Factors Influencing Employee Perception of Fair Compensation - Essay Example

 Universally, compensation, in whatever form it takes, is an essential part of the management process of any organization; large or small. Furthermore, it is a major factor that determines not just how an organization is been run, but also how employees perceive the management process. Every organization want to achieve her objectives, fulfill her mission, and most importantly for this discourse, maximize return on her human and capital investment (CAPS, 2003 p.7). Employees, on the other hand, desire a fair treatment, to be reasonably compensated for their efforts. Equity or fairness, from the employee’s perspective is best explained with the equity theory. Equity theory suggest that in the quest for fairness and justice, employees quantify their inputs and outputs and judge fairness or otherwise, by comparing these to that of a 'referent other' (Werner and Mero, 1999 p.1291). According to Werner and Mero (1999), employee inputs include quality of job performance, length of service, education, experience, amount of responsibility and pressure, productivity on the job, effort expended on the job and organizational citizenship behavior. While outputs subsumes pay and benefits, promotions, status and intrinsic rewards (p.1291). Compensation can be defined as including pay and benefits, with particular emphasis on pay i.e. wages/salary, bonuses, stock options, incentives, etc. Fairness, on the other hand, is an objective evaluation of competencies, performance and compensation (CAPS, 2003). Fairness or the perception of fairness plays a crucial role in understanding employee behaviors/morale in any organizational settings (Charness and Haruvy, 2000 p.655); employees that perceive that they are being under or over compensated tend to experience feelings of anger or guilt and therefore act in a way to correct the situation or achieve fairness either by altering inputs or outputs, using a different referent for comparison or creating psychological justifications (Werner and Mero, 1999 p.1292). In this regard, employee perception of fairness is bound to have a profound effect on productivity, job performance, and organizational citizenship behavior. For example, underpayment and other perceived inequities have been related to lower satisfaction, lower productivity, illegal behavior, lower production quality, and increased turnover. Therefore, as concluded by Bass (1995), understanding factors that shape employee perception of fairness will greatly help in building employee trust and improve productivity (Bass 1995 quoted in Pillai et al., 1999 p.898). Thus, this essay will look into the factors that influence and shape employee perception of fairness with their compensations. On a general note, consideration of fairness in a workplace is grouped under the umbrella term 'organizational justice (Pillai et al., 1999; Charness and Haruvy, 2000). Pillai et al explains that organizational justice focuses on the ways in which employees determine if they have been fairly treated in their job and the manner in which such perception influence or affect other organizational outcomes (p.900). However, Lee et al. (1999), explaining that organizational justice is more of an evaluative judgment about the appropriateness of a person's treatment by others, defined organization justice as an individual's perception of the fairness of treatments, in this respect, compensations, received from organizations and how this perception of fairness modifies the employee's behavior (p.854). Organizational justice can be broadly divided into two; distributive justice and procedural justice. Though this two are distinct, they are closely related and both greatly affect an employee’s sense of fairness. While, distributive justice deals with the fairness of a given outcome, in this instance, examples include salary increase or bonus; procedural justice relates to a perception of fairness in the decision making process that resulted in the given outcome (Charness and Haruvy, 2000 p.656). Unlike distributive justice, Procedural justice has been shown to be multi-dimensional, consisting of formal procedures or the degree to which procedures are fair, and interactional justice or the way in which the procedures are carried out. For example, satisfaction with a salary increase is greatly affected by satisfaction with the process through which the increase was effected. Several studies have indicated that employees are more satisfied with outcomes that have their inputs. A sense of control in the decision making process elicits a perception of fairness, which in most cases is not related to the quality of the outcome, but the feelings of ‘having a say’ in ones fate (Pillai et al., 1999; Kuhn and Yockey, 2003; Werner and Mero, 1999). What can be inferred from this discussion so far is that the search for determinants of employee perception of fairness must cut across both the outcomes – the compensations they receive, and the process through which the outcomes came about. The first determinant of employee perception of fairness is what Charness and Haruvy (2000) called ‘self-serving bias’. They argue that in most cases, judgment about fairness is aligned in the direction of self interest. For example, employees may analyze relevant and irrelevant information in arriving at their perceived fair compensation. Such self serving perceptions of fairness can be a result of the inputs of economically irrelevant details or procedures into the employee’s analysis of a fair compensation. Problem arises when the real compensation is not the same as the employee’s perceived ‘fair compensation’ (Charness and Haruvy, 2000 p.656-657). From another perspective, Werner and Mero (1999) argue that employee determine if they are fairly compensated or not by comparing their inputs and outputs with that of a referent other. Referring to the theory of 'relative deprivation', these authors explain that individuals compare their conditions with others in the same context to determine if they have received a fair compensation. They opine that despite the fact the individual sensitivity to fairness/equity differs, a critical determinant of equity or inequity is the referent other that is used for comparison. This theory was used to explain the result of a study by Stouffer et al., where employees' satisfaction with promotion opportunities was found to be lower in an organization where there where more promotional opportunities compared to satisfaction of those in an organization with less opportunity. While it is agreed that employees compare their condition with that of others to determine if their compensation is fair, the choice of the 'referent others' for comparison differs from one employee to the other. Based on common choices of comparison others, Werner and Mero (1999) highlighted three distinct choices of comparison other; External, internal and employee (p.1293-1294). External comparison other refers to a situation where the 'comparison other' has a similar job but a different employer. Some evidences point to the fact that managers at senior level are more likely to use external comparison others to determine if their compensation is fair or not. When the comparison other has a different job but the same employer it is regarded as internal. Although, employees have been found to use both external and internal comparison others, their relative importance in an employee fairness perception is reportedly unclear. However, Werner and Mero reported studies where employees using internal comparison others were more satisfied with their compensation than those using external others. They also reported another study that showed that employees tend to use both internal and external others or neither of the two, depending on personal differences. The last one, employee other, is when the referent other has the same job and the same employer. Such employee is mostly a confederate or a group member. Employee others tend to exert the greatest influence on fairness perception of employees (Werner and Mero, 1999). Thus, an employee determines if he is receiving a fair compensation by comparing his inputs to the organization, his outputs – pay and benefits, with that of another employee with the same or different job and with the same or different employer. Taking a slightly different but broader approach, Dulebohn and Martocchio (1998) posit that employees' perception of fairness compensation is influenced by six different factors which they identified thus: understanding the pay plan, satisfaction with the basic pay, organizational commitment, beliefs in the effectiveness of the pay plan, actual pay amount and organizational identification (Dulebohn and Martocchio, 1998 p.470). The authors explain that understanding is a major factor that influences employee attitudes to organizational activities. Employees tend to be more satisfied with outcomes of process that they fully understood. For example, studies have shown that employees' attitudes towards performance evaluation process are positively related to the degree to which they understand the process. Thus, when employees understand how their pay is determined, their satisfaction with the processes of the pay plan and the final outcomes that they receives is enhanced. Also, understanding the pay process gives the employee a sense of control on the compensation, which Kuhn and Yockey (2003) identifies as major determinant of employee satisfaction with their compensation. Though understanding the pay plan processes enhances the employee satisfaction, believe in the effectiveness of the pay plan also play a crucial role. However, the role of these two factors appears to be complementary. Individuals tend to believe in what they fully understand compared to what is perceived as ambiguous or shrouded in secrecy. Understanding the pay plan process results in a total evaluation