Can Perceived Fairness in Reward Structures Be Unanimous - Assignment Example

Can Perceived Fairness in Reward Structures be Unanimous? In today’s intensely competitive business environment, competitive advantages are hard to achieve and sustain. More and more organisations are changing the manner in which organisation manages itself and aims at deriving a competitive advantage through its human capital. This involves increasing productivity, efficiency and reducing costs through numerous aspects of human resource management. Developing reward systems, which link corporate objectives to human resource strategies, is essential in the process of gaining such strategic advantages. In administering a reward system, it should fulfill numerous objectives including, acquiring of qualified personnel, retain present personnel, reward desired behaviour, control costs, comply with legal regulations and ensuring equity (Schwind & Wager 2002). Sometimes, these objectives may be at a trade off, posing challenging decisions for the management. For example, objective of equity and fairness in reward systems may come at a price of alienating high performing staff that feels they deserve to be paid higher than the average performers. An effective remuneration strategy’s primary focus should be on deriving a high performance through its workforce by promoting and rewarding performance. Ensuring fairness and equity in the process of administering the reward strategy will be an important aspect. There will be an obvious trade off between rewarding those who are high performers and achieving a high level of perceived equity. If the reward systems aim to achieve a high level of perceived equity and administered with structured salary scales with high or sole levels of base pay components, then those who contribute to the organisational operations at an above average level may perceive such a remuneration system as unfair since it does not recognise the higher levels of performance. Thus, it may be an unrealistic goal to achieve a pay strategy, which is perceived as fair by all. However, organisations can and should strive in ensuring that a maximum level of procedural fairness and equity in both internal and external perspective is achieved without a trade off between priorities of organisational performance. A company’s reward strategy defines how it intends to reward the employees and should be based upon remuneration policies and procedures. The remuneration policy should establish the organisation’s position on key structural factors that needs to be addressed in a remuneration system design. These involves, whether the remuneration will be Job or Person Based, Degree of importance placed on Performance and how its linked to remuneration, organisation’s position in the labour market (i.e. Pay Master or Low Payer) how important will internal and external equity be, degree of importance of hierarchy in pay, how flexible will the remuneration mix be, and what level of significance does seniority and job security holds (Lawler 2000). Factors determining pay levels will include the external and internal relativities, the worth of the person or the team to the organisation and the collective bargaining arrangements (Armstrong). An organisation’s remuneration system involves financial and non-financial benefits, which an organisation is able to and willing to offer to its employees in exchange of for employee contribution (Cascio 1998). While it is difficult to develop and administer a pay system that is unanimously perceived as fair, it is important that reward systems are developed with a high level of equity and fairness in terms of internal and external perspectives. Internal equity requires that pay be linked to the relative worth of the job to the organisation. External equity refers to the organisational pay structures being comparatively fair in comparison to market rates. Importance of ensuring a fair reward system lies in that it would affect the motivation level of the employees positively, which in return would benefit the organisational productiveness. In developing a remuneration system, it is important to consider the motivational aspects associated with a fair and equitable reward system. Remuneration provides the reinforcement needed to ensure company goals are achieved. Theory of Reinforcement in motivational studies indicates that Consequences, which give Rewards, increase a behavior while consequences, which give Punishments, decrease a behavior. Consequences, which give neither Rewards nor Punishments, extinguish a behavior (Weiss 2001). Another motivational theory, which has implications for remuneration strategy, is the expectancy theory. Expectancy Theory of motivation aims at understanding how individuals make decisions regarding various behavioral alternatives. In an organisational context for example, the behavioral alternatives will be to work at average level or be innovative and strive for excellence. The theory suggests that when deciding among behavioral options, individuals select the option with the greatest motivation forces, which depends on three factors: Expectancy, Instrumentality and Valance. Expectancy refers to the Probability of the desired outcome. That is the belief that ones effort will result is attainment of desired performance goals. The instrumentality is the belief that by meeting the performance expectations, a greater reward will be forthcoming. The valance refers the value of the reward to the individual and will is a function of his or her needs, goals, values and source of motivation (Weiss 2001). Practical applicability of this theory is three pronged. The Expectancy factor indicates that organisations should maintain consistency and fairness in the remuneration policies, have the faith of the workforce and should have attainable and realistic goals linked to the