The Equity and Fairness of Employee Compensation Systems


This goal of this project is to determine the collateral and fairness of staff compensation systems. Having chosen the study topic the next phase was to create out objectives which to base the research. These included:

To assemble a precise profile of the concept and so this means of collateral and importance compensation.

To identify the major ideas of equity throughout history.

To explore worker payment systems.

To determine the recognized equity of these systems by surveying employees and analysing the results.

The authors have provided a Books Review talking about the ideas and ideas of authors who have previously written and whose writings are relevant to the aim of the topic. The authors believe it is important to learn how employees experience the collateral of the system that establishes their pay, as pay and payment employ a important impact on the morale, inspiration, job satisfaction and performance and retention of personnel.

Literature Review

The Interpretation of Equity

Employees compare their initiatives and rewards with those of others in similar work situations. Individuals, who work for rewards from the company, are motivated by a desire to be equitably treated at work. Equity theory ideas 'focus on the importance people put on perceptions of fairness in how professionals deal with them relative to others'(Knights and Willmott, 2007).

Importance of Compensation

Compensation is key to organisational strategy (Mello, 2011). It comes with an impact on appealing to and retaining employees and making sure optimal performance in getting together with the organisation's aims. Mello represents the economic need for compensation and provides so it 'should allow the organization to keep a cost composition that enables it to compete effectively and successfully in its market segments'.

Money as a Motivator

F. W. Taylor thought that employees would only be determined by receiving the maximum amount of money as you possibly can (Taylor, 1911). That is a restricted idea. Due to Taylor's ideas on money as motivator and ideas by other freelance writers, the question about financial rewards as motivational factors carries on. If rewards are allocated incorrectly on non-performance factors such as seniority, status and job name employee motivation and effort could be reduced. Professionals need to recognise that the recognized value of the direct and indirect payment, depends on employees own point of view on equity.

Adam's Collateral Theory

Equity theory suggests that once an individual has chosen an action that is likely to satisfy his / her needs, the average person assesses the equity or fairness of the outcome (Adams, 1965). Three attitudes are possible; an individual may feel equitably rewarded, under rewarded, or over rewarded. When individuals feel under rewarded or higher rewarded, they will do something to reduce the inequity.

Fairness Theory

A further development 'Fairness theory' considers the idea of accountability and blame. 'When people identify an instance of unfair treatment, these are holding someone in charge of an action that threatens another person's material or psychological well-being. If no person is at fault, there is absolutely no public injustice'(Greenberg and Cropanzo, 2001). Professionals should be aware of the importance of utilizing decisions to be able to achieve organisational goals in a good and equitable manner. Payment systems contain two components; direct and indirect and an equitable system must include three types of collateral: internal, exterior and individual (Mello, 2011).

Equity and Fairness of Direct Financial Compensation

Base pay involves paying the staff a set income or salary as compensation for the task they perform for the company. 'These roles are known as skill or knowledge centered systems. The characteristics of a particular job is set, and pay is made comparable to how many other organizations pay for careers with similar characteristics' (Cummings and Worley, 2009). This method of assigning a base pay to a particular role means that there is little difference in purchase the same role across organisations. 'This also causes a cost on a specific skill but it does not pay back employees for every one of the skills they may have, discourages people from learning new skills and brings about a view of pay as an entitlement' (Gibson, 1995). Collateral can be viewed as both favourable and unfavourable for the employee. Equity is positive for the employee when the worker gets the same compensation as other employees performing the same job using the same set of skills. 'Skill structured pay can result in durable worker satisfaction by reinforcing individual development and by producing an equitable income rate' (Lawler, 1996). The downside to this is the fact there would be a heavy investment on training and development of new skills for the employees. A measurement system would also have to be capable of indicating when employees have learned the new skills (Lawler, 1996). A sociological research study (Temnitskii, 2007) used on the topic shows that people's general thoughts and opinions on the fairness of basic pay is in line with Adam' s theory of collateral. The analysis also puts forward the hypothesis that 'the higher the worker's sense of fairness as it pertains to pay and salaries, the higher their level of job satisfaction with the many aspects of the task and, above all, the quantity of their pay and the procedure of the organization as a entire' (Sekisova, 2002). Direct financial compensation by means of wages and earnings can be seen as reasonable for employees performing the same process as it generally does not allow for any discrimination or favouritism at work. It isn't a good motivator in terms of performance as the pace of compensation does not change with respect to performance and employees have to increase their skill set to be able to increase their income rate.

