In the modern workplace, equity and fairness issues generally revolve around outcomes such as employee remuneration, rewards and benefits. The dispute over fairness in remuneration has been greatly discussed over the past few decades yet no such perfect compensation scheme is generally accepted by everyone. This paper provides a brief overview of inequality in remuneration with focus on age, qualification and nationality discrimination and highlights impacts of perceived unfairness in distributing remuneration.
When employees are treated unfairly due to their age, education or nationality; employee involvement, performance and retention would suffer. This paper then touches on the justification for fairness in remuneration and concludes that fair remuneration is subjected to different employees’ perception. Since each employee has different motivation and expectation from work, it is hardly possible to develop a universally accepted remuneration scheme that suite everyone’s self-interest.
However, it is advisable to apply a transparent compensation system with multiple intrinsic and extrinsic rewards based on employee’s performance to ensure that employees are given due credit and compensated equitably. 2. Employee remuneration Remuneration system has always been a central and controversial issue in the area of human resource management. Paying the employee fair remuneration to generate a sense of equity or even satisfaction without affecting company profit is a major core to this on-going debate.
This essay aims to discuss the fairness in distributing remuneration, the impact of perceived inequality in remuneration on organizational operation and propose recommendations to determine effective and fair compensation. For the purpose of this essay, remuneration is defined as the total rewards – both monetary and nonmonetary – granted to employees in return for their labor and contribution to the company. The term “Remuneration” is also used interchangeably with the term “Compensation” in this essay. Remuneration covers both financial and non-financial compensation in which:
1. Direct financial remunerations are direct monetary pay in the form of fix and variable salaries, commissions and bonuses. 2. Indirect financial remuneration refers to monetary rewards that are not included in the direct compensation but are part of the employment contract between the companies and its employees such as paid leave, paid maternity and paternity, pension plans and education subsidy. These rewards often fall into “statutory benefits”, which refers to authorized benefit established by statute and the employment act. 3.
Non financial remuneration consists of non-monetary compensation namely work conditions, career development, advancement opportunities and recognition that motivate employees to work. Although it is easy to define remuneration, how to determine compensation is far more difficult to answer. Remuneration is determined based on a variety of complex factors and varies significantly across companies, industries and locations. Over the years, companies have used a myriad of factors – qualifications, experiences, performance, gender, nationality, racial etc – to set remuneration.
2. Inequality in remuneration Inequality in remuneration occurs when employees perceive themselves to be underpaid or overpaid by the employer. Rarely do employees feel overpaid, so in this essay, we only focus on underpaid remuneration. According to equality theory, inequality happens when employee believe the ratio of his inputs to his outcomes to be less than those around him. There are two groups of people that employees often compare to: internal and external groups. Based on these points of comparison, there are two types of inequality:
1. External inequality happens when employee compares his reward with those who perform similar jobs in other companies. 2. Internal inequality occurs when employee makes a comparison with those who are in the same organization. Due to the difference in each company’s background and condition, external inequality is more tolerable to employees than internal inequality. Some of the popular internal inequalities that will be discussed are age, education and nationality discrimination.
Despite the fact that there are no studies suggesting the correlation between age and job performance, employees are often discriminated due to their age based on the extent of their value and worthiness to the company. Some employees are reporting age discrimination beginning as early as in their thirties while by the time they are forty, they are considered to be “old” and more of a burden or liability than a younger employee because of higher salary, pension and other benefit costs.
The older workers are often perceived to be not as capable or qualified as their younger counterparties, hence commanding a lower remuneration package in general, even though their vast wealth of working experience could still be relevant and applicable in current context. In the workplace, people are always judged and discriminated against their educational qualifications and credentials as employees who have attained higher learning in their fields are often perceived as being knowledgeable and resourceful, hence giving them a first mover advantage in terms of securing a better job prospect as compared to their peers.
The remuneration benefits of higher education for individuals and society as a whole can be both monetary and nonmonetary. Across different racial/ethnic groups for both males and females, there is a positive correlation between higher levels of education and higher attainment of remuneration benefits, in addition, degree holders are more likely to enjoy better company subsidized health insurance and reimbursements, leave entitlements and other allowances than the non-degree holders in general.
It is also well noted that the income gap between diploma and degree holders has increased significantly over time. The earnings being garnered by a degree holder is large enough to recover both earnings foregone during undergraduate years and the cost of tertiary education fees in a relatively short period of time. Although it does not necessarily mean that higher learning leads to better job performance and efficiency, employers often perceive higher learners to be high achievers who have the potential to develop their competences and add value to the company as a whole.
