Abstract
Zimbabwe's thrust toward economic formalisation, propelled by national development strategies, namely National Development Strategy 1 (2021-2025) and National Development Strategy 2 (2026-2030), together with digital reforms, has metamorphosed the compensation management systems in micro, small and medium enterprises (MSMEs). This study explores how compensation and benefits systems transform during formalisation. Guided by institutional theory (IT), the resource-based view (RBV), organisational life cycle theory (OLCT), and the dualist, structuralist and legalist approaches, the study contributes to understanding the complex dynamics of economic formalisation and its implications for human resource management practices in developing contexts. Issue 2/2026 585 The researcher draws on an interpretive phenomenological study conducted with 25 stakeholders, including employees, HR managers and company owners/executives from companies that have successfully transitioned from informal to formal economic structures, as well as senior government officials from ministries responsible for labour and MSMEs. The research unpacks the multifaceted perceptions of stakeholders regarding these compensation shifts. The findings highlight a dual impact in compensation transformation: even though formalisation enhances structured transparency, institutionalised payroll systems, statutory compliance, accountability, social protection and long-term income security, it also introduces challenges such as administrative burdens, decreased short-term financial flexibility, and a perceived loss of personal relationships between the employees and the company owners. The study empirically contributes to debates on business formalisation by focusing on the lived experiences of the stakeholders involved. Theoretically, it shows how compensation systems evolve as companies grow and adapt to external pressures. Policy implications for balancing the welfare of the employees with firm sustainability in Zimbabwe's transitioning economy are discussed, including recommendations for phased compliance frameworks, targeted subsidies for statutory contributions and compensation models that are hybrid in nature and reconcile regulatory requirements with the lived economic realities of employees and companies.