Impact of Perceived Fairness of Pay on Job Satisfaction Performance and Retention
INTRODUCTION The focus of this paper will be to research the impact of perceived fairness of pay with regard to employee job satisfaction, performance, and retention. Additionally, the paper will discuss how the perceived fairness of pay aligns with specific organizational behavior theoretical foundations. It is necessary to point out that the most important variable of any survey, and the premise to any documentation or research addressing one’s perceived fairness of pay and its impact on job satisfaction, is that it is contingent on respondents to be sufficiently reflective and open about their own levels of satisfaction regarding work. ... PERCEIVED FAIRNESS OF PAY What is perceived fairness of pay? We will attempt to answer the question with another, yet more intimate question, “Am I paid fairly for the job responsibilities I have? ... But the question specifically asks whether one’s pay is fair, not whether one is paid enough. Some people associate fair pay with what one receives for a “fair day’s work”. But determining and deciding on the actual pay rate is where the problem begins. ... Most often, we create our judgment of “fairness” by comparing how things are with how we think they should be. ... As individuals, when deciding and creating our judgment of “fairness”, language plays and important role in the process. ... That is one’s perception of having an important voice in the determination of a particular outcome is a key ingredient for one’s job satisfaction, particularly with one’s perceived fairness of pay. ... One’s perceived fairness of pay consists of four dimensions (Heneman & Schwab, 1985): (1) perceived fairness of pay level, (2) perceived fairness of pay increases or raises, (3) perceived fairness of the pay structure and its administration, and (4) perceived fairness of benefits. Although collectively these for dimensions can be summarized as one’s perceived fairness of compensation, for purposes of this document, we will summarize and make reference to them in their most generic form, perceived fairness of pay As the “Consequences of Perceived Fairness of Pay” illustration indicates (See Appendix A), when employees perceive they are paid fairly, they are more likely to: (1) be satisfied with their job, (2) feel that the organization will satisfy their long-term needs and goals, and (3) feel that their workload is reasonable. Indirectly, perceived fairness of pay can also be associated with reductions of stress and increases in retention in the workplace. ... Another may not perceive what is perceived as fair for one person as fair. ... Adams), which helps us understand one’s perceived fairness of pay. Adams suggests that each of us compares our “inputs” (work) and our “outcomes” (pay). ... Clark’s Economic Foundations of Well-Being (2000), suggests there is evidence that one’s perception of job satisfaction falls as others’ perceived fairness of pay and income increases. This holds for: (1) employees at the same level and capacity, (2) one’s spouse, (3) other adults in the same household, and (4) one’s perceived fairness of pay on the same job a year ago. Employers are also aware that one’s perceived fairness of pay is positively related to job satisfaction. They are continuously striving to establish fair pay and to achieve three forms of equity: job equity, market equity, and pay equity. When jobs are fairly graded and paid relative to each other, the employer achieves job equity. ... And when employees are paid fairly relative to each other, the employer achieves pay equity. All three contribute and shape the employee’s perceived fairness of pay. PERCEIVED FAIRNESS OF PAY AND JOB SATISFACTION Because compensation decisions are particularly significant to employees, the process by which they are made is likely to influence employee job satisfaction. ... Distributive justice can be leveraged to address the fairness of organizational outcomes such as promotions, pay increases, and raises. It states that the fairness of these same outcomes is determined according to relative allocation norms or equitable input/outcome criteria (Rasinski, 1987), in other words the fairness of an outcome is not based on arbitrarily defined characteristics. Procedural Justice in the other hand focuses on the procedures or processes used to make decisions and their relative fairness (Folger & Greenberg, 1985; Greenberg, 1990a). ... These two, as we previously mentioned, are tenet of the perceived fairness of pay. Therefore, procedural justice refers to the influence organizational procedures such as the grievance structure and the administration of performance evaluations and promotions have on the employees’ perceptions of organizational fairness. Milkovich and Newman (1993) agree that the manner in which compensation decisions are made are just as important as the perceived fairness of the same and as important as the magnitude of the decision itself. Support for this comes from research showing that perceptions of procedural justice contribute significantly to the perceived fairness of pay (Folger & Konovsky, 1989). ... As a result, including important stakeholders in the job evaluation process may increase perceptions of fairness in pay and job satisfaction because it allows one to have a voice in the design of the criteria for compensation, even if one ultimately has little direct control over the final compensation. Furthermore, Greenberg (1997) asserted that levels of job satisfaction are improved when concerns are addressed about how one’s compensation level, salary in particular, is determined. Once again, these findings support the view that procedural variables are important factors that influence one’s perceived fairness of pay in the workplace. We earlier discussed perceived fairness of pay consisted of four dimensions. Landy, Barns & Murphy (1978) also found that the perceived fairness of promotions and pay increases, a subset of one’s perceived fairness of pay, is also strongly correlated to process variables such as the opportunity to express one’s feelings during a performance evaluation. In this particular example the perceived fairness of the pay structure and its administration is more likely to change following job evaluations or performance reviews, while the perceived fairness of benefits is likely to remain unaffected. It is also important to mention that change and lack of increase to one’s perceived fairness of the pay structure and its administration may be an indication one’s unfamiliarity and inability to understand such system. Leventhal (1990) further identified six criteria of his own which he felt had an impact on one’s perceived fairness of pay and work-related outcome. ... The latter, as Sheppard & Lewicki (1994) and Barrett-Howard & Tyler (1996) found, the application of a consistent ruling, is the most important criterion of one’s perceived fairness of pay – it was closely followed by accuracy and impartiality. One way of approaching the questions of job satisfaction is by separating the extrinsic and intrinsic factors of one’s role or occupation. Herzberg went on to develop his theory that there are two dimensions to job satisfaction: hygiene and motivation. Hygiene factors are those associated with an employee’s negative feelings about the job and related to the environment in which the job is performed – they cannot motivate employees but can minimize dissatisfaction, if handled properly. ... Motivator factors are related to the employee’s positive feelings about the job and to the content of the job itself – they create satisfaction by fulfilling employees’ needs for meaning and personal growth.