This is a concept that needs a great deal of contemplation!
I am sure there are many of us who cannot quite determine how we get paid and that certainly results in disconcerted feelings of unfairness.
Hopefully this essay will provide some food for thought in understanding the causes of these feelings.
Let it be known that global pay systems are usually based on three principles; 1) paying for the job - this is the traditional Pay System with salary grades, classifications and pay ranges, and other obfuscations, 2) paying for skills - this system pays for now what are called competencies which days gone by were called knowledge, skills and abilities; you get paid whether you actually contribute or not, 3) paying on the basis of purely the market. Find out what your organization's pay system is all about within the context given above. If an organization pays for the job, more often than not this organization is traditional, rigid and bureaucratic. Paying for skills, knowledge or competency is actually great, but there is a certification process involved, and this system requires a lot of administration. Paying on the basis of purely the market is the most equitable methodology because it focuses the pay system directly into the economic dimensions of employment. Such a system requires that your organization have access to market data and that the data is believable and acceptable. In addition to the methodologies to determine base - or what I call "come to work pay" - there are merit systems that pay incremental increases to cover the "cost of living" and job performance as laid out by senior management. Other types of programs include bonuses, cash profit sharing and long-term cash bonuses, milestone bonuses and employee referral payments. Then there is stock or other equity related compensation programs for some or all employees. This is also a good practice and in the dotcom era made a lot of employees millionaires. Greed motivated executives take home astronomical sums of money courtesy of these equity-based programs. All of these are organizational behavior scenarios, which one can learn to navigate through. But whether you are paid equitably or not is quite subjective and it depends on your concept of "felt fair pay". So compare your pay with others in a similar position within your company or with others in other companies holding similar positions as you and then you can determine whether you are paid fairly or not. Fairness also depends on whether you understand the processes and methods to determine your starting pay or even when an organization doles out annual increases or bonuses or any other compensation scheme. Fairness depends on what, how and why you are paid. Research evidence shows that if employees do not know the what, how and why of their pay system as it relates to them then the employee' pay perception does not equate fairness.
—Akerlof and Yellen (1990), building on work from psychology, sociology, and personnel management, introduce “the fair wage-effort hypothesis”, which states that workers form a notion of the fair wage, and if the actual wage is lower, withdraw effort in proportion, so that, depending on the wage-effort elasticity and the costs to the firm of shirking, the fair wage may form a key part of the wage bargain.
—A crucial point (as noted in Akerlof 1982) is that notions of fairness depend on the status quo and other reference points. — —Experiments (Fehr and Schmidt 2000) and surveys (Kahneman, Knetsch and Thaler 1986) indicate that people have clear notions of fairness based on particular reference points (disagreements can arise in the choice of reference point) — —thus, for example firms who raise prices or lower wages to take advantage of increased demand or increased labor supply are frequently perceived as acting unfairly, where the same changes are deemed relatively acceptable when the firm makes them due to increased costs (Kahneman et al) — — in other words, in people’s intuitive “naïve accounting” (Rabin 1993), a key role is played by the idea of entitlements embodied in reference points (although as Dufwenberg and Kirchsteiger 2000 point out, there may be informational problems, e.g. for workers in determining what the firm’s profit actually is, given tax avoidance and stock-price considerations).
So in summary whether "fairness" exists in a pay system depends on all the following factors:
1. Whether the various stakeholders understand the pay processes.
2. Fairness is directly correlated to the "secrecy" of the pay system. The more secret the pay system the more unfair is the perception.
3. Also "fairness" depends on an individual's personal comparators or reference points.
4. Finally, recent research shows that "fairness" is part and parcel of how employees perceives the pay system as "appropriate" to the individual's needs.
Thus an organization's pay system needs to devote more time on the employee "demand" side of the pay equation.
