Equity in Compensation

NURLIYANA BINTI MOHD SAIFUL BAHREN

2012888658

BM7703F

1. Compensation Model

2. Equity- Other terms- Definitions- Importance- Equity Theory- Types of Equity of Compensation

3. Organizational Justice- Types of organizational justice

4. Where Does Malaysia Stand in the World in terms of Equity of Compensation

5. Cause-and-Effect of Equity on Compensation

Outline

Compensation Model(Milkovich, Newman & Gerhart (2011)

POLICIES TECHNIQUES OBJECTIVES

INTERNAL ALIGNMENT

INTERNAL STRUCTURE • EFFICIENY

• FAIRNESS

• COMPLIANCE

• ETHICS

COMPETITIVENESS PAY STRUCTURE

CONTRIBUTIONS PAY FOR PERFORMANCE

MANAGEMENT EVALUATIONS

Other Terms

Equity is synonym to:JUSTICE

FAIRNESS

IMPARTIALITY

JUSTNESS

OBJECTIVENESS

Perceived of Inequity?

Definitions of Equity of Compensation

“Pay equity influences those behaviors which determine

organizational effectiveness and their behaviour towards

absenteeism, productivity, and the quality of work”

(Lawler, 1981)

“Equality principle of reward allocation serves to emphasizes the common elements and similarities based on the same qualifications”

(Deutsch, 1975)

“Role of fairness that is concerned with the ways in which employees determine if they have been treated fairly in their jobs and which will influence work-related variables

(Moorman, 1991)

“Organizations that ignore equitibility concerns run the risk of endangering negative organizational

outcomes of decisions, non-cmpliance with procedures and

lower satisfaction”

(Lind & Tyler, 1988)

The equitable compensation and awards that should be received accordingly based on KSAs,

experience, contribution. All these will give a positive behaviour to

motivate the employees to perform better without doubting the system.

Importance of Equity of Compensation(Burns, 2012)

To maintain company’s

marketability

Employees will not be taken for

granted by the employer

Avoid inefficiencies and costs that detract from companies

Ability to recruit and retain the

best and the brightest

Equity Theory(Adam’s Equity Theory, 1963)

Basic Proposition of Equity Theory(Huseman, Hatfield & Miles, 1987)

Individuals develop perception of fairness by calculating their inputs & outcomes, then compare with

others

If comparisons done perceived to be unfair

by the individual, hence inequity exist

As differences in equity increases,

tension & distress felt by the individual

increases

The greater the tension due to

perceived inequity, the harder an

individual will work to decrease tension &

increase perceived level of equity

Types of Equity of Compensation

Stock options

Employee stock

purchase plan

Restricted options

Stock appreciation

rights

Internal Equity of Compensation

INTERNAL EQUITY:

The pay relationships among different jobs/ skills/ competencies

within a single organization

Supports organization strategy

- To structure the organization through the nature of business and according to their

qualifications

Supports work flow

- Process by which goods/

services as delivered to

the customers

Motivates behaviour

- The challenge is to design structures that

will engage to achieve

organization’s objectives

A company uses internal alignment if it:

Structures vary among organizations, internal pay structure can be defined:

Number of levels

- Reporting relationships

Differentials

- To motivate, pay is determined by KSA & value added

Criteria: Content & Value

- Work & how it is done

- Contribute to objectives of organization

What Shapes Internal Equity?

External factors

• Economic pressure• Government policy• Stakeholders• Cultures and

customs

Organization factor

• Strategy • Technology• Human capital• HR policy• Employee acceptance• Cost implications

Internal structure

• Levels• Differentials • Criteria

External Equity of Compensation

Expressed through such practices:

Pay level that is

above than competitors

Pay level that is

lower than competitor

OBJECTIVES:- Control costs

- Increase revenue

- Attract & retain

employees

What Shapes External Equity?

• Nature of demand• Nature of supply

Labor market factors

• Degree of competition• Level of product demand

Product market factors

• Industry, strategy, size• Individual manager

Organization factors

Organizational Justice(Greenberg, 1987)

How an employee judges the behaviour of the organization and their resulting attitude and behaviour that comes from this.

Employee are ATTENTIVE & REACT to actions and decisions to the justice of events in their everyday lives and have PERCEPTIONS

whether fair or not.