The differences in the numerations, based on the inequities in nationality still exist and will continue to exist at more or less the same manner. Even as income gap narrows between nationalities, employees who are western qualified or experienced tend to be better paid and compensated as compared to their Asian counterparts, depending on sector and niche. Encouragingly, more and more employers are hiring and compensating on merit, as opposed to focusing on one’s origins. 3. Impacts of perceived inequality in remuneration
Dissatisfaction with perceived inequality in organizations will be expressed in different forms. Dissatisfaction with the job itself will be manifested by employees absenting themselves from their workstation, either through frequent absences or terminating their employment contract, while dissatisfaction with promotional opportunities and immediate supervisors will be expressed as grievances. Generally, the extent of demotivation is proportional to the perceived inequality or disparity within an organization.
For some, just the smallest of perceived inequities would cause massive disappointment and a feeling of injustice, resulting in demotivation or even open hostility. Some employees reduce their efforts and focus, becoming disgruntled or outwardly difficult or even portray disruptive behavior. On the other hand, others seek to improve their deficiencies and disparities by making claims or demands for more monetary and nonmonetary rewards or even seeking as alternative job.
Often, different employees always evaluate and see themselves in terms of their surrounding work environment which managers would have to manage and treat each employee accordingly. Another major impact of perceived inequality is suggested by the Equity Theory which states that individuals who feel unfair will experience distress which will eventually result in their effort to restore equity by adjusting their inputs or outputs or by leaving the organization (Carrell and Dittrich, 1978).
Employee may reduce his input by cutting down his working hour, becoming reluctant in acquiring new skills, getting more passive in solving problems. As a result, output will be negatively affected: service quality will deteriorate; product faulty increases and innovation is discouraged. 4. Fairness in remuneration Undeniably, human being is selfish. Since we all pursue personal interest, what is good or fair to someone might be unfair in the other. So the questions are, does the problem of inequality lie in the remuneration scheme or in the employee himself? Is there a remuneration system that is considered fair by everyone?
Our stand is that the issue of fairness and adequate compensation is mainly due to the mind and perception of the employee rather than the compensation scheme itself. Each employee is unique in terms of personal background, which leads to difference in employee expectation about remuneration and therefore results in various levels of satisfaction and equality. Take the case of qualification discrimination: people who graduate from top universities have higher expectation for salary than those from unknown polytechnics because they had invested more time, money and efforts in studying than their peers.
However, polytechnic students can argue that past achievements weren’t really affect current and future performances and therefore, companies shouldn’t use qualification as a basis in distributing remuneration. From the polytechnic graduates’ viewpoint, whoever work more effectively and contribute more to the company’s success deserve better rewards. To sum up, both parties have persuasive reasons to argue for their rights and benefits. Therefore, it is impossible to come up with a standard remuneration that satisfies everyone.
What the company can do is probably to offer a sustainable package which can link both three factors together: employee’s personal expectation, the company’s objectives and profitability. There are also other guidelines in setting appropriate remuneration such as The Fair Work Act from Australia Federal Workplace Relations, Canadian Human Rights Act, Ireland Anti-Discrimination Pay Act, Equal Pay Act of United States etc. 5. Recommendations Our recommendations for effective and fair remuneration are based on three key objectives of compensation, which are to attract talented people, retain and motivate current employees.
The recommendations also take into account the three factors that affect remuneration: employee’s expectation, the company’s objectives and profitability. 1. Starting remuneration packages should be customized to employee’s unique background, expectation, company policy and varies within a predetermined range. Firstly, to attract talented employee, we propose to offer competitive packages based on the employee’s unique background, their expectation and the company policy.
The purpose of this scheme is to find a match between employee’s expectation and the offering packages. Under this scheme, companies are allowed to pay more for top students or appropriate candidates. One biggest advantage of this strategy is that it follows the supply and demand of the labor market. Offering distinguished packages for top graduate ensures that the company can attract talented employees to join their organization. Some companies pay equal benefits for new comers with the same positions.
Although this method seems to be fair as everyone get the same piece of cake in the team, it might create mixed feeling among the employees: some are satisfied and some are not due to their different expectation. In order word, offering everyone the same piece of cake can lead to the mismatch between employee’s expectation and the actual remuneration packages at the initial state and this mismatch may grow bigger in the future. The difference in starting pay, however, shouldn’t be too huge so as not to trigger unpleasant and unfair feeling among the new joiners because they will eventually do the same work, same duty and same title.
It is advisable to set an appropriate pay range for each position to make sure that everyone is more or less compensated. 1. Subsequent remuneration should be based on employee performance to create incentives for employees Although personal backgrounds serve as a good basis for determining the starting pay, they are not effective factor to determine subsequent salary level. After all, what really matter is not what the employee’s history is, but what he can do for the company and how much he contribute to the organization’s success.
As far as we know, many of the billionaire or CEO are actually non-educated or non-degree holder. Bill Gates and Steve Job are too well-known examples: they are paid millions of dollars for their impressive contribution to the company, not for their age, gender or educational background. There shouldn’t be a cap or a limit to the salary based on their previous background. In essence, the starting pay is initially determined based on each individual’s background within a specific range for similar position.