Equity and Fairness of Indirect Financial Compensation

The fairness of motivation pay as an indirect form of payment is highly important. Incentive pay includes systems such as bonus deals, commission, profit showing, stock options and performance-related pay. It is vital that equity standards are superior as they possibly affect an employee's behaviour and attitudes. Research has shown that high executing organisations create relational exchanges within the task place that derive from trust health care and esteem (Rousseau, 1995). These companies are believed to be of a high standard. Bonus plans and percentage are two of the most frequent forms of motivation based pay. Bonus items are given when certain benchmarks of performance are met, however if employees neglect to meet these standards of performance then usually bonus will not be granted. Commission can be viewed as a good form of motivation pay as the employee is paid purely predicated on their performance and expertise. However, it could be unfair if the worker is not working through the busiest intervals, therefore said employee will lose out on compensation. In order to be equitable employers should make allowances for circumstances like this. Profit showing has multiple advantages including better financial success, high degrees of output and positive staff attitudes. Identified pay equity is considered a mental health impact of revenue sharing and demonstrates the potency of a profit writing plan. Emotions of pay inequity should develop if plan related income do not match personal changes in work inputs (Florkowski, 1987). Stock options that are allocated differentially in proportion to performance may be perceived as more equitable than earnings sharing, particularly by employees seeking some sense of control or possession in the business. Alternatively stock options may create weaker levels of work inspiration and performance than merit pay as their ultimate value is set, at least partly, by market forces over that your employee has no control. Therefore, the eventual value of stock options may turn out to be less proportionate to employee contribution or performance than expected, therefore again resulting in a notion of inequity (Kraizberg et al. 2002).

Performance-based rewards allow employees to visit a stronger connection between their performance and organisational performance. However, this form of reimbursement will not work for each and every organisation (Mello, 2006). Issues of interest concerning the fairness of the reimbursement systems can also cause problems in the task place.

Internal Equity

Employers need to determine a pay structure that complies with employees' equity expectancies. One of the ways is through inner equity, whereby the machine aims to achieve a good pay differential among all the employees aligned to each position within the organisation. Managing and utilizing an internally equitable pay structure can be fragile and difficult to attain. Research has demonstrated that 'seventy eight percent of employees would be most angered if they found themselves paid less than others doing the same job in their own corporation' (Nash, 1972). As it is often possible for an employee to know their co-workers' salaries, fairness is essential whenever a system is chosen. Good communication must be there in the organisation and employers have to make certain that their workers grasp the paying decisions to keep good morale and low turnover of personnel. To truly have a successfully established reimbursement system also to correctly evaluate the different jobs within an organisation, four techniques are available; 'job rank, job classification, point systems and factor assessment' (Mello, 2011). These techniques are changeable to different varieties of organisation. Job ranking could possibly be the simplest and the most well suited for small organisations, as it includes a hierarchical ranking of the positions. Scientific organisation of the jobs, with the points systems or factor comparability focuses in a more or less quantitative way on the various factors that produce employment more important over a compensation level. Once the pay system is designed and applied, high executives and CEO pay needs to be carefully considered in order that all employees understand their pay as equitable. Salary compression 'happens when new hires earn higher earnings than employees who have more experience' (Mello, 2011). If earnings are not adjusted to the new hires, a show up in morale and devotion is usually to be expected.

