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08/17/2012

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Agree that employees care more about what their colleagues make than market rates. Besides they don't understand and are very skeptical of "just how" market rates are determined --- and the fact that they are never talked about until someone brings up the issue of "fair pay".

What is or isn't 'fair pay' depends on definitions of fair.

My example is my children: my nine-year-old considers it fair if he gets to go to bed at the same times as his sister. My twelven-year-old daughter considers it fair if she gets to stay up later.

I'm never going to be able to treat them 'fairly' because they have different definitions of fair.

In the workplace, 'fair' depends on age/ gender/ role/ work experience/ education/ performance... you name it. Just as at home, no one is ever going to be satisfied. Unless they secretly know they are well-off, as with those 'overpaid' workers you cite.

Pay issues such as equity, competitiveness, and fairness will be around as long as we keep compensation secretive. Employees typically take what other employees say at face value, so if your co-worker shares what they are paid, and its more than you are paid, you accept it as fact, even though it probably isn't. Many companies try and manage these type of issues by establishing policies making it a terminable offence to talk about pay, which are generally ignored.

I'm a proponent of complete transparency in pay practices: everybody knows what everybody else is paid. This requires companies to establish pay systems and administer those systems based upon consistent and understandable criteria, company values, and a compensation/reward philosophy.

I'm also a realist, and recognize that the notion of complete transparency in pay practices will be too threatening to most organizations to seriously consider, but even in the face of that they can still adopt, and should adopt, a pay philosophy that drives their compensation and reward practices. Execution against that philosophy should provide a good context for managers to respond to the "fair pay" issues you raise in your post.

Jacque, Iola and John are all correct. Transparency (including clear communication of management's definition of "fair") dispells most issues. Employees don't get to set the rules for owners. Open exposure of the principles and practices behind discretionary policies also creates motivation to assure that the information is correct and fully defensible; that is both healthy in iteslf and a vital ingredient for confident disclosure. Anything kept secret is assumed to be indefensible.

P.S. Termination for sharing wage information has been found to be illegal in the US under the NLRA, without a union being necessary. Employee speech in social media sites, for example, can be protected speech for a number of reasons, even though most people on both sides don't know that.

On fair pay or internal equity I am particularly sensitive to the point of James when it says that " employees are more sensitive to internal equity relationships than to external market competitive realities ".

In my experience I have found that companies tend to emphasize too much the external equity and not enough the internal one.

They are very concerned to constantly measure how other organizations/the market is paying forgetting that:

1) their employees will not leave if they are paid 10%-15% below the market median !
All evidence and research shows that reasonable pay differences versus the market are not the critical trigger for an employee to leave the company.

2) while companies compare themselves with other companies employees compare their pay with other employees but not those on the market but those inside their company. They will compare their pay with the pay of their colleagues ! Let’s be reasonable. Most employees do not really have sound and structured market info on the remuneration levels of equivalent jobs. This with the exception of employees who spend most of the time out of their company (i.e. sales) and, maybe to a certain degree, USA employees since in the US market data availability is higher compared to Europe or other geos. So it’s very probable that your employees will know the pay of some of their colleagues.

So what happens when employees perceive unfairness and pay inequities within their organizations ?

Obviously tensions and discomfort start to grow and this, in the medium term, can bring a deterioration of the general climate which will, sooner or later, impact company performance and business results. More specifically voluntary turnover will increase (I realize now that with the present labor market conditions this will not happen asap ! ) and we all know that in such a situation the best performers will leave and the low performers will stay. In addition it could happen that your best performers will lower their performance.

You can find this in my Internal Equity document posted here:

www.marco-bernardi.com/my_projects_4.html

Thanks for adding your observations, Marco. We who write for the Compensation Cafe continually remind our readers that remuneration is more complex than cash alone and that communications are central to the issue. You are quite right about the wealth of external market pay data in America compared to Canada, UK, EU and elsewhere (where survey robustness is ranked in declining order). Internal equity considerations always trump external survey influences.

It is also a reality that while management focuses on their external competitors, employees only see their internal peers and thus obsess about any invidious comparisons they perceive, whether warranted or not. Many studies have verified that the vast majority of workers rate themselves as far above average in value, which is (of course) statistically unlikely. People tend to minimize their weaknesses and exaggerate their strengths, particularly compared to co-workers. This was covered in detail long ago by Elliott Jaques in his writings on "felt-fair" pay levels. The problem never goes away.

P.S. http://youtu.be/g8mynrRd7Ak has the perfect classic short video on this topic.

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