Sunday, 11 March 2012

The importance of an equitable and fair approach to reward management

Despite a widespread agreement on the motivational role played by money has not yet, is far from being and is possibly unlikely to be ever reached, the largest part of Authors concede that the hygiene attribute of money can be taken as axiomatic. It can hence be contended that the transactional component of individual reward par excellence, that is to say cash, invariably plays a role in the composition of an overall reward package. It is unlikely that individual motivation may be remarkably affected by money, at least in the mid- to long-term, but the circumstance money would be reduced or would not be perceived and considered as adequate by individuals is very likely to cause individual dissatisfaction and hinder employee motivation.


This actually is a circumstance which should provide employers food for thoughts in that regardless of the reward philosophies and strategies pursued by an organization, employers should never neglect and underestimate the importance of money, if anything as a hygiene factor. Irrespective of its hygiene quality, nonetheless, employers should pay extra attention to money, as a component of the reward packages they offer, for the equitable and fair representation of the overall reward system it can and should help employers to foster and endorse in the organizational settings.

Fairness, equitableness and consistency should be put at the basis, as the founding pillars, of every approach to reward management (Armstrong, 2009). Reward strategies, the philosophies underpinning these and the practices by means of which strategies are executed in fact together with HR strategy and policies, can also effectively contribute to endorse fairness and equitableness within every organization. The attainment of such an alignment would enable in turn employers to effectually foster integrity and reinforce organizational values, beliefs and behaviour.


According to the ACAS (2005), salary has a remarkable impact on working relationships so that employers need to develop salary schemes capable to fairly reward individuals according to the results these yield. Reward can and should hence be used by employers as the most effective, practical means to provide their employees tangible evidence of integrity and consistency within their organizations. As stressed by Armstrong (2009), reward practices should be used by employers as an additional means to treat individuals fairly and not as something which could cause downsides and pose threats to the organization.


Financial executives and bankers bonus schemes are a good, or rather, a bad example of how reward practices can prove to be detrimental for an organization. Unfortunately, the banking and financial industry does not represent the only example of bad reward practices implementation. Just a very few years ago, general public in the UK was appalled at learning that civil executives were receiving a staggering £47 million in bonuses, whereas there were soldiers receiving annual salaries worth less than £17,000. The circumstance that some hospitality organizations had introduced the regrettable habit to include the tips received by their staff in their salaries in order for these to meet the national minimum wage provisions, clearly represents another bad example of poor reward practices (Keefe, 2010). With specific reference to this deplorable wont, it must be observed that the Legislature in the UK took promptly action no longer permitting, from October 2009, bars and restaurants’ owners to consider gratuities as part of their employees’ salary (Keefe, 2010).

To set internal pay levels and make decisions about the composition of individual reward packages employers can have recourse to different methodologies; irrespective of the specific approach these decide to implement, notwithstanding, what matters the most is that the method these identify enables them to let employees perceive and consider the reward system operated by the organization as fair and equitable (Torrington et al, 2008).


