Factors affecting ‘Fairness’ in the Determination of Salaries
Perhaps the first point to discuss is: What is ‘fairness’? While historical roots of the word ‘fair’ mean ‘beautiful’ in German and Old English, with respect to salaries, the definition ‘treating people in a way that does not favor some over others’ (Merriam- Webster 2010) would be more consistent with the mental definition of fairness that most of us have. Further points would include ‘marked by impartiality and honesty; free from self-interest, prejudice, or favoritism; conforming to the established rules; allowed; consonant with merit or importance’ (Merriam-Webster 2010).
Thus, an employee’s perception of fairness on the job is simultaneously objective (correlating with the pay given to others for a similar and/or analogous task) and subjective (the desire to earn more, and other personal considerations). If we change focus from the employee’s purview to that of the employer, the employer is likely to be objectively considering the ‘fair wages’ within the organization as well as comparative rates of pay within the industry, and subjectively considering the ‘lowest possible wage to pay for the maximum work’. The latter may not be a pleasant thought, however it is likely realistic.
Employee perception of fairness is a critical factor. Employees want to feel that their work is valued, and of course payment for work done is the primary point of perception. Wiley (2011) stated that fair pay is the predominant consideration for at least 25% of employees; equitable pay is, as will be shown herein (vide infra) important to an organization in terms of employee contributions and overall levels of engagement. Fairness with respect to pay has also been shown to impact upon employees’ life satisfaction, employee engagement, physical health, psychological health, turnover intentions, and work stress. The best interests of companies are also served by fair wages.
Considerable research has shown that companies having an engaged workforce tend towards high performance levels on a variety of metrics addressing organizational performance (Salanova, Agut, and Piero 2005; Harter, Schmidt, and Hayes 2002). Factors that are not normally considered are that happy employees are less stressed; lower stress results in an improvement of both physical and psychological health; these result in better employee focus on the job as well as fewer absences from the job (Spector, Dwyer, and Jex 1988; Spector and Jex 1991). If employees are fairly compensated, turnover may be reduced, which lowers replacement (including training) costs (Fitz-enz 1997). It is known that outcomes, both at the organizational level, and at the employee level, are impacted by compensation (Rasch & Szypko, 2013). Often the costs of hiring and training are not considered as they should be, but they can be considerable relative to the cost of increasing job-satisfaction and engagement for present employees.
A Brief History of Determining Fairness in Pay
From the perspective of economics, the concept of fairness is defined as a rational and bias-free value for price. It is obvious to many that executive pay in some firms is unreasonably exorbitant, and beyond justification (Bowers & Whittlesey, 2010).
Using ratios to determine salary ‘fairness’ is a concept that is not novel. Back in 1977, Peter Drucker advocated salary ratios for employee and executive salaries (Drucker, 1977), with internal flexibility such as a 30-1 ratio for large firms vs. A 15-1 ratio for a smaller business. While it was obvious that this wage disparity was not any type of ‘equality’, it was at the least within a normal and desirable range, instead of being outrageous and ridiculous. Drucker (1984) wrote in the Wall Street Journal again addressing concerning the inappropriateness of massive salaries and bonuses for head management, and suggested that executive pay be set as a multiple of employee pay, such as 20-to-1 at maximum. When stock market performances make ‘everyone’ everyone millionaires, including the rank-and-file employees, the idea of fairness becomes confusing (Bowers & Whittlesey, 2010). The empirical basis from which ‘fairness’ in executive pay can be formulated is still lacking; without consensus, or at the least an attempt to find such, this area may continue to be a contentious one. The complexity of corporate diversity, ranging from internal structure, type of business, business size, are all factors which may play into the nature of executive pay. However, at present, this topic is not one that has become clear-cut for decision making at the corporate level (Bowers & Whittlesey, 2010).
