Fair and Equitable Compensation

Topics: Employment, Employment compensation, Salary Pages: 5 (1776 words) Published: September 3, 2012
In exchange for job performance and commitment, an employer offers rewards to employees. Adequate rewards and compensations potentially attract a quality work force, maintain the satisfaction of existing employees, keep quality employees from leaving, and motivate them in the workplace. According to research conducted by the Corporate Executive Board, the most important workplace attribute is compensation, (The Increasing Call for Work-Life Balance, 2009). Not only must wages be set high enough to motivate and attract good talent, they must also be equitable—that is, the wage must accurately reflect the value of the labor performed. Fair and equitable compensation is a crucial factor in the success of an organization. It is important because it is a tool that is used to recruit, maintain, and motivate their employees to contribute to the organization’s success. As discussed, equity or fairness is a key component in creating a successful compensation system. Equity and fairness can be defined in three ways. First, the perception exists that all employees in an organization are being treated fairly. Second, external pay equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations. Third, internal pay equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization. Perceived inequity or unfairness, either external or internal, can result in low morale and loss of organizational effectiveness. For example, if employees feel they are being compensated unfairly, they may restrict their efforts or leave the organization, damaging the organization’s overall performance. There are a number of components that need to be addressed when developing a compensation system to ensure they align with the organization’s strategy and objectives (Martocchio, 2009). The compensation strategy must help to create the desired work culture. How the system is structured and managed will directly impact the culture of the organization. A compensation philosophy is developed to guide the design and complexity of a compensation program. A consistent philosophy provides a strong foundation for both the organization and the employee. Without a philosophy, the organization is at risk for inequity. A proper design of reward and compensation systems requires careful review of the labor market, thorough analysis of jobs, and a systematic study of pay structures. Employers must consider internal and external factors that may have an impact. From an internal perspective compensation has to be fair and equitable among all workers in the same organization. Internal equity can be achieved when pay is proportionate to the employee’s qualifications and contributions to an organization. From an external perspective, compensation has to be fair and equitable in comparison to the external market. Potential employees are recruited from a certain geographic area or labor market. The actual boundary of a labor market varies depending on the type of job, organization, and industry (Encyclopedia of Business and Finance). For example an opening for a computer programmer at Google may attract candidates from across the country, whereas a secretarial position at a local hospital may attract candidates only from the immediate local area of the hospital. There are many factors involved in estimating what is fair and equitable. HR professionals must be aware of all these factors. To assist with understanding the market, compensation surveys are extremely helpful. A compensation survey obtains data regarding what other organizations pay for specific jobs or job classes in a given geographic market (Dessler, 2011). Large organizations periodically conduct compensation surveys and review their compensation system to assure external equity. Several factors are generally...
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