Despite the phenomenon has more recently captured a wider interest and attention by reason of the bonuses scandal and of the likely domino effect it has generated triggering the international financial crisis, this is not an occurrence typical of recent times. In fact, the negative impact on individual motivation and satisfaction caused by a reward system perceived as unfair and inequitable by employees has been already investigated, back in 1963, by John Stacey Adams. The findings of his study revealed that individual level of satisfaction at work directly depends on the extent individuals perceive pay levels and increases to be distributed fairly (Adams, 1963).
On the basis of these findings, Adams (1963) developed the “equity theory.” The main assumption of this thesis is that each individual tends to develop and form his/her own idea about what can be considered “fair reward” in exchange for his/her contribution to the organizational performance. This clearly takes us to the realm of the psychological contract. Individuals, according to the activity they perform and the results they produce, invariably develop expectations; employees assume and are indeed expected to receive a fair compensation for their contribution to the business result. Whenever these expectations are not met, individuals feel that their psychological contract has been breached by the employer and consequently feel the urge to react in some ways. This individual reaction is actually at the basis of an additional significant tenet underpinning the equity theory: when an individual feels that s/he is not treated fairly or equitably this seeks justice. It is hence of paramount importance identifying what individuals consider as fair and what they do not, and on the basis of what employees perceive and consider as equitable or otherwise a reward system.
In general, people do not tend to criticise and deem inappropriate reward disparities per se. Even considerable differences in treatment could be accepted whether these are perceived and considered as justified by objectives circumstances. Employees would ultimately accept the payment of very high bonuses to the individuals filling executives and senior management roles, provided that these are reasonable, justified and, most of all, “proportionate to the need” (Keefe, 2010). More in details, Reilly (2010) explains that these differences are accepted when directly associated with reasonable factors, to wit: “working hard, helping others, contributing more and working longer hours.”
As explained by the equity theory developed by Adams (1963), there are basically two different factors mainly influencing individual judgment about what can be considered as fair or otherwise. Firstly, people try to assess and determine whether a correct balance has been established by the employer between inputs and outputs (Torrington et al, 2008). Individuals are hence first of all concerned with assessing whether individuals’ reward packages actually properly match their skills, competencies, qualifications, efforts, experience, expertise and the final results yielded. Subsequently, their attention is directed at comparing their outputs and the way they have been rewarded with the results delivered by the other individuals and the reward they have received for these.
Whenever individuals feel that their output, which they deem equal or even superior to that produced by their peers, is not rewarded appropriately, they feel and consider that their psychological contract has been breached by the employer. Under such circumstances, individuals believe that their employer has treated them neither fairly nor equitably. Employees show hence signs of dissatisfaction, which are manifested in a series of actions such as increased absenteeism, desire to leave the organization, poor performance and lack of trust on the business’ employee relations practices (Torrington et al, 2008).
As suggested by Robertson (2010), the problem is not associated with the level of reward in general, which could also be lower vis-à-vis that offered to the individuals filling the same role in different organizations, but rather with the internal inequalities, which can also “destabilise” a business. These bad practices are likely to directly and indirectly produce remarkable effects on an organization budget. Under these circumstances, individual reaction habitually gives rise to higher sickness absence and employee turnover rates, which clearly account for additional costs. This employee resentment is also clearly reflected in poor customer service, which provokes in turn a negative impact on the customers’ appreciation of the firm and of its products and services (Cotton, 2010).
Fair and equitable, nonetheless, is not the same as equal. As discussed earlier, differences in treatment are fairly justified and accepted whenever these are based on the objectively different individual level of contribution. Are similarly acknowledged the differences in benefits provided to different individuals on the basis and as a consequence of the different results yielded by these (Kessler, 2010).

To this extent also corporate culture clearly comes to play. An organization approach to reward management should definitely be consistent and coherent with the culture the employer aims at fostering and endorsing. Before pointing in any given direction, whatever it might be, employers should be sure that their decisions will be clearly understood and accepted by everybody; differently, employers might be prompted to face a series of downsides, negative effects and ultimately divisiveness.