Impact of Pay Fairness on Employers and Organizations
One of the areas of difficulty for an organization is that perceptions do not always reflect reality; thus a fair organization could be perceived to be unfair, and vice versa. When fairness is evenly distributed throughout all levels of a corporation, it can be assumed to be based in reality rather than perception. Factors that can be considered include procedures and policies that ensure fairness, and in some cases unions. Many will state that fairness is a key factor in terms of employee engagement. (Employee ‘engagement’ is essentially enthusiasm, correlating the relationship between the employee and the organization, such that the employee is pro-active and productive.)
Entitlement, situational proximity, and expectations also have an impact upon employee perceptions concerning fairness (Beugre, 1998). As well, perceptions of fairness are also impacted by clear-cut demographic factors. Educational level could and should reasonably affect salary where pertinent – a Ph.D. may make no difference on an assembly-line).However, gender and race (or ethic background), given equivalent skills and talents, should not impact salary. Of interest, it was shown that for women, fairness was defined as equality, whereas for men, equity was the definition of fairness (Beugre, 1998). It is interesting to consider that ‘equity’ and ‘equality’ are not precisely the same in meaning and/or implementation. How to address this difference is also a topic for further consideration.
During periods of corporate change (such as role reduction, structural change and cost-cutting), it is very easy for employees to misunderstand the ongoing process and perceive unfairness (even if not actually occurring); this perception can subsequently lead to impaired engagement by employees. Notice, however, that during a period of corporate change, the employee unhappiness and/or perception of unfairness is not derived from the change itself, but due to any direct or perceived inequities of treatment. These may be as simple as not being fully informed as to the nature of on-going changes (Beugre, 1998). Among the most important aspects of positive employee perception are trust and good communication, particularly when organizational changes are being made (Kontakos, n.d.). Indeed, the value of communication can not be over-stated; this inclusionary process can increase employee engagement, perception of fairness, and overall job satisfaction.
Employee participation in choices that impact their own wages and compensation can unequivocally establish the premise of fairness in the workplace. Because the workplace pay system directly reflects the organization’s concept of distributive justice, full-disclosure of the employee salary package is perhaps one of the best ways to establish employee trust. When it is possible to provide employees with ‘cafeteria-style’ benefit choices (a variety of benefit choices), these may both decrease organizational expenses but also permit the employee to be involved, and ultimately to better understand the position of the organization. While industries may not be able to include and/or incorporate employees into all operational aspects, there are some simple things that can done. Among the most significant, incorporation and utilization of feedback on a frequent basis along with effective communication are very important aspects of employment; these are strong contributors to employees’ satisfaction in the workplace (Kontakos, n.d.).
Impact of Pay Fairness on Employees
Employee commitment (‘engagement’) is arguably associated with: valued and meaningful work, workload that is sustainable, justice and fairness, supportive community at work, feelings of control and choice, and appropriate reward and recognition (Saks, 2006). Walker Information recently surveyed employees in thirty-two countries, and determined that employee engagement/commitment was most influenced by trust, concern for employees, fairness, and care (Frank, Finnegan & Taylor, 2004).
When employees felt procedural justice in organizations was fair, their level of engagement was higher (Saks, 2006) including approbation of supervisors (McFarlin & Sweeney, 1992). Being a participant in employment activities also enhances fairness, even if the employees’ choice in a decision is not utilized (Greenberg, 2002) When an organization includes employees in the information-sharing with respect to protocols and procedures, that organization is perceived as being more caring. When processes for decisions are unclear, trust is damaged and once again engagement is decreased. Research has shown that distributive justice (perceived fairness of reward sharing) correlates strongly with employee job- (Schappe, 1998) and pay-gratification (McFarlin & Sweeney, 1992), Leadership efforts should show sincere concern (Kontakos, n.d.).
Engagement levels are lower for employees who perceive their pay is inequitable or unfair. In the United States, generally 50% believe they are appropriately paid, vs. only 40% globally. Seventy % of United States employees feel that their organization is fair, again vs. 40% globally. While globally, only 48% of employees understand the process of compensation-maximization, for U.S. employees that number is approximately…