The Perception of Pay

by Michael Haberman on November 7, 2012 · 2 comments

 

Pay levels and employee satisfaction can be a challenging balance for employers.

There have been many thousands of pages written on motivation and multiple theories posited over the past 100 years. We learn about them in management classes and HR classes. I have talked about them every year for the past 15 years as I teach and students have struggled with them for as long. A main tenet in business philosophy is that pay is the number one motivator for employees. Many of these employees might say the same thing. However, a recent study shows that it may not be the actual pay but the perception of pay that is important.

 

Pay satisfaction

Janice Wood writing in PsychCentral reports on the work of Amit Kramer, Ph.D., in her post Pay Satisfaction Tied to Less Work-Family Conflict. I must admit that my first reaction to this title was “DUH”, but I delved a bit deeper into the article. Kramer’s study determined that there are levels of pay satisfaction that will vary from employee to employee. Once a “sufficient” level of pay is achieved employees will start comparing that pay to other factors. As Kramer puts it “It becomes ‘my pay’ compared to others; ‘my pay’ compared to the effort I invest; ‘my pay’ compared to the things I give up and miss in life for the opportunity cost of working.”

Equity theory

For those of you that have taken the SHRM prep classes let me remind you of Adams Equity Theory, which states that employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it against the perceived inputs and outcomes of others. The belief is that people value fair treatment which causes them to be motivated to keep the fairness maintained within the relationships of their co-workers and the organization. The structure of equity in the workplace is based on the ratio of inputs to outcomes. Inputs are the contributions made by the employee for the organization. Sound familiar? Well hopefully the principle is familiar.

Kramer goes on to say that for some employees pay may be #1 but “…for others the social aspects of pay and the things they perceive to be sacrificing for pay are stronger or act as additional incentives and disincentives”. The study shows that the actual level of pay is not important it is the relative level of pay. Kramer says “…when employees change jobs, they re-evaluate their pay and are more likely to change their pay satisfaction, not necessarily because they get a raise, but because of the social aspect of pay. And the way individuals evaluate their pay is by comparing their pay relative to their co-workers’ pay, relative to the effort they put in, and relative to what they sacrifice in order to work.”

Pay satisfaction causes problems at home

Ms. Wood in her reporting of the study writes “…even highly compensated employees report high work-family conflict because they also perceive pay inequity among colleagues.” One of the things unsaid in this report is that I think the home problems are not only caused by the employee’s perception of their pay but also because of their spouse’s perception of their pay. The proverbial “keeping up with the Smiths” comes into play here, especially with promotions that change the circle of acquaintances.

Kramer suggests a couple of solutions to the pay perception and home problems. One suggestion is that you tailor policies and benefits to each individual employee. Not necessarily a practical suggestion, which Kramer admits are typically only done for key employees.

The second suggestion for the rest of the employees was to provide a more flexible work schedule that would allow employees to spend more time with family or to just spend time as needed. This supposedly will be seen as a trade-off for the level of pay. And to an extent this does work for employees who have a job that permits that time. It works for me. But I am not sure this really solves the “perception of pay” issues that may still exist. Does spending more time with your spouse off set the perception they have of you not making “enough” money to allow the desired social level?

The lesson here is that motivation, compensation and pay satisfaction is not easy to determine. It not only varies for each employee but for each employee’s situation. Ah, the joys of being the compensation manager.  

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{ 2 comments… read them below or add one }

Paul Hebert November 7, 2012 at 8:53 am

Something else to add to the mix – the difference between absolute and relative pay…

a famous 1998 study by economists Sara Solnick (then at the University of Miami, now at the University of Vermont) and David Hemenway of the Harvard School of Public Health. Subjects were asked which they’d prefer: to earn $50,000 while knowing everyone else earned $25,000, or to earn $100,000 while knowing everyone else earned $200,000. Objectively speaking, $100,000 is twice as much as $50,000. Even so, 56 percent chose $50,000 if it meant that would put them on top rather than at the bottom. We are social creatures and establish our expectations relative to others.

We’d rather have more than someone than more in general. We are a weird group…

Link to study here ($41.00) http://www.sciencedirect.com/science/article/pii/S0167268198000894

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Michael Haberman November 7, 2012 at 9:06 am

Paul, very interesting. The additional question is how would our signifcant other view that situation as well. Thanks for the input.

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