External Equity

A simple definition of external collateral is employee's perception of the conditions and rewards with their employment, compared with employees from other companies. External collateral is the term used to spell it out reasonable and competitive settlement with regards to the market value of employment. Considering external collateral involves researching alignment to what contending employers pay to catch the attention of and maintain employees who have similar skills and duties as the prospective new hire. Reimbursement is a tool employed by management for a variety of purposes to help expand the life of the business. Compensation may be modified according to business needs, goals and available resources. External equity is the problem that exists when an organisation's pay rates are in least equal to advertise rates. Additionally it is known as complementing strategy. An employer's goal ought to be to pay what's necessary to draw in, retain and stimulate a sufficient volume of qualified employees. This requires basics pay program that pays off competitively. Data as turnover rates and exit interviews can be helpful in deciding the competitiveness and fairness of pay rates. There may be however no labour market for a specific job. Source and demand are different across markets leading to wage spaces in the labour market. This is due to a number of factors including geographic location, industry sector, organisation size, product competition, education and experience level. Most organisations established the pay for jobs to about the same as what other organisations pay for the same job. If an company enhances costs of pay, they will attract a higher standard of job seekers for the job leading to lower turnover rates and more capable and qualified job seekers getting the work. Some organisations placed the pay below that of other organisations which results in higher turnover rates and less certified applicants applying for the position. A job candidate might make an application for this company as they visit a chance of advertising and development within the company.

Individual Equity

Mello defines individual collateral as 'pay differentials among those who hold identical jobs in the same company' (Mello, 2011). Seniority based mostly pay where employee compensation is determined by their durability in the business is widely used. Research has found both examples that support and criticize this theory. In most public colleges in Michigan teachers are paid corresponding to the system. It really is argued that under this system teachers are less likely to 'innovate or excel in the class' (Munk, 1998). However, a recent French study found that senior customers of personnel were generally less subjected to stress and thought the environment of the company was agreeable (Baggio and Sutter, 2010). Merit based mostly pay compensates employees according to their performance face to face and 'ideally provide an motivation for employees to work harder and accomplish more'. This has however being questioned, as it will depend on the responses system, that can be quite subjective (Mello, 2010). Merit pay was condemned by Deming who expresses that 'evident dissimilarities between people occur almost completely from the system that they work in, not from the folks themselves'. He argues that the system factors are uncontrollable for employees and this thus specific performance ranking is unfair (Karwowski and Salvendy, 1994). Furthermore, Deming tensions that kind of pay system discourages teamwork by putting too much focus on the average person (Deming, 2000). Companies pay by incentive plans that happen to be also based on performance. Incentive pay is punctual, through the form of stock ownership for instance, as opposed to an addition to basics salary. As a consequence, 'it must be re-earned in subsequent time periods and can have a larger motivational impact' (Mello, 2010). Skill based mostly pay systems determines employee compensation regarding to 'the acquisition and mastery of skills used on the job' (Mello, 2010). The main benefit is the fact that it can encourage employees to try training programs and then show the knowledge with the business. However the system has flaws. In a quickly changing environment, some skills are outdated quickly, however most employees would contemplate it unfair their payment was to be reduced on the basis that their skills are no more of value to the company (Mello, 2010). Team founded pay plans contain pleasing a team of employees who've achieved performance goals. It is effective in companies that already have a culture of assistance among employees and the key advantages add a climate of duty and dedication to the group, cooperation instead of competition and a heart of camaraderie (Jackson, 2009). It requires to be applied proficiently through good communication, worker implication and associates feeling that the machine is 'fair and equitable' (Mello, 2010).

Equity of Executive Compensation

Many dispute that the pay of the CEO should be a representation of the performance of your organisation. You will discover negative reactions which criticise CEO reimbursement pay. Criticism has often been from shareholders, employees, the multimedia and the public generally. However, there is always a demand for successful CEOs, who can achieve earnings for shareholders. The compensation plans are therefore justified using cases. Visible scandals in the media, exposing CEOs who have earned large numbers while their organizations were in serious financial challenges, have brought negative focus on executive compensation deals. The commodity approach to reimbursement packages allow the employees of a company to purchase stocks. The negative facet of commodity is the chance for executives to be involved in activities which artificially drive up the worthiness of the stock. Because of the negative publicity associated with executive compensation packages there is a change towards offering employees and executives stock grants instead of stock options. Issues with unethical CEOs have resulted in companies experiencing financial difficulties as the executives have been around in receipt of large payouts. The difficulties associated with professional compensation packages continue to be key tactical issues for organisations. The total amount between optimising performance and the equity of executive payment systems are essential for the success of an organisation. This is very difficult to accomplish. The right CEO will only be attracted to an organisation with a lucrative compensation package on offer. However, it must be recognized, employees and shareholders require the CEO to perform competently to attain profits. Relating to Steve Kaplan 'evidence shows that CEOs typically are not overpaid, in fact, good CEOs may be underpaid. Boards are well aware that they need to pay the heading rate in order to attract and keep top executives. Overall, they answer rationally to the inexorable drive of the talent market' (Mackey, 2009)

Research Findings, Examination and Interpretation

In the building of the survey the creators used a particular strategy to formulate the claims. Each statement was developed with collateral of compensation or influence on employee behavior as the central concern. By this method the creators can immediately correlate the perceived equity with employee behaviour. There have been sixty replies. Six questions focus directly on whether employees consider their pay is equitable.

