Equity and its Impact on pay rates

In studies at Emory University researchers investigated how capuchin monkeys reacted to inequitable pay. They trained monkeys to trade pebbles for food. Some monkeys got grapes in return for pebbles others got cucumber slices. Those receiving the sweeter grapes willingly traded in their pebbles. But if a monkey receiving a cucumber slice saw one of its neighbors get grapes, it slammed down the pebble or refused to eat the cucumber. The moral seems to be that even lower primates are genetically programmed to demand fair treatment when it comes to pay.

Equity theory of Motivation

Higher up the primate line the equity theory of motivation postulates that people are strongly motivated to maintain a balance between what they perceive as their inputs or contributions and their rewards. Equity theory states that if a person perceives an inequity a tension or drive will develop in the person’s mind, and the peso will be motivated to reduce or eliminate the tension and perceived inequity. Research tends to support equity theory, particularly as it applies to people who are under paid. One recent study found that turnover of retail buyers is significantly lower when the buyers perceive fair treatment in the amount or rewards and in methods by which employers allocate rewards.

With respect to compensation managers should address four forms of equity: External, internal, individual and procedural.

1) External equity refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies.
2) Internal equity refers to how fair job’s rate is when compared to other jobs within the same company for instance, is the sales manager’s pay fair, when compared to what the production manager is earning.
3) Individual equity refers to the fairness of an individual’s pay as compared with what his or her co-workers are earning for the same or very similar within the company, based on each individual’s performance.
4) Procedural equity refers to the perceived fairness of the processes and procedures used to make decision regarding the allocation of pay.

Addressing Equity issues

Managers use various methods to address each of these equity issues. For example, they use salary surveys (surveys of what other employers are paying) to monitor and maintain external equity. They use job analysis and job evaluation to maintain internal equity. They use performance appraisal and incentive pay to maintain individual equity. And they use communications grievance mechanism and employees participation in developing the company’s pay plan to help ensure that employees view the pay process as transparent and procedurally fair. Some firms administer surveys to monitor employees’ attitudes regarding the pay plan. Questions typically include how satisfied are you with your pay? And what factors do you believe are used when your pay is determined?

Even large sophisticated companies aren’t immune to pay inequities. with morale down due to widespread concerns about racial discrimination suits, layoffs and possibly inequitable salaries, Coca-Cola Co undertook a salary review of companies ranging from PepsiCo to Procter & Gamble and Yahoo .Management then announced raises ranging form about $1,000 to as much as $15,000 for most of its employees.

When inequities do arise conflict can ensue. To head off discussions that might prompt feelings of internal inequity some firms maintain strict secrecy over pay rates, with mixed results. For external equity, online pay forum sites like Salary.com make it easy for employees to discover that they could earn more elsewhere.

In the Indian context, the differential between private sector salaries in comparison to government or public sector salaries has becomes a matter of concern, to the extent that the prime minister of India appealed to the private sector to control the rising salaries of top executives of companies. The substantial salary differentials have reportedly also contributed to attrition and, in general for the best talent being less attracted to the public sector and government jobs

Paycheck India project

While government and public sector salary levels are public, private sector salary details are generally not shared. This lack of salary information often leads to labor market imperfections. The Paycheck India project is part of the worldwide, Web based research initiative on wage transparency called the Wage indicator project. In India, the Paycheck project is anchored by a research team from IIM Ahmedabad in collaboration with the University of Amsterdam the Dutch trade union federation FNV, and the Wage-Indicator Foundation. The paycheck projects involve salary questionnaire that is used to collect salary details from employed people anonymously and a salary checker Web site that presents the average salary figure for various occupations. The project also maintains as India focused minimum wage checker and a link called VIP Paycheck which shares interesting compensation details about the rich and famous.