Compensation

Employee Rewards: The Importance of Perceived Fairness

Perceived fairness of employee rewards (or the lack thereof) is often at the root of why employees leave organizations. The idea of fairness also determines if an employee will make an extra effort to reach organizational goals or even the objectives of his or her own job. For these reasons, it’s vital for organizations to ensure that their employee rewards are rooted in principles of fairness.

Research demonstrates that employees’ perception of fairness and equitable treatment is a core driver of retention, engagement and performance. In fact, unfair treatment is corrosive. Just the perception that treatment is unfair can have devastating effects on the organization because it:

  • Creates a climate of distrust and hostility
  • Erodes performance and employee commitment to the organization
  • Increases counter-productive work behavior
  • Reduces the willingness of employees to help each other
  • Increases unionizing activity
  • Increases voluntary turnover and absenteeism

The perception of unfairness even drives people out of organizations. Research from the employee opinion database at Hay Group (which contains over 4 million employee records) shows that the variables that drive employees out of organizations include (in rank order):

  1. Career development opportunities
  2. Compensation
  3. Work climate
  4. Manager/supervisory conflict
  5. Lack of challenging work
  6. Direction of organization
  7. Lack of recognition

Most of these involve perceptions of unfair treatment relative to other employees.

Employee Rewards: Understanding How Fairness is Perceived

There are three types of fairness in the workplace:

  1. Distributive. This relates to equity versus equality in rewards. “Are we fair in how we allocate rewards?” Ron Keimach asked in a recent BLR webinar. “Fair can mean it’s not equal . . . but the logic is understood.”
  2. Procedural. This relates to a fair or consistent reward process. “Are we consistent about it?” Keimach asked. “Is the appearance of it consistent?”
  3. Interactional. This relates to the need for interactions that reinforce what the employee observes. Our interactions affect our fairness perception. What are the employee/employer interactions like? “How often does the interaction occur, and is it a healthy interaction?” Keimach asked.

    This can be directly related to performance management, for example. If the employee is getting one message (e.g. “good job”) all year, but then is told at the annual review that they didn’t perform well enough to receive a bonus, that is an example of a scenario in which the employee/employer interactions don’t create a perception of fairness. (Performance management isn’t to be done just once a year – it needs to happen regularly to increase perception of fairness).

While distinct, there is often correlation amongst the three types of fairness in the workplace. Deficiencies in any of the three can cause fairness gaps.

It’s also important to understand that employee reward fairness concerns are typically relative to a benchmark or comparison point. They may be relative to employee skills, capabilities and performance, for example. An employee may perceive whether their individual reward package is fair in terms of:

  • The amount of effort the employee invests
  • The quality and impact of the employee’s performance
  • The education, experience and training the employee possesses
  • The content and complexity of their current role

The employee will also compare fairness relative to others:

  • The supervisor and subordinates
  • Peers doing the same job and similar jobs in the organization
  • Peers in other organizations

Therefore, reward programs must focus on fairness from both an internal and external perspective.

For more information on fair employee reward programs, order the webinar recording of “Employee Rewards: How to Fairly and Effectively Drive Engagement and Loyalty.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Ron Keimach is a principal and the West Region Reward Practice Leader for Hay Group. He has helped implement organization design, job measurement, compensation planning, incentive, and cultural change initiatives across many public and private sectors.