Fair pay and fairness in rewards- Taking philosophy to practice
It would be rare to find a team manager who wouldn’t have had a team member complaining that she/he is not fairly paid. The response that the team member gets is a bigger moment of truth than events that actually led to her/his perception of being not fairly paid.
An organization’s stance on fair pay, the steps it takes to ensure fairness in rewarding and the capability it is building in its people managers to take and communicate reward decisions, impacts the company culture and these are at the heart of the employment relationship. Getting it wrong can have significant negative effects on commitment and morale of employees, employer brand, and possibly public image.
Can pay ever be fair?
In November 2017, Lionel Messi inked a new contract with FC Barcelona. He will receive a $59.6 million signing bonus. News reports say he will earn $667,000 a week. Last season, he made $50 million in salary and bonus for his efforts on the pitch, while Indra Nooyi, Chairperson & CEO of PepsiCo earned a salary of $29.8 million in 2016. Away from sports and closer to home, the Prime Minister of India draws a monthly salary of Rs.1.6 Lakhs ($ 30,182 annually) while Former Tata Consultancy Services (TCS) CEO and current Tata Sons Chairman N Chandrasekaran earned a little over Rs.30 crore ($ 4,716,000 annual) in FY17, a majority of which was in the form of commission, the company’s annual report showed.
The above could make you cry out “Not Fair!”, unless you see it in a more holistic context of the jobs, the level of influence and power associated with them, benefits and perquisites that accompany each of them, and the sector/industry they work for. The jobs above are not the right benchmarks for each other. And, after all, money is not the only motivator!
Internal parity is no longer a driving principle in most organizations as employees come with their own set of skills, education, experiences, and they perform in different business contexts. The goals of compensation have shifted to the internal consistency of reward policies and external competitiveness of pay. And the leadership issue is how to balance these two often competing forces.
Concepts of fairness and equity are developed during a child’s upbringing and often persist for a lifetime. While an important business topic, it is also a “grey area” that’s often left alone, gathering more haze and murkiness around it. Lack of fairness at the workplace increases counterproductive behavior. Employees may display “self-adjusting” behavior such as reducing effort to bring better correlation between effort and reward.
So, let’s quickly refresh our understanding of 3 different and inter-related concepts:
Equity: Equity theory is based on the premise that employees will put forth a particular level of effort that they feel compares to the reward potential. From an employee’s point of view, it comes down to a straightforward equation of inputs must equal outputs. Inputs range from enthusiasm to application of skills, while the output sought could include career advancement, monetary compensation, non-monetary recognition, etc.
Fairness: Fairness, besides equity, is also perceived or measured in relativity. Employees gauge fairness in rewards relative to others and from what they see and hear in the media — from the Government, the market, from colleagues, managers, HR and top management.
Justice: This has 3 elements i.e. a) Distributive justice – How is wage budget distributed between employees? Is there architecture behind how they are allocated? b) Procedural justice – Is there consistency in execution and application of reward principles and processes? c) Interactional justice – is perceived at the point of impact when the Line Manager delivers or communicates the reward to the employee and is perceived basis the level of trust between the manager and employee.
All of the above, are largely from the employee’s perspective, however, it also depends on how other stakeholders act from their own viewpoint of fairness.
As with most things, fairness lies in the “eyes of the beholder”! Each stakeholder i.e. the employee, the line manager, investors, board members, activist shareholders, the government, and rewards experts, see fairness from their own “lenses”.
Employees: Employees express concerns about internal equity (comparison with fellow employees) and external equity (comparison with peer groups in the industry). The question here is “Am I being paid fairly for the work that I do?”
Line Manager: Managers are keen to see their teams deliver the desired business results and that behavior is aligned with team priorities. Managers are keen to ensure that the allocated budget is utilized for their high performing and most promising employees. The question here is “Am I empowered to reward my high performing team members?”
Investors & Board Members: Their agenda is to review top management compensation and pay for performance mechanisms to ensure pay is aligned to value created and return generated for shareholders. The question is “Is the reward program delivering value, and if it is profitable to our shareholders?”
Government: Governments are increasingly becoming active not just about ensuring Minimum Wages but getting increasingly concerned about ‘Equal pay for Equal Work’. Iceland has become the first country in the world to make it illegal to pay men more than women, while Theresa May’s Government in the UK has introduced a legal requirement for all employers with more than 250 employees to publish their data on gender pay and bonuses by April 2018.
Activist Shareholders: While big shareholders have, since long, talked about the rise in executive pay, activist shareholders are taking up the compensation cause, focusing more on whether CXOs deserve what they get. Activists are also taking up the issue of gender pay disparity and CEO pay to Frontline pay ratios.
