Can you help me understand how the pay systems in most companies work? How do I determine whether I am getting a fair and equitable pay for the work I do?
A great question! I am sure there are many of us who cannot quite determine how we get Paid. 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 in days gone by were called knowledge, skills and abilities. Under this system 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 has 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.
All of these are organizational behavior scenarios which one can learn to navigate through. 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. Greedy executives take home astronomical sums of money courtesy of these equity- based programs.
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 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.