remuneration system. The instrumentality aspect suggests that the organisation should have proper means of measuring performance and have performance-linked remuneration so that greater the performance the higher will be the reward. The valence aspect also has critical implications for the development of an effective remuneration system. Valence factor of the theory suggests that individuals will have differing values attached to the rewards and this will depend on their value system. For some, the financial benefits will be most crucial while some others will value the fringe benefits. Thus, the need for incorporating flexible remuneration and reward packages has to be recognised. Need based motivational theories as Maslow’s Hierarchy of needs may indicate that pay strategies will have to be classified to suit different groups of employees. As the need theories stress, upper level needs can not provide a source of motivation until the lower levels needs are satisfied, these will have implications in deciding what needs are to be first fulfilled. For example, the dominating physiological needs may lead to greater importance placed on cash remunerations among the factory workers. In contrast the senior level management may be more appreciative of status symbols as entertainment accounts and company paid vehicles etc, while the financial remunerations also stay as a part of the package. Hertzberg’s two factor theory which defines hygiene factors and motivators at work place indicate that certain component of a reward system will be perceived as prerequisites which needs to be in place to keep employees from becoming dissatisfied. The motivator factors if present will lead to satisfaction and motivation. Base pay components of a remuneration system can be seem as a hygiene factor while performance incentives can be seem as motivators. While these need based motivational theories clearly indicate the need for differentiated pay structures and reward mixes to cater to various needs at different levels of employment, the perceived fairness may suffer. For example, only the senior management at Tesco are offered company paid vehicles and performance bonuses as a part of their remuneration package. This is perceived as unfair by many of Tesco employees at lower levels of the hierarchy. The equity theory of motivation suggests that people compare their efforts and rewards with the others to determine the fairness of the outcome. Employees compare their remunerations with other employees in the organisation as well as with employees in similar positions in outside companies. Perceived inequities may prompt the individuals to take actions to remedy the felt inequities. Such actions may include demand for more rewards or reducing of efforts. Both have negative implications for an organisation’s productivity. If the demands are in the form of unionized bargaining, this affects the workforce moral as well as the overall company image. It is therefore of great importance to strive for internal as well as external equity in developing remuneration strategies (Lawler 2000). While recognising the importance of fairness in reward strategies, to what degree can such fairness be achieved in formulating pay structures is a challenge which HR managers need to address. The Equal Pay Legislation Act of 1970 requires that equal pay be administered to equal work. Such legislature aims at minimising the inequalities related to gender and work segregations. Studies reveal that despite such legislature, women still earn only up to 80% of the men’s earnings. While equality in skills, efforts, responsibility and working conditions indicates the necessity to have equality in administered pay, there are factors, which justifies differences in wage rates. These include the difference in performance ratings, measures through a formal appraisal system, seniority, rehabilitation assignments after lengthy absences from work, demotion pay procedures, phased in wage reduction procedures and temporary training positions (Schwind, Das & Wager 2002). In developing a remuneration strategy, a company has to take in to account not only the prevailing legislature concerning remunerations but also the collective bargaining agreements. Collective bargaining encompasses wage agreements negotiated by trade unions to be applicable for a whole industry. While it will not be possible to formulate a system which is perceived as fair by all those involved, by incorporating a systematic procedure in to the reward strategy formulation process, organisations can avoid blatantly unfair systems being administered. A basic framework that is recommended in formulating an effective remuneration strategy includes, analysis of the existing situation, developing a remuneration policy, planning the implementation, Job evaluation (concerned with internal equity), Market surveys (concerned with external equity), establishing Salary structure and development of a performance appraisal system that can integrate with the remuneration strategy. In order to bring in Internal Equity to the process, job evaluations based on their perceived importance and worth to the organisation should be carried out. Job evaluations involves the systematic procedures to determine the relative worth of the job to the organisation and can be based on several different approaches such as job ranking, job grading or point systems (Schwind, Das & Wager 2002). Variations of above methods, which adopt to suit internal organisational conditions, have been developed. Hey Plan is one of the most widely used job evaluation model developed and marketed by Hey & Associates consultancy firm. However all of these approaches focus on the duties, responsibilities and working conditions of the job to identify which jobs are to be paid more than the others. The remuneration levels are linked to these levels