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COMPENSATION & REWARDS
Jan 28, 2014

Do pay inequities lead to unethical behaviour?

Study offers some insights into the implications of pay discontent
    

By Claudine Kapel

Few would likely disagree with the premise that unfair compensation practices can fuel employee discontent. But a new research report offers an interesting lens for understanding the importance of pay fairness.

The report, entitled Cheating More for Less: Upward Social Comparisons Motivate the Poorly Compensated to Cheat was written by Leslie K. John of Harvard Business School, George Loewenstein of Carnegie Mellon University and Scott I. Rick of the University of Michigan. The report reflects the findings of a series of experiments conducted by the research team.

In the first experiment, participants were paid five cents or 25 cents per self-reported correct response to a series of questions. Half of the participants were aware they could have received an alternative pay rate.

Participants earning five cents per point who were aware of the higher alternative rate reported “significantly higher” scores than those earning 25 cents per point. In contrast, there was no statistically significant difference in the scores reported by participants who were unaware of the two rates per point.

In addition, those earning five cents per point who were aware of the higher alternative rate were most likely to judge the pay scheme as being “unreasonable and unfair” and to indicate they deserved a higher payment.

The second experiment featured groups of participants experiencing three different types of conditions.

In the first set of groups, participants were told the pay rate for their group was the same for everyone and there was no mention of an alternative pay rate. In the second set of groups, participants were told there were two potential pay rates, with the actual rate established by a coin toss, and all the participants in the group received the same rate. In the third set of groups, each participant received a slip of paper marked either A or B. A coin toss was then used to determine the rate of pay – either five cents or 25 cents – that corresponded to the A and B.

In this experiment, the researchers covertly collected the workbooks where participants recorded their responses to enable them to measure true performance.

The proportion of participants who cheated by overstating their scores did not differ significantly across groups. Among those earning five cents a point, however, those who were aware of there being two rates of pay within the same group were more likely to overstate their scores to a greater degree.

The researchers concluded “the effect of performance-based pay-rates on dishonesty depends on how readily people can compare their pay-rate to that of others.”

So how can these research findings help us with day-to-day compensation management?

The report suggests the findings serve as a caution to employers about the potential hazards of sharing information on the details of individual employees’ pay. The reality, however, is that while few organizations share that type of information, employees do.

There’s also no getting away from variances in pay levels. They’re a fact of life in most organizations. And they often exist for very good reasons, including differences in work experience, time on job and/or performance.

Thus, the moral of the story shouldn’t be that organizations should strive to pay everyone in the same job the same, although that might make sense is some environments. What’s key is to take steps to ensure you have a sound – and defensible – approach for managing compensation.

You can test for potential issues around pay fairness by asking some potentially tough questions:

  • Do you have a clearly defined base pay structure that’s aligned with competitive market practice? Do you have a budget for providing market adjustments, when needed?
  • Does the organization manage pay within the context of the structure, or are there a lot of exceptions?
  • Are there clear guidelines that govern how employees progress through their salary range or wage scale? Do pay decisions align with these guidelines or do leaders and managers make a lot of discretionary pay decisions?
  • Are there periodic reviews that assess how the salaries of employees in the same job compare? Can leaders and managers credibly explain differences in pay levels or does it appear that some individuals or groups are being unfairly held back or disadvantaged?
  • Do employees understand how they’re compensated and the factors that influence pay increases?

The reality is that you’ll never be able to banish grapevine conversations about pay. But you can take steps to ensure your pay practices are consistent, well considered, and well understood. That won’t stop employees from comparing notes – but it may lower the volume on potential concerns.

Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.

    
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