Reward Practices Impact Perceptions of Fairness

When it comes to how employers reward their workers, neither total pay nor salary increase has the biggest impact on employees’ concerns about fairness. That honor goes to career development opportunities, according to a July 2011 research report by WorldatWork, an association of total rewards professionals, and pay consultancy Hay Group. The report, Reward Fairness: Slippery Slope or Manageable Terrain?, was produced in collaboration with Dow Scott, a professor of HR and employment relations at the Graduate School of Business, Loyola University Chicago, and was based on a survey of 500 WorldatWork members, 75 percent of whom are based in the U.S. The survey was fielded from Nov. 15-Dec. 20, 2010.

The research spotlighted the extent that, in the view of reward professionals, employees expressed concerns about internal equity (fair treatment compared with fellow employees), external equity (fair treatment compared with those at other organizations) and the determinants of reward fairness. Reward professionals consider employees' top five reward concerns to focus on fairness regarding:

• Career development opportunities.

• Merit increases.

• Base pay amounts.

• Nonfinancial recognition.

• Employee development/training.

“Reward professionals view career development opportunities as the top reward fairness concern because growth opportunities are in high demand by employees, while at the same time career development processes are not particularly developed in many organizations,” said Tom McMullen, Hay Group’s North American reward practice leader. “Career development concerns are also the No. 1 retention issue for employees, according to our employee opinion database,” he noted.

Surprisingly, reward professionals did not consider variable pay (bonuses and other incentives) to be among employees' top five concerns regarding reward fairness. “Variable pay is likely not ranked as a top concern because a decent portion of these plans are based on corporate or business unit performance measures as opposed to individual performance measures,” which might be viewed as more subjective, said Loyola University's Scott. “There are also fairly systematic reporting processes in place in organizations that provide periodic communications as to how [variable pay] programs are performing, resulting in less ambiguity.”

Determinants of Reward Fairness

Reward professionals identified the criteria they believed were the most important in driving perceptions of fairness for base pay, variable pay and nonfinancial rewards, as shown below.

For base pay:

• Work responsibilities associated with the job.

• Individual performance.

• Time in the job.

For variable pay:

• Individual performance.

• Overall organizational performance.

• Team/department performance.

For nonfinancial rewards:

• Individual performance.

• Time in the job.

• Individual potential (as viewed by management).

Improving Perceptions of Fairness

The study addressed factors that have eroded perceptions of reward fairness in organizations. The No. 1 response was the poor economic environment (including pay freezes, layoffs and pay cuts), followed by inconsistent application of reward policies and playing favorites. Poor reward communications and lack of leadership rounded out the list.

“While some factors, such as the economy, are outside of our control, equipping managers to more equitably distribute and communicate rewards can have a huge impact on the perceptions of fairness within an organization,” Scott concluded.

When asked what works particularly well in improving the perceptions of reward fairness in organizations, reward professionals overwhelmingly identified:

• Effective reward communications.

• External benchmarking.

• Reward strategy and design.

• Nonfinancial recognition programs.

“Communication is king in improving perceptions of reward fairness," said Kerry Chou, WorldatWork's compensation practice leader. “The best organizations focus not only on the core messages to be communicated, but also the most effective messengers and channels. In addition, these organizations devote significant energy to determining how to sustain core messages and equip managers to effectively communicate them,” Chou noted.

Other Steps

According to Hay Group’s McMullen, HR organizations would be well-served to establish effective processes around job design and organization design, work measurement systems, person-role fit assessments and performance assessment processes. “Improving these HR infrastructure processes should substantially enhance the perception of fairness in organizations,” he advised.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​