of importance to the company, derived through the job evaluation process. While job evaluations are concerned with the internal equity, wage and salary surveys are utilised to bring in external equity to the reward system. External equity, which relates to the perceived fairness in pay relative to other employers in the industry is important to ensure that work force moral and motivational levels are maintained as well as to ensure that organisation is able to attract and retain high caliber staff from the labour market. A company can decide on being a low paying employer or a high paymaster. While the use of surveys may strive to incorporate a certain level of equity it may not result in a system which all employees perceive as fair. A company may opt to be a low paymaster or be at par with average paying employers rather than be a high paymaster. These decisions will depend upon a host of organisational conditions such as business stability, cost structure, competitiveness in the market, the industry life cycle, the importance of human capital in the business process etc. If a company decide to pay at par with average rates in the industry, some of the employees may perceive it as unfair, specially if they are qualified enough to be in other high paying organisations. In developing remuneration structures, various components of reward should be taken in to consideration. Traditional approach was to apply a flat rate to each wage structure. The disadvantage of this method was that it had no allowance for rewarding those who are exceptional performers. Therefore, while it may be perceived as fair by some, the system would undoubtedly be seen as unfair by those who perform exceptionally and get paid the same as those with mediocre or poor performance. The modern concept of Broad-Banding is used to improve upon the Job Based Pay systems where a large number of pay grades are compressed in to few broad bands. Within these bands, there are upper and lower limits, which contains pay zones signifying similarly grouped jobs. Broad banding allows the remuneration system to recognise high performance within fixed pay structures where band span may range up to 200% of the minimum pay for the particular pay band (Armstrong & Murlis 1988). While the high salary ranges allow for room to reward those high performers, the high salary differentials within the same salary band can cause dissatisfaction among employees and be seen as an unfair reward system. More and more companies are now moving away from flat job based pay systems and adopting skill based pay systems to promote a learning environment and incentive pay structures to reward performance. Incentive pay is being incorporate as partial or total of the remuneration package and base salaries are linked to the multiple skills of the employee. Expansion of skill base leads to salary increments. A skill based salary system aids in benefiting organisations in becoming highly flexible autonomous work team structures where employees multi task to achieve goals and objectives effectively. Such pay structures allow organisations to move away from hierarchical, specific job profiles in to team structure. Companies such as Microsoft with its dynamic and multi talented work groups have successfully adopted such remuneration systems. While such a pay system seems fair, some of those who are not geared at multitasking may not perceive it as a fair means of administering salary and rewards. When considering incentive based reward structures and their fairness and equity in pay administration, some of the Pay for performance models can be seen as straightforward and fair. For example, piece rate wage or a commission based reward system is directly linked to individual performances, which are measurable and quantifiable. However, there may be external conditions, which are beyond the control of the employee, which affects the achievement of the set targets. Thus, application of purely incentive based pay systems can be seen as unfair in some scenarios by those who are affected by adverse conditions beyond their control and receive low pay as a result. Another form of performance based pay structures involves Merit pay systems. The increments are based on annual performance appraisals. Weaknesses include the ineffectiveness in motivating performance as the principal of merit pay yields “annuity effects", unclear links to desired performance and lack of correlation between timing of incentive and timing of rewarded performance. Individual performance rewards such as Discretionary Bonus payments are more effective in driving performance as clearly defined set of objectives are linked to the reward. The pay raised is administered as a percentage increase of their existing salary. This method allows greater rewarding for those who are high performers in the organisation but can still be perceived unfair when some individuals receive high bonuses. A widely publicised & critisised £ 26 million per each bonus pay off to the Tesco’s eight board members for their contribution towards achieving a record profit of £ 2 billion in year 2005 is an example of how some of the employees may view such remuneration arrangements related to performance as unfair. Team and organisational-based remuneration strategies are being adopted to drive performance through collective effort and some of these team-based pay systems are very successful in those organisations such as Coopers & Lybrand that have incorporate high performance autonomous work groups in to its structure. In order to ensure the effectiveness of Team Performance Rewards, the objectives should be clearly outlined. These may include the level of productivity, output, quality and reject levels. The teams will be ranked as per their performance and team bonuses will be provided as per the ranking. Even in team based pay systems, the