BEHAVIORAL ASPECTS OF COMPENSATION

Behavioral factors affect all types of compensation. Most people in work organizations are working in order to gain rewards for their efforts. Except in volunteer organizations, people expect to receive fair value in the form of compensation for their efforts. Whether regarding base pay, variable pay, or benefits, the extent to which employees perceive they are receiving fair value often affects their performance and how they view their jobs and employers.


1. EQUITY

People want to be treated fairly in all facets of compensation, including base pay, incentives, and benefits. This is the concept of equity, which is the perceived fairness of the relation between what a person does (inputs) and what the person receives (outcomes). Inputs are what a person brings to the organization and includes educational level, age, experience, productivity, and other skills or efforts.

What a person receives from the organization, or outcomes, are the rewards obtained in exchange for inputs. Outcomes include pay, benefits, recognition, achievement, prestige, and any tangible or intangible reward received. Individuals judge equity in compensation by comparing the effort and performance they give with the effort and performance of others and the rewards those others receive. But it must be stressed that these comparisons are personal and based on individual perceptions, not just facts.
A sense of inequity occurs when the comparison process results in an imbalance between input and outcomes.
As figure indicates, there are individual, organizational, and external dimensions to equity.

Equity Considerations in Compensation 

PROCEDURAL AND DISTRIBUTIVE JUSTICE IN COMPENSATION
Internally, equity means that employees receive compensation in relation to the knowledge, skills, and abilities (KSAs) they use in their jobs as well as their responsibilities and accomplishments. Two key issues that relate to internal equity are procedural justice and distributive justice.

Procedural justice is the perceived fairness of the process and procedures used to make decisions about employees, including their pay. Procedural fairness is viewed both in terms of the policies and procedures and the actions of supervisors and managers who implement the policies and procedures. As it applies to compensation, the process of determining the base pay for jobs, the allocation of pay increases, and the measurement of performance must be perceived as fair.

Two critical issues are (1) how appropriate and fair is the process used to assign jobs to pay grades? and (2) how are the pay ranges for those jobs established?

Another related issue that must be considered is distributive justice, which refers to the perceived fairness of the amounts given for performance. This facet of equity refers to how pay relates to performance. For instance, if a hard-working employee whose performance is outstanding receives the same acrossthe- board raise as an employee with attendance problems and mediocre performance, then greater inequity may be perceived. Likewise, if two employees have similar performance records but one receives a significantly greater pay raise, the other one may perceive that the inequity is due to supervisory favoritism or other factors not related to the job.

To address concerns about justice, some organizations establish appeals procedures.

In public-sector organizations, appeals procedures usually are identified formally, whereas in private-sector firms they are usually more informal. Typically, employees can contact the HR department after they have discussed their concerns with their immediate supervisors and managers.

PAY OPENNESS
Another equity issue concerns the degree of openness or secrecy that organizations allow regarding their pay systems. Pay information kept secret in “closed” systems includes how much others make, what raises others have received, and even what pay grades and ranges exist in the organization.

A growing number of organizations are opening up their pay systems to some degree by informing employees of compensation policies, providing a general description of the basis for the compensation system, and indicating where an individual’s pay is within a pay grade. Such information allows employees to make more accurate equity comparisons. It is crucial in an open pay system that managers be able to explain satisfactorily any pay differences that exist.

EXTERNAL EQUITY
Externally, the organization must provide compensation that is seen as equitable in relation to the compensation provided employees performing similar jobs in other organizations. If an employer does not provide compensation that is viewed as fair by its employees, that organization may have higher turnover of employees, may have more difficulty recruiting qualified and scarce-skill employees, and may attract and retain individuals with less knowledge, skills, and abilities, resulting in lower overall organizational productivity. Organizations track external equity by using pay surveys, which are discussed later in the chapter.

2. IMPORTANCE OF EQUITY AND COMPENSATION ACTIVITIES

It is important for HR professionals and managers to develop, administer, and maintain compensation programs that are perceived equitably by employees. The consequence of an equitable compensation program is that individuals are more likely to be attracted to and take jobs in organizations where employees do not voice widespread concerns about equity. Greater loyalty, less turnover, and higher commitment to achieve organizational performance objectives are more likely if employees believe they are compensated fairly and will share in the growth of the organization. Also, the organization must have policies, procedures, and administrative support systems that are viewed as job-related and are not manipulated by favoritism or personality preferences of managers and supervisors. Finally, external equity is crucial if the organization is going to compete effectively in the labor market. Increasingly in many labor markets, some employers are finding it difficult to attract and retain a workforce with the necessary capabilities to compete in a global marketplace. Regularly tracking external pay data and updating pay structures are integral to ensuring external equity in any organization.