Pay Fairness in Employment: Key Factors and Impacts

Introduction: Defining Fairness in Salary Determination

Perhaps the first point to discuss is: what is "fairness"? While the 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) is most consistent with the understanding of fairness that most people share. Further relevant meanings 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 or analogous task—and subjective, reflecting the desire to earn more along with other personal considerations. If we shift focus from the employee's perspective to that of the employer, the employer is likely to be objectively considering "fair wages" within the organization as well as comparative rates of pay within the industry, while subjectively considering the lowest possible wage that will secure the maximum amount of 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 payment for work done is the primary point of that perception. Wiley (2011) stated that fair pay is the predominant consideration for at least 25% of employees. As will be shown in subsequent sections, equitable pay is important to an organization in terms of employee contributions and overall levels of engagement. Fairness with respect to pay has also been shown to affect employees' life satisfaction, employee engagement, physical health, psychological health, turnover intentions, and work stress. The best interests of companies are likewise served by fair wages.

Considerable research has shown that companies with an engaged workforce tend toward high performance levels across a variety of metrics addressing organizational performance (Salanova, Agut, and Peiro 2005; Harter, Schmidt, and Hayes 2002). Factors that are not always considered include the fact that happy employees are less stressed; lower stress results in improvements in both physical and psychological health; and these improvements produce better employee focus as well as fewer absences from work (Spector, Dwyer, and Jex 1988; Spector and Jex 1991). When employees are fairly compensated, turnover may be reduced, which lowers replacement and training costs (Fitz-enz 1997). It is well established that outcomes at both the organizational and employee levels are affected by compensation (Rasch & Szypko, 2013). The costs of hiring and training are often underestimated, yet they can be considerable relative to the cost of increasing job satisfaction and engagement among existing employees.

A Brief History of Determining Fairness in Pay

From an economic perspective, the concept of fairness is defined as a rational, bias-free value for price. It is obvious to many observers that executive pay in some firms is unreasonably exorbitant and beyond justification (Bowers & Whittlesey, 2010).

Using ratios to determine salary fairness is not a novel concept. As early as 1977, Peter Drucker advocated salary ratios for employee and executive pay (Drucker, 1977), with internal flexibility such as a 30-to-1 ratio for large firms versus a 15-to-1 ratio for smaller businesses. While this wage disparity did not constitute any form of equality, it at least represented a normal and defensible range rather than something outrageous. Drucker (1984) returned to the subject in the Wall Street Journal, again addressing the inappropriateness of massive salaries and bonuses for senior management, and suggested that executive pay be set as a multiple of employee pay—at a maximum of 20-to-1. When strong stock market performance makes millionaires of employees at all levels, including rank-and-file workers, the idea of fairness becomes more complex (Bowers & Whittlesey, 2010).

The empirical basis from which fairness in executive compensation can be formulated remains unclear. Without consensus, or at least a serious effort to reach it, this area is likely to remain contentious. The complexity of corporate diversity—encompassing internal structure, type of business, and business size—all factor into the nature of executive pay. At present, this topic has not lent itself to clear-cut decision making at the corporate level (Bowers & Whittlesey, 2010).

Impact of Pay Fairness on Employers and Organizations

One of the central difficulties for any organization is that perceptions do not always reflect reality; a genuinely fair organization may be perceived as unfair, and vice versa. When fairness is consistently distributed throughout all levels of a corporation, it is more likely to be grounded in reality rather than perception alone. Relevant factors include policies and procedures that ensure fairness, and in some cases union representation. Many would argue that fairness is a key driver of employee engagement—that is, the enthusiasm and proactivity that characterize the relationship between an employee and the organization.

Entitlement, situational proximity, and expectations also affect employee perceptions of fairness (Beugre, 1998). Perceptions of fairness are additionally shaped by demographic factors. Educational level can and should reasonably affect salary where pertinent—a Ph.D. may make no meaningful difference on an assembly line—but gender and race or ethnic background, given equivalent skills and talents, should not affect pay. Notably, research has found that for women, fairness tends to be defined as equality, whereas for men it tends to be defined as equity (Beugre, 1998). It is worth noting that "equity" and "equality" are not precisely identical in meaning or implementation, and how to address this difference remains a topic requiring further consideration.

During periods of corporate change—such as role reductions, structural reorganization, or cost-cutting—it is easy for employees to misunderstand ongoing processes and perceive unfairness even when none exists. This perception can subsequently lead to diminished engagement. Importantly, however, employee unhappiness during periods of corporate change is typically not caused by the change itself, but by any direct or perceived inequities in treatment. These may be as simple as employees not being fully informed about the nature of ongoing changes (Beugre, 1998). Among the most important contributors to positive employee perception are trust and good communication, particularly when organizational changes are underway (Kontakos, n.d.). The value of inclusive communication cannot be overstated; this process can increase employee engagement, perceptions of fairness, and overall job satisfaction.

Employee participation in decisions that affect their own wages and compensation can unequivocally establish the premise of fairness in the workplace. Because the workplace pay system directly reflects an organization's concept of distributive justice, full disclosure of the employee salary package is perhaps one of the most effective ways to establish employee trust. Where possible, offering employees "cafeteria-style" benefit choices—a variety of benefit options from which to choose—can both reduce organizational expenses and allow employees to engage meaningfully with the compensation system, ultimately fostering a better understanding of the organization's position. While companies may not be able to include employees in all operational decisions, certain straightforward measures can be taken. Among the most significant: incorporating employee feedback on a regular basis, alongside effective communication, are strong contributors to workplace satisfaction (Kontakos, n.d.).

Conclusion

When employees understand how compensation is determined, how to maximize their pay, and the interrelationships between performance and pay, they are more likely to be satisfied with the wage structure. Research addressing the factors involved in employee engagement is highly valuable, particularly when it focuses on perceptions of fairness. Employee engagement is weakened by unfairness—whether perceived or actual—and is conversely strengthened by fairness. It should be clear that attracting and retaining talented employees requires earning their emotional commitment. The overall rewards architecture—including benefits and non-financial elements—should also be part of employee discussions. What were once called "fringe benefits" are now significant employment factors, costing employers an additional 30–40% on top of base salaries where available. While some benefits may be required by government regulation, they can also be understood as part of a corporation's total reward package and thus affect employees' perceptions of fairness. When an organization is transparent, even the work done by those who design compensation systems can be used to build employee and management trust and goodwill (Rasch & Szypko, 2013).

Perhaps the most important perspective to consider regarding "a fair day's wage for a fair day's work" is that reasonable employee compensation can function within an organization to increase that organization's overall success.