of the process for fairness and can greatly enhance not just belief in the system, but satisfaction with the outcome. Again, employees are more likely to be satisfied with compensation resulting from a process that they understand and believe in. The third factor is organizational commitment. Trust in superiors and organizational commitment has been shown to influence employee satisfaction with compensation and thus perception of equity. Organizational commitment improves trust, satisfaction and by extension, perception of fairness. Employees who are committed to an organization tend to have a stronger attachment and trust in the superiors that precludes a sense of unfair treatment. Also, since according to Werner and Mero (1998), employees compare what they get with what others are receiving in determining if they have been fairly treated, satisfaction with the payout amount is therefore related to a sense of fair treatment. Employees who believe that what they receive as compensation is proportional to their inputs to the organization are bound to be more satisfied and feel fairly treated, compared to employees who believe what they get is not in consonance with their efforts (Dulebohn and Martocchio, 1998; Werner and Mero, 1999). Identification with a particular work group influences an employee’s perception of fairness. According to the Group value model (Lind and Tyler, 1988 quoted in Dulebohn and Martocchio, 1998), an individual's general attitudes towards his/her workgroup influences his/her perception of fair treatment. As a result, due to high level of identification with a group, a group member might see an organization's activities/procedures as fair simply because his/her workgroup endorses the procedures. In conclusion, putting all that have been said so far into consideration, one can summarize how employees determine if the compensation they receive is fair nor not. The strongest argument so far is that presented by Werner and Mero (1999) that employees compare what they receive with that of a referent other, considered to be doing the same job either with the same or a different employee. By comparing what they get as compensation with what another employee in similar context receives, employees are easily convinced of the farness or otherwise of their compensation. Since, according to Charness and Haruvy (2000) employees tend to estimate what a fair compensation ought to be, putting their perceived contribution to the organization into consideration, employees might decide if what they get is fair or not by balancing what they actually get as compensation with what they expected. Employees that get compensation far below their perceived fair compensation might be more prone to entertain feelings of bad treatment and anger. Also, employees determine if they are fairly treated or not, by considering the degree of inputs, and by extension, control that they have over the pay plan process. A transparent and 'well spelt out' compensation plan that is obvious to all is less likely to elicit a feeling of unfair treatment, since employees understand, beforehand, what to expect and how to expect it. Other factors that employees would likely put into consideration in determining if their compensation is fair include; the perceived effectiveness of the pay plan, self interest, dignity, respect for rights and entitlement due to every employee, trust in the honesty and lack of bias in the decision making process, and whether the employee believe that the employer, authority or corporation treat people in a fair and reasonable way. References Charness, Gary and Ernan Haruvy (2000). Self-Serving Biases: Evidence From A Simulated Labor Relationship. Journal of Managerial Psychology, Vol.15 No.7, 2000, pp.655-667. Chicago Area Partnerships [CAPS] (2003).Pathways And Progress: Best Practices To Ensure Fair Compensation. A Report On Compensation Practices. Dulebohn, James H and Martocchio J. Joseph (1998). Employee Perceptions of the Fairness of Work Group Incentive Pay Plan. Journal of Management, Vol. 24. No. 4 pp.469-488 Kuhn, Kristine M and Mark D. Yockey (2003). Variable Pay As A Risky Choice: Determinants Of The Relative Attractiveness Of Incentive Plans. Journal of Organizational Behavior and Human Decision Processes, Vol 90 pp.323–341. Lee, Cynthia and Kenneth S. Law and Philip Bobko (1999). The Importance of Justice Perceptions on Pay Effectiveness: A Two-Year Study of a Skill-Based Pay Plan. Journal of Management, Vol. 25, No. 6, pp.851–873. Pillai, Rajnandini, Chester A. Schriesheim and Eric S. Williams (1999). Fairness Perceptions and Trust as Mediators for Transformational and Transactional Leadership: A Two-Sample Study. Journal of Management, Vol. 25, No. 6, pp.897–933. Werner, Steve and Neal P. Mero (1999). Fair or Foul? : The Effects of External, Internal, and Employee Equity on Changes in Performance of Major League Baseball Players. Journal of Human Relations, Vol. 52, No. 10, pp. 1292-1313. Read More