faculty compensation system as follows: the value, vision, mission, and goals of the organization must be clearly defined; each individual must accept personal responsibility for achieving these goals; faculty performing at a satisfactory level must receive a compensation increase to maintain a constant standard of living, while faculty performing at an above-satisfactory level should receive a compensation increase appropriately more than the satisfactory level; and faculty must believe the compensation system to be administered in a fair and objective manner. Five criteria for designing an effective higher education faculty compensation system are also included. (Contains 29 references.) (CS)