Line Managers should clearly be prepared and able to assess these cases, averting being long-sighted or far-sighted if and when such circumstances should arise. Whether a big negative change in individual behaviour should be identified, as for instance an unusual “throw a sickie” phenomenon growing trend, Line Managers should consider and investigate whether recent events associated with pay or grade increases granted to other members of the team may be at the basis of that behaviour. What matters is not what the employer, even conscientiously, has decided to do, but rather how that decision is perceived and felt by individuals. It could be worth reminding that Performance Management as a process and not as a system can enable employers to prevent similar circumstances to occur. PM as a process, by means of the establishment of the two-way communication channel it entails, enables Line Managers to provide their direct reports continuous feedback. This can clearly help both managers and employees to have a clear idea of the reciprocal expectations and of the degree to which these expectations are and can be actually met.
The importance of the need for employers to focus not on what they think it is fair, but on what individuals perceive as fair was stressed by Jaques (1961), who developed the “felt-fair” notion. This concept led to the development of a new method to grade jobs, that is, the “felt-fair test”, which is sometimes used after the conclusion of, and hence in addition to, the job evaluation exercise (Torrington et al, 2008).
In general, fair reward management approaches should basically be inspired by the concepts of distributive and procedural justice. The concept of distributive justice, which recalls the first assumption underpinning the Adams’ equity theory, was introduced by Leventhal (1980) in order to stress the circumstance that individuals feel of being treated with justice whenever reward is shared according to the results yielded by each of them.
Tyler and Bies (1990) introduced the concept of procedural justice focusing on the practical and implementation point of view of reward practices, basically associating with the way managers make decisions and execute reward policies a particular importance. Procedural justice is ensured when: employees’ voice is listened at, personal bias does not affect manager choices, decisions are applied coherently and in the same way to everybody, and employees are promptly informed about the employer decisions and the reasons behind these.

Employers have habitually recourse to two main approaches when determining their employees’ pay levels: job evaluation and market pricing. The job evaluation exercise helps employers to determine and assess internal relativities, that is, the importance each role (and not the individual filling these) has for the organization, whereas market pricing enables employers to gain a thorough knowledge about the way competitors reward the same positions and roles within their businesses and adapt internal rates accordingly. Since fairness and equity are anyhow concerned with internal relativities, to attain fairness employers mostly need to focus on the job evaluation exercise. To take into due consideration individual view about pay, the felt-fair exercise should clearly also be used.
Gaining a general consensus, while trying to agree pay levels within an organization, can prove to be a very tricky objective to attain. In order to cushion the blow employers should constantly strive to strictly adhere to some fundamental and general tenets.
As suggested by Torrington et al (2008), the most important thing is invariably having recourse to a unique, standardised method for pay identification, both for base and variable pay, for all the roles and jobs available within the organization. During the exercise efforts have to be clearly devoted to leave as little room as possible to bias and arbitrary decisions.
Employee participation and contribution to the pay determination process clearly contribute to make the implementation process easier and ensure the establishment of an open communication channel between the employer and the entire workforce, enabling in turn the management to clearly explain employees the mechanism and reasons which have accounted for the identification of that particular approach.

Communication, nonetheless, is pointless whether it is not strictly coupled with transparency and clarity. Employers should hence make some efforts to ensure that the pay determination approach, and the way it is executed, is clearly understood and learned by all of the employees (Torrington et al, 2008).


A similar approach should also be used by businesses when planning to introduce changes in their current pay schemes. As suggested by the ACAS (2005), employers in order to avoid the legal actions which may potentially be taken by staff should agree with employees and their representatives the planned changes on pay schemes before these are implemented. This approach clearly also helps organizations to ensure that the new system is accepted and perceived as fair by staff.


There is actually an additional area which may represent, especially in the years to come, a cause for employers concerns. As pointed out by Keefe (2010), employers might soon be prompted to deal with staff complaints of unfair and unequal treatment by reason of the changes in the pension schemes they have introduced and implemented within their businesses. During the last few years, many employers have changed and are still in the process of changing their pension schemes, to wit: switching from the defined benefit (DB) to the defined contribution (DC) scheme. Despite all or part of these schemes changes have possibly been agreed with trade unions and employees representatives, it can neither be neglected nor excluded that, as warned by Biggs (2010), these differences could give raise to tensions during the next years.


When making decisions about pay systems it might prove to be particularly difficult for employers devising schemes which are perceived as fair by everybody; notwithstanding, organizations which introduce equitable procedures are most likely to obtain excellent and impressive results (Torrington et al, 2008).

Businesses must pay extra attention to the felt-fair aspect of the reward packages they offer, pay fairness and equitableness in fact invariably emerge as crucially significant factors from the different surveys carried out on the subject over the years.

Longo, R., (2012), The importance of an equitable and fair approach to reward management, HR Professionals, Milan [online].

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