First Notes: Fairness: Day 2 Strat Comp

Overview

Use pay fairness discussion to provide overview of course topics (Chap. 1, Part 1)

• Intro - Questions? Assignment 1 for next Tues on Canvas

• “Are you paid fairly” discussion follow-up - Chap 1—types & forms of returns from work

• Understanding pay fairness perceptions—Equity theory (covered in Chap. 3)

• Chap 1– Definitions and Pay Model

Are you paid fairly

factors

• depend on tips/low base pay

• benefits

• can’t control pay

• subjective criteria

• location - remote

• amount of skill/effort required

• comparison - diff org - similar job

• ability to pay

• length of stay - experience

• value of job, location, flex

• job security

Types and forms of returns from work (Chap. 1) “Total Returns” [or ‘Total Rewards’]

• Total Compensation (Financial Returns)

  • Direct: cash (e.g., wages, merit, incentives)

  • Indirect: Benefits and Services (e.g., insurance, retirement, paid time off)

• Relational Forms (Non-financial):

  • Recognition & Status

  • Employment Security

  • Challenging Work

  • Learning Opportunities

  • Relationships, support, safety, fairness, etc.

My additional notes

Total compensation – all the things you get financially from work

Relational – valuable and important but not financial

Why are these important: Identifies the things we will be focusing on. There is an understanding that there is some sort of trade off between the two (you may be willing to accept less pay if you have more non monetary benefits.

Helps determine satisfaction – with job, pay, and benefits

Equity Theory Comparisons: people are motivated by perceived inequities

• In determining pay fairness people consider the following:

  –External comparisons: those doing same job in different organizations

  –Internal comparisons: those doing same or different job in same organization

• Managing pay fairness perceptions means managing these comparisons

My notes on equity theory

Theories are useful as a model or framework to understand categories of different things and their relations

Equity Theory: How people think about this issue of fairness. A theory of motivation- people are motivated by inequity. “If I am getting paid unfairly, I will do something about it bc I don’t like it”

Thinking about total returns and comparing what I get with external and internal comparisons. Who are we comparing ourselves too? Not gonna compare yourself to the pay that your manager and higher ups get

Understanding Pay Fairness Perceptions: Equity Theory

Fairness perceptions determined (in part) by comparing: Do Outcomes / Inputs [for us] = Outcomes/ Inputs[for other]?

• What are important outcomes (returns) from work?

  • Total Returns

• What are the inputs that people bring to the job?

  • Education

  • Experience

  • Ideas

  • Effort (work ethic)

  • Ability to Communicate effectively

  • Performance

notes

Outcomes and inputs. total returns are outcomes. Inputs are all the things we do/bring/provide for work. Inputs: education, experience,

Consequences of perceived inequity

• Perceived Inequity:  

  • O/I (person)  <  O/I (other)

  • examples: 500/100 < 500/50

• Options for restoring equity?

  • Increase outputs – raise, leave, form a union

  • Decrease inputs – reduce effort (slow to help coworkers or less responsive to customer needs/picking up phones less)

• Interesting options:

  increase effort to get attention from boss- this would increase your perceived inequity

  Increase efficiency – find hacks so you don’t have to work as hard to maintain the level of inputs

  Decrease workload – ask boss to decrease

• Limits to theory

  • Perception: Who is comparison?

  • Individual differences in responses to perceived inequity.

  • Role of procedural fairness: not just the outcome itself but how you reach the outcome. People are more willing to accept inequity if they think it is being done/calculated fairly (trust the judgement of the person making the decisions)

perceived inequity examples

my notes:

Example: (keep in mind these numbers are perceptions and we are just trying to apply a number for comparison sakes)

the person doing the comparison (the worker) has a ratio of 500 units of outcomes and 100 units of inputs (500/100 = ratio of 5)

Other: outcome?/Input? -> 500/50 (let’s say we perceive that they have less quality of inputs (less education for example))

Because we perceive a gap/ inequity (500/100 < 500/50), we are gonna try to do something about it.

people stay at jobs for a lot of reasons, not just pay

Summary of employee perceptions of pay fairness

• Based on different forms of pay—total compensation

• Both internal and external comparisons used

• Negative consequences of perceived inequity

video example::

• computation monkeys. 2 monkeys, each do a task. If they give the researcher a rock, they get a cucumber. Both monkeys are willing to do the task in order to get the reward. If you give one of the monkeys a grape (more valuable than a cucumber), the other monkey freaks out for not getting a grape- they throw the cucumber back at the researcher.

• Shows the basic idea that this fairness notion is hard wired into us.

Compensation and Rewards

Definition: All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Difference between compensation and reward

• Reward is contingent on behavior and how the company is doing

• Compensation is what we are getting for the input we put in (education, effort, etc.) you are entitled to the pay/compensation

Types of Effects of Pay on Employers’ Behaviors

• incentive effect

• sorting effect

Linking pay to the people of the org: if you pay more, you will likely have better/more well equipped people in the org

People outside of the org are responding to differences in pay

incentive effect

• degree to which pay influences individual and group motivation

Sorting effect

Effect that pay can have on the composition of the workforce. How does this work?

–Pay level

–Pay mix

pay level

affects ability to attract and retain top talent

• contributes to size of applicant pool. You have the ability to be more selective if you have a larger pool

pay mix

how people are paid [base, bonus, benefits*]. Affects types (preferences) of employees who are attracted and retained.

• affects the types of people attracted to and willing to stay

  If there is a match between pay mix and preferences (org values me as a person, work life balance, a company that offers these may be more attractive)

ex. Invidia workers make 1million a year because of their stock options so everyone wants to work for them

The Pay Model

What is the best decision to make given that we (have an outcome?)

The first set of decisions we’ll be making in this class is internal alignment (phase 1) internal job structure or pay structure

Come up with a way of using characteristics to help find value. (criteria to determine how much a job should get paid)

2^nd phase – external competitiveness: this is where it gets more technical. Working with data. Comparing Value and external salary data

3^rd phase: individual level – contributors of how people are paid differently. individual differences

Last one isn’t discussed in class

All these things make up a complete compensation system.

The Pay Model Policies

• internal alignment

• external competitiveness

• individual contributors

• management

The Pay Model Techniques

• internal alignment: work analysis, descriptions, evaluation/certification →internal structure

• external competitiveness: market definitions, surveys, policy lines →pay structure

• individual contributors: seniority based, performance based, merit guidelines →incentive programs

• management: costs, communication, change →evaluation

The Pay Model Objectives

• internal: efficiency

  • performance, quality, customers & stockholders, costs

• external: fairness

• individual: compliance

• management: ethics