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Pay Satisfaction

Pay Satisfaction

Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of their manager.  How can this gap ever be closed?

Managers live with changes and constraints in their jobs every day. Knowing the key drivers of pay effectiveness and satisfaction are important. The perceptions of employees around equity and fairness may provide an altogether different understanding. Employees perceive what is “fair” and the manager has a rather critical role in achieving that result.

Equity not Equality

There is a perception amongst some experienced managers that what employees want is equality in their pay – to receive at least the same base pay increase, bonus, stock, etc. as another, whether inside the company or at another company. One part of that perception is correct, that employees make comparisons between their situation and those of other comparable employees both inside and outside the company. But those comparisons are usually not made to achieve equality; they are made to achieve equity.

Equality would require all things to be equal (same amount). Equity makes a comparison of the inputs and outputs such as performance inputs (employee vs. others) and outputs (the manager’s decision on the rewards amount). As a result, the employee may be very satisfied with their level of inputs and the resulting rewards decision.

Finding the Balance

On the other hand, if there are imbalances in the equity equation that aren’t remedied to the employee’s satisfaction, they may try to re-balance them on their own. For example, if they were to reduce their inputs (commitment, dedication, effort, loyalty, etc.) they may be more satisfied with the lower end of the manager’s rewards decision. In another scenario, the employee may have a whole different idea of what is relevant to the manager’s pay decision, or the manager may have a different perception of what is a relevant reward. Overall, without some constant and ongoing communications between manager and employee, the pay equity scale may never be in balance.

Pay Satisfaction Drivers

The Compensation Roundtable of the Corporate Executive Board (now Gartner) has conducted extensive research on perceptions of employees as to satisfaction with how they are paid. It resulted in two primary discoveries with quantitative results that thus drive employee performance (their discretionary efforts) and retention (intent to stay). Both of these satisfaction drivers are able to be influenced by a manager because they are based on the employee’s perceptions, and those perceptions are formed from the manager’s action or lack of action on how they set, communicate and evaluate performance targets as well as communicate the company’s intent and strategy for pay programs that the manager administers. The two drivers are:

Pay process fairnessEmployees who believe that pay processes are fair are half as likely
to leave a company as those who believe that they are not.
Pay distribution fairnessEmployees who believe that pay distribution is fair are likely to give
half again as much effo1t as those who believe that they are not.
The perception of fairness in pay processes and distribution are both able to be influenced by a manager.

Process and Distribution Fairness

(First off, let me just say here that I’ve never been a fan of using the word “fair” to describe pay. “Fair” is a large public event that happens every summer in US counties, with rides, games, and agricultural exhibits.) But back to a more serious tone…

Process

Perceptions of process fairness are driven from organizational design of systems and processes, and manager decision-making:

  • The perceived understanding of the performance and pay system (organization, performance targets, communication)
  • The perception that the system in which performance and pay decisions are made is fair (organization, equitable achievable targets, communication)
  • The perception that performance ratings and pay are determined in a fair manner (manager)
  • The perceived understanding of how individual performance and pay decisions are made (manager)

Distribution

Pay distribution fairness is linked to two familiar levers for pay systems, internal equity and external competitiveness. In order to improve perceptions of fairness, employees need to believe that their pay is fair compared to others within their organization and that their pay is fair compared to others in comparable organizations. You should have a regular list of comparator companies with which to compare your external pay practices.

Within the distribution satisfier, the decisions your managers make on pay and rewards are typically done within the context of tools and budgets that are provided. Some of the common tools include:

  • competitive pay ranges (to allow differentiation of pay for higher performers and to be able to pay competitively to the external market);
  • a merit matrix (to allow managers to distribute funds in base pay increases based on competitiveness and performance);
  • if you have incentive plans, any sort of individual factor or element that managers control that provides greater payouts for top performers.

Other elements of decisions that managers make around rewards for employees may recognize especially significant achievements. Cash examples: (cash or other recognition program). Noncash: days off, key project assignment, visibility/ exposure, or others. Remember though that perception of what the reward is may be different than how the employee feels or perceives it.

Communicating

Finally, communicating pay is not just an annual event. Managers should discuss their performance expectations with employees. Employees should know how targets are determined. And similarly, managers should share their decision process, and current and future compensation growth potential.


Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services related to this topic are Market Analysis, Salary Structures, Job Architecture, Pay Equity and Employee Pay Planning Tools.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

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Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of […]

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