Equity and Its impact on Pay Rates

In studies conducted 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 a grape it slammed down the pebble or refused to eat the cucumber. The moral, it would seem, is that lower primates may be genetically programmed to be treated fairly when it comes to being paid.

Higher up the primate line, the equity theory of motivation postulates that people have need for and therefore value and seek fairness at work. People are strongly motivated to maintain 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 person 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 underpaid.

With respect to compensation, managers should address four forms of equity: external, internal, individual, and procedural. External equity refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies. Internal equity refers to how fair the job’s pay rate is, when compared to other jobs within the same company (for instance, is the sales, manager’s pay fair, when compared to what compared to what the production manager is earning). 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 jobs within the company, based on each individual’s performance. Procedural equity refers to the “perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.

Managers use various methods to address each of these equity issues. For example, they use salary surveys to monitor and maintain external equity. They use job analysis and job evaluation to maintain internal equity. They use performance appraisal and various types of incentive pay to maintain individual equity. And they use communications, grievance mechanisms, and employees’ participation in developing the company’s pay plan to help ensure that employees view the pay process as transparent and fair. Some firms administer surveys to monitor employees’ attitudes regarding the pay plan. Questions typically include, how satisfied are you with your pay? What criteria were used for you recent pay increase? 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, ad possibly inequitable salaries, Coca-Cola Co, undertook a salary review of companies ranging from Pepsi Co to Procter & Gamble and Yahoo. Management then announced raises ranging from about $1,000 to as much as $15,000 for most of its employees. When inequities do arise, conflict can ensure. To head off discussions of internal or individual equity, some firms maintain strict secrecy over pay matters, with mixed results. But for external equity, online pay forum sites like vault.com, combined with easy access to salary data on sites like Salary.com, make it easy for employees to discover that they could earn more elsewhere.

The process of establishing pay rates while ensuring external, internal, and to some extent procedural equity consists of five steps:

1. Conduct salary survey of what other employers are paying for comparable jobs (to help ensure external equity).
2. Determine the worth of each job in your organization through job evaluation (to ensure internal equity).
3. Group similar jobs into pay grades.
4. Price each pay grade by using wave curves.
5. Fine tune pay rates