Equity in Compensati on NURLIYANA BINTI MOHD SAIFUL BAHREN 2012888658 BM7703F
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