However, once the employee has started to work, a more incentive compensation schemes must be implemented to retain and motivate good employees to walk toward the organization’s common goals. 1. Remuneration scheme should be communicated clearly and implemented in a transparent way to all employees. Although remuneration is a private and confidential issue for each employee, a transparent remuneration system is required to reduce potential conflicts and disputes among employees. The clearer the system is, the better the employee can adjust their input and output to reap more benefits from the company.
It is also beneficial to the company to defend itself against any discrimination claimed by the employees. One widely used method for accessing incentive remuneration schemes are performance appraisals. During appraisal reviews, companies need to be precise with their decisions as it would inevitably determine extrinsic factors such as salaries, as well as intrinsic factors like promotions. It is the role for companies to provide various equitable remuneration packages to employees so that they can concentrate at their work without financial worries.
According to Nankervis, one of the most crucial factors in extrinsic motivation is monetary reward, whereby how it is being allocated sends a message to employees about what the organization believes to be important and worth encouraging (Nankervis and Baird, 2005). 1. Remuneration should be implemented on both business strategy and the organization strategy Furthermore, studies have shown that in order to motivate better work performance, companies can implement remuneration strategies that apply on both business strategy and the organizational strategy, which have a resulting impact on the results and behavior of staff (Gerard, 2001).
Companies can also implement corporate sharing strategies such as proposing of issuing discounted shares prices to employees, profit sharing system and variable bonus schemes. Studies have proven that firms with employee shareholdings tend to perform better as these schemes aid to align the employees and their employers towards the desired board organizational objectives (O’Neill, 1994). 1. Remuneration should be a combination of multiple extrinsic and intrinsic rewards.
Multiple extrinsic rewards system shall be employed to ensure employees’ high level of performance over an extended period of time. These rewards range from different monetary rewards to various non-monetary benefits in proportion to employees’ performance and it shall be administered with transparency and equity to ensure positive reinforcement. Monetary reward is the basic motivation for people to work and this shall be made as the essential structure of an organization’s disbursement.
At the very minimal, the base salary of employees shall meet the basic survival needs and must be adjusted according to the annual cost-of-living inflation. On top of the base salary, variable incentive compensation plans shall be incorporated to the organization’s monetary rewards system and these rewards must be made contingent to the performance of the employees. These variable incentive compensation plans shall be packaged into the organization’s remuneration to target different levels or groups of employees.
Gain-sharing shall be used to reward employees as a result of employees’ collective effort in reducing the operational costs and increasing the organization productivity. One of the gain-sharing examples is the Scanlon Plan, developed in the 1920s by a steel-industry union leader named Joseph Scanlon, a portion of any cost savings, usually 75%, are distributed back to employees; the company keeps the other 25%. (Graham-Moore and Ross, 1983). Another form of incentive compensation plan shall be bonus award.
Bonuses are good cash rewards especially to sales and marketing people in an organization. This cash awards will serve as a one-time recognition and encouragement for their extraordinary performance in bringing more business opportunities to the company. Non-monetary rewards shall come from the thoughtfulness of the employer that bring about the value of being nice to employees and let them feel appreciated for the work they performed. Positive attention like praises and positive feedback from supervisory staffs will enhance the morale of employees and encourage creativity in exchanging ideas.
A PricewaterhouseCoopers survey of 2,500 university students in 11 countries found that 57% named as their primary career goal “attaining a balance between personal life and career”. (Shellenbarger, 1999). Therefore, work-life balance’s benefit like having flexible working hours, maternity and paternity leaves, shall be implemented to allow employees the freedom to resolve their work-life conflicts as long as the bottom life of this implementation – the employees’ responsibilities to their scope of work – is being taken care off.
Besides that, workplace shall be designed and constructed to incorporate factors like comfortability, ergonomics, cleanliness and privacy as part of the management effort in taking care of employees’ welfare. After all, it is imperative to ensure that the extrinsic rewards must be able to exhibit the clear linkage of the employees’ working performance instead of being perceived as an entitlement. Equity and transparency shall be pervasive in the organization culture to silent all disgruntling voices.
While using multiple extrinsic rewards is important to achieve continuous high performance, it is crucial to highlight the importance of inter-departments coordination to meet the organization’s commitment; otherwise, this will become a backfire in the future. 6. Conclusion It is the employer’s duty to ensure that the compensation system is attractive to new joiners and motivating to current employees.
While it is challenging to design such a perfect remuneration scheme that satisfies all employees with different needs and expectations, it is possible to implement a transparent and logical compensation system to reduce the feeling or perceptions about inequality in the workplace.
Locher, A. H. and Teel, K. S. (1988): ‘Appraisal Trends’, Personal Journal, 67(9): 139. Nankervis, A. , Compton, R. and Baird, M. (2005): Human Resource Management: Strategies and Process, fifth edition, Sydney: Thomson Gerard, I. (2001): ‘Staff Looks for More than Cash’, Weekend Australian,Weekend Careers, 1: 1.