The Pay Equity Theory

Pay represents one of the most interesting and misunderstood aspects of business life. Many believe that pay is the single most important motivator of both performance and talent acquisition. However, when asked, the majority of the working people claim that they are not motivated by pay and their pay system has little influence over the way they behave on a daily basis.

Pay has become such an important aspect of human resource management that we have invented a new word to use in developing pay systems. That word is “incentivize”. Managers are urged to incentivize as a way to increase employee motivation and create a scenario for pay satisfaction.

There are two major determinants of pay satisfaction:

Pay adequacy, which is the degree to which an individual’s pay level satisfies his or her financial needs.
Pay Equity, which is the degree to which an individual perceives that his or her pay level is fair in comparison to others.

Pay Equity Theory is an important theory of satisfaction and motivation that is the fundamental basis of the design of most modern compensation systems. It is based on the premise that employees evaluate the level of their pay by comparing their contributions (inputs) and rewards (outcomes) to the contributions and rewards of others that are comparable. There are many things that individuals may consider in making their equity assessments.

Job Contributions. These are the requirements of the job itself.

Performance Contributions. These refer to the type and level of extra role behaviour exhibited by an individual.

Personal Contributions. Equity theory holds that there are large numbers of potential contributions that individuals make that may not have a direct impact on job performance, but which these individuals feel should be rewarded.

There is not always a perfect fit between what companies want to reward and what individuals consider in determining pay equity. The main thrust therefore is for the company to always remain aware of employee Pay Equity satisfaction and then do something about any potential challenges before they become problematic.

Do you enjoy excellent Pay Equity in your organisation?

Information from Richard W. Scholl, Schmidt Labor Research Center.