Rewards Experts: Reward professionals are keen to make the most of their wage budgets, and want their reward programs to drive desired business results. The question here is “Is my reward program aligned to stakeholder needs, and are they aligned with business priorities like growing market share, delivering customer delight and expansion of distribution?” The economists among the reward experts also analyze if the annual pay increases in real terms are aligned with the increase/decrease in inflation & GDP.
Fair Pay Principles
Pay equity is a complex matter. Taking into consideration all of the factors that differentiate one employee from another, it is not easy to determine what is fair and what is not. To meet the increasing focus and demand on fairness, organizations need to develop a set of fair pay principles that are relevant to their business. Below are 7 effective principles that could be adopted:
The first basic step is to ensure that employees (both men and women) are given the right job and at the level that is commensurate with their experience, education, and skills. This starts at the time of hiring an employee. Ensure that conscious and unconscious biases do not creep in while making job offers. During salary reviews, more focus needs to be given to potential areas of pay discriminations i.e. is one set of employees’ (say, male employees) average pay as a percentage of the market benchmark significantly higher than another set (in this example, women employees) for the same grade in the same business function? While anything greater than 5 percent is considered a significant difference, companies may decide to keep narrower deviations as an aspirational benchmark. Organizations would benefit from a more formal process of analysis & monitoring of potential pay discrimination and interfering factors like gender, age, years of experience, social background, etc.
Organizations normally commission annual salary benchmarking surveys in their relevant marketplace for similarly sized roles. They should aim to ensure that all their employees are paid within an established pay-range (e.g. 75-125% or 80-120%, adopted basis business needs and talent market dynamics) of the market competitive benchmark that the organization has arrived at. Besides cash, HR policies and benefits offerings need to be benchmarked to ensure offering of a market competitive total rewards construct. These ensure an infusion of an element of external equity into reward decisions.
3. Enabled through performance development
To ensure procedural justice and build internal equity i.e. effort to reward correlation, it is elementary to ensure that the rewards foundation is built on a performance-driven culture that measures delivery against agreed goals and provides regular feedback to enable people to raise the bar and strive for better performance, that in turn creates opportunity to earn commensurate pay.
4. Give a share in company’s successes
Business leaders and HR experts need to ensure that their employees get a share of the company’s success. In addition to fixed pay and benefits, employees should have the opportunity to get a piece of the success of their business unit or market operations, through a commission or bonus plan.
5. Enables a certain standard of living
Globally, companies are striving to ensure that employees in the lowest grades should have a fixed pay (i.e. excluding bonus, commission, overtime, etc.) that is at least sufficient to cover reasonable living for self and dependents plus some discretionary spend. This is what is a “living wage”, however, most countries do not have a recognizable “living wage” equivalent. Thus, organizations should ensure that employees in different cities or regions are paid commensurate with cost of living or the industry pay levels in that city/region.
6. Communicated transparently, in a way it is easy to understand
Beyond providing pay-slips on a monthly basis, organizations should provide annual statements that show the value of all pay and benefits delivered in the year. Many leading organizations provide a Total Rewards Statement (TRS) or an Employee Value Proposition (EVP) deal document. These should be easy to understand and accessible and should include pay, benefits, commissions/bonus, recognition programs and career advancement opportunity offerings.
7. Establish Top Executives’ pay rationale
Besides benchmarking executive pay against the pay of executives in companies of similar size and complexity, organizations should set standards on total pay for CEO & CXOs that do not exceed a certain percentage of the company’s wage bill or should not be more than a certain ratio to the total revenue or a multiplier to the lowest paid frontline employee.
Fair Pay Analytics – What can organizations do to get an early warning?
Progressive multinational organizations are carrying out discrimination testing by type and level of jobs to ensure Fair Pay. This includes analyzing differences due to factors like gender, age and nationality. Many are thinking of testing by ethnicity and disability and other forms of discrimination, subject to availability of data. Statistical testing, like T-tests, can be performed on the compensation data to check if the two groups (e.g. male & female) are similar and if there is the probability of data points occurring by chance. These affirm whether the difference between the two groups is statistically insignificant or otherwise.
Empower & involve line managers
Building reward decision-making capabilities in your line managers and empowering them to take decisions within the overall rewards framework, will build a culture of ownership. Ownership at that level ensures interactional justice and fairness since the person who knows the employee the most is involved in the decision.
Fair Pay is the right thing to do. Employees want it, shareholders and governments demand it and the society expects it. It is not about everyone getting everything, it is about everyone getting what they need in order to be successful and contribute to business success!
(The opinions expressed in this article are the author's own and do not reflect the views of his employer.)