The everyday’s decisions made by the organization is the central interest because it impacts JOB ATTITUDES & PERCEPTIONS of fair pay, equal opportunities for promotion and personnel selection

procedures.

ORGANIZATIONAL JUSTICE

INTERPERSONAL JUSTICE

INFORMATIONAL JUSTICE

INTERACTIONAL JUSTICE

PROCEDURAL JUSTICE

DISTRIBUTIVE JUSTICE

Types of Organizational Justice

(Adams, 1965)

DISTRIBUTIVE

JUSTICE

Associated with decision outcomes and distribution of

resources. The outcomes

can be tangible & intangible

(Leventhal, 1980)

PROCEDURAL

JUSTICE

Processes that lead to outcomes

which involves

consistency, accuracy,

ethicality and lack of bias

(Bies & Moag, 1986)

INTERACTIONAL JUSTICE

Treatment that an employee receives as

decisions are made with 2 other components:

- INTERPERSONAL JUSTICE: Perceptions of

respect in one’s treatment

- INFORMATIONAL JUSTICE: Adequacy of

the explanations given in terms of timeliness,

specificity and truthfulness

Which Justice is More Significant?(Deutsch, 1985)

DISTRIBUTIVE JUSTICEEquity Principle

Allocation of rewards in proportion to each individual’s contribution

towards group

Can directly influence interpersonal culture and productivity of

individuals, groups and organization

(Folger & Konovsky, 1989)

Equality Principle

Rewards to all individuals regardless of differential

inputs

Need Principle

Allocation of rewards based on individual

needs

More an important factor to predict organizational commitment, turnover

and behaviour to predict job satisfaction compared to procedural justice

(Dailey & Kirk, 1992)

Where Does Malaysia Stand in Equity in Compensation?

Gini Coefficient of Malaysia against Other Countries(World Bank, 2013)

Gini Coefficient:

Measures the income/ consumption of individuals from an equal distribution.

Index Level

0 = perfect equality

100 = perfect inequality

MALAYSIA = 46.2

WHY DOES THIS

HAPPEN?

(World Bank, 2013)

This shows that Malaysia is in the Top 10 in the world & No. 7 in Asia with the Highest Employment Ratio that Underpins Social Stability

(World Bank, 2013)

This shows that Malaysia is in the Top 15 in the world & No. 5 in Asia with the Highest Per Capita Incomes that Supports Social Stability

(Bloomberg, 2013)

Income equality can also be affected by:

- Demographics

- Older populations with wealth accrued over time

- Economic downturns

- Rigid labor market

According to Maestri and Roventini (2012), there is a negative

relationship between income inequity & economic growth. This

shows Malaysia can still be considered as average, under 50.

JUSTIFICATION

JUSTIFICATION

Cause-and-Effect of Equity on Compensation

Equity in Compensation

MOTIVATION

PERFORMANCE

SATISFACTION

TURNOVER

Relationship of Equity in Compensation with Job Satisfaction(Al-Zu’bi, 2010)

.

.

Examined the Relationship

between Organizational Justice and Job

Satisfaction encompassed by 3

components, distributive,

procedural and interactional justice

229 employees from Electrical Industries Companies in Jordan which was selected through a stratified random sampling

1) Distributive justice:(-) Workoad, level of pay

(+) Work schedule, rewards, job responsibilities

2) Procedural justice:(+) Managers unbiased

3) Interactional justice: (+) Managers treat with respect , sensitive to personal needs, discuss

implications

Relationship between employees’ perception of organizational justice and

personal traits:

Significant relationship: Gender

No significant relationship: Age &

educational level

Relationship between

organizational justice and job

satisfaction:

STRONG RELATIONSHIP

OBJECTIVES:

1) Levels of organizational justice as perceived by employees

2) Employee perceptions on job satisfaction & organizational justice

3) Relationship of personal traits and organizational justice

JUSTIFICATION

- Equity of Compensation & Job Satisfaction

- Equity & Personal Traits (Age, Gender, E

ducational level)

Conclusion

• Employees feel the sense of belonginess due to fairness• Company will maintain its marketability

comparing with its competitors• Equity in compensation help to retain their

employees• Acceptance and rejection of the

compensation system plays a big role in maintaining or changing a system