fairness may suffer due to “free rider “ issues. In order to ensure that team members varying degree of contribution is taken in to account, a peer rating systems are now being applied within the team to decide on the sharing of the incentive. This aims to reward those team members who contribute more to the team performance to a greater degree than those who contribute less and bring in more fairness in to the reward process (Cascio 1998). Organisational-based incentives relate to gain sharing plans and profit sharing plans. Due to its common impact across the organisation, these schemes have positive impact on not only the organisational performance but also the organisational culture as well. Gain sharing plans or Scanlon plans emphasis the win-win philosophy and motivates employees to work together to improve the organisational performance, imperative of their functions and the resulting profits through productivity improvements, cost reductions and other organisational improvements are shared between the employees and the employer on a predetermined ratio. The employee share is normally distributed on equal dollar amount across the employees. Profit sharing schemes usually combine an annual pay out as well as a contribution to a pension fund. When employees retire or leave, their share of the fund will be dispensed. Tesco operates one of the most successful profit sharing schemes with joint contribution of employees. Such reward elements bring in a greater sense of fairness but the free rider issues may still cloud the notion of fairness. Sometimes, organisational profitability is affected by external factors beyond employee performance and control and thus losses, which may result in from factors as recessions may take away employee benefits as profit sharing (Bratten & Gold 1999). Employee Stock Ownership Plans (ESOPs) gives the employees a genuine control over the company operations and its decision making process. Some companies offer fixed prices for a period of years at the rate, which the employees can convert, a component of their pay in to stock options. This element of the reward strategy may aid the organisation in bringing in greater sense of equity and fairness to the process by ensuring all employees having a fair chance of becoming owners of the company, increasing commitment and sense of belonging. New developments in the filed of remuneration management brings in a wide array of flexible reward elements combining base pay, incentive pay, non financial benefits such as insurance cover where the choice is left to the employee. Reward strategies, which are strategically linked to organisational objectives and are person based, focusing on continuous development of skills is now being widely adopted to bring in fairness in reward administration while driving organisational performance. Relative importance of a job is a highly subjective decision and with the modern organisational management concepts of total quality management, value chain management & high performance autonomous work groups, which highlights the importance of all employees in achieving the overall objectives, employees may not accept that their jobs are of a lesser importance to the overall organisational operations. While equity and fairness is an important aspect of a reward policy, the focus of an effective reward strategy would lie on driving key organisational objectives, which are linked to the reward system. However, achieving a high level of internal and external equity is of importance to ensure the motivational levels of employees as well as compliance with legislature. While job evaluations and market surveys will form the foundation of an equitable remuneration strategy, different pay models such as job based, skill based and performance based will decide the different elements of the rewards and remuneration packages. Need based motivational theories such as Maslow’s Hierarchy of needs and Hertzberg’s two factor theory indicate a clear need for differentiated reward mixes to meet the needs of and motivate different employee categories. However, in formulating reward strategies which are effective in addressing such varying motivational needs and which drives performance through linking reward to performance, the perceived fairness of the reward system may suffer. Notion of fairness contains a degree of subjectivity and not totally rational. Therefore, procedural equity achived through implemntation of reward policies, procedures and pay models will only achieve a partial level of perceived fairness. Thus, in conclusion, it can be noted that while organisation have various means through which it can strive to achieve equity and fairness in rewarding its employees, the possibility of formulating a reward system, which is perceived as fair unanimously, would not be practical. References Amstrong, M. & Murlis, H. (1988) Reward Management:A Handbook of Remuneration Strategy & Practice. 3rd ed.London: Kogan Page Limited. Bratten, J. & Gold, J. 1999, Human Resource Management: Theory & Practice, 2nd ed, McGraw-Hill Publishing Company Ltd, New York. Pp 237-261 Cascio, W. F. (1998) Managing Human Resources: Productivity, Quality of Work Life, Profits. 5th ed. New York: McGraw-Hill Companies. Kohn, A. (1993) Why incentive Plans cannot work. Harvard Business Review, Sept/Oct, p 54-63. Lawler, E.E. (2000) Rewarding Excellence: Pay Strategies for the New Economy. San Francisco: Jossey-Bass Publishers. Schwind, H. Das, H. & Wager, T. (2000) Canadian Human resource Management: A Strategic Approach .p. 391 –423Toronto: McGraw Hill Company,. Stroh, L. K., Brett, J. M., Baumann, J. P. & Reilly, A. H. (1996) Agency Theory and variable pay compensation strategies. Academy of Management Journal, 39, p. 751-67. Weiss, J.W. (2001) Organizational Behavior & Change. 2nd ed. Ohio: South-Western Collage Publishing. Read More