Direct base purchase might work is good and equitable (e. g. wages, wages, commissions, bonus items, stock options, earnings sharing)

75% of employees agreed or strongly decided, 7% were undecided and 18% disagreed or highly disagreed.

Indirect compensation for might work is good and equitable (e. g. vacation pay, time off, work hours, pension strategies, insurance plans)

48% of employees agreed or strongly agreed, 11% were undecided and 35% disagreed or highly disagreed.

I am compensated rather and equitably relative to colleagues of the same level doing the same work in my own organisation

55% of employees decided or strongly decided, 15% were undecided and 30% disagreed or highly disagreed.

I am rewarded rather and equitably relative to colleagues of the different level doing different work in my organisation

37% of employees arranged or strongly arranged, 35% were undecided and 28% disagreed or highly disagreed.

I am compensated quite and equitably relative to workers outside my own organisation

45% of employees decided or strongly arranged, 35% were undecided and 18% disagreed or highly disagreed.

The pay and rewards of professionals in my company is fair and equitable

37% of employees arranged or strongly arranged, 37% were undecided and 26% disagreed or firmly disagreed.

The results signify that most employees understand their pay as equitable and reasonable. With a fascinating outcome regarding inside/ external and professional pay equity. High 'undecided' percentages for these factors pose interesting questions which may reflect the existing economic problems and the doubt employees are facing because of their futures. The results show that perhaps employees don't really know what their colleagues, managers and CEOs are being paid therefore can't determine their thoughts of inequity as is mirrored in the debate we see in the multimedia consider these issues at the present time.

The next group of statements uncover data about how exactly equity in compensation systems effect on employees thoughts, behaviours and motivation

Conditions of work, incentives and benefits influence my emotions regarding whether prize for my job is equitable and fair

72% of employees agreed or strongly arranged, 12% were undecided and 26% disagreed or firmly disagreed. These results quite obviously highlight the importance the effect of factors such as work conditions have how employees understand the equity of the pay. Perhaps management might use these details in the look of settlement systems to target not only on direct and indirect settlement alone.

I increase/ lower my performance regarding to whether I believe my pay is good and equitable

38% of employees agreed or strongly decided, 12% were undecided and 50% disagreed or firmly disagreed. The divide result to this statement poses some interesting questions. Management should be relieved that for 50% of employees, identified pay equity doesn't alter their performance. However should professionals concentrate their attention on the fact that the other 50% do alter their performance or potentially do? What implications dies this have for organisations?

My pay and incentive influences my motivation

55% of employees arranged or strongly agreed, 8% were undecided and 37% disagreed or firmly disagreed. This consequence highlights the importance of money and compensation as a motivational factor and the necessity for the reimbursement system to be equitable.

Please rate the importance of factors you are feeling the fairest & most equitable compensation systems should be based on (1 being most important, 5 being least important)

Employees responded as follows:

Individual Performance 1

Skills and Capacity 2

Seniority/ Experience 3

Job Rank/ Level or Level 4

Organisation Performance 5

This consequence could give organisations valuable information regarding how to design reimbursement systems. The survey data shows the have an impact on of perceived fairness on behaviour, performance and motivation. Management should be aware of the ability of an adequately designed pay offer to effect and help the achievements of attaining organisational objectives.


The implication of the thinking behind the theories and ideas of equity is important for organisations to comprehend when considering staff compensation systems. If they are to reach your goals, examining the fairness of organisational decisions about the allocation of pay is very important. Employees consider not only what those decisions are, but also the way in which where those decisions are created and if there is a recognized inequity the implications for the organisation could be very costly. At the same time a planned and implemented, proper form of employee compensation can be a highly effective motivator and contributor to staff performance and job satisfaction which would finally benefit the organisation.

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