Do your employees think you pay them fairly?

It’s all about perception when it comes to fair pay. John Crowley explores the thorny issue of salary.

Paying your employees accurately is very important. But are you paying your employees fairly?

When I say ‘fair pay’, I don’t mean a legislated definition of the phrase. I’m not talking about the legal minimum wage, or even the minimum living wage.

I’m actually talking about a definition of fair that exists within a psychological framework. This framework is called ‘equity theory’.

It’s nothing to do with whether you are paying employees fairly or not

I interviewed psychologist Simon Kilpatrick, founder of Instrinsic Links, who says that ‘equity theory’ (Adams, 1965) is all about an employee’s perception of being paid fairly.

“It’s nothing to do with whether you are or are not paying them fairly,” he says.

The theory is based on social comparison, and how people perceive whether or not they are receiving fair treatment. When applied to a workplace, the theory seems to suggest that the amount of effort a person puts into their work is a direct result of how they compare themselves to others.

Perceptions of pay inequality work in both directions

Essentially, this means that you might be paying an employee a fair wage on paper – ie an amount of compensation that represents the value they are providing for your organisation. But if they are aware of a colleague or co-worker who is being paid a higher amount for very similar work, then this leads to a feeling of pay inequality.

Thus, despite being fairly paid on paper, an employee might end up putting less effort into their work, as they feel unfairly paid compared to their peers.

But equity theory doesn’t just talk about people feeling hard done by on their salary. In fact, the feeling of unfairness can work in both directions – and if an employee feels that they are being overpaid, the consequences aren’t always great, either.

There are three distinct reactions to perceived equality of pay

Simon says that there are three distinct reactions to perceived pay equality or inequality, which are outlined by equity theory. These are:

  • Pay equity: the employee feels satisfied that they are being fairly paid.
  • Overpayment inequity: the employee feels lucky and/or guilty that they are being paid more than they deserve.
  • Underpayment equity: the employee feels angry and/or frustrated that they are being paid less than they deserve.

“Many employees take action to ‘balance the books,’” says Simon. “Somebody feeling guilty because they believe they are overpaid may begin to turn up early, work late, and put more energy into projects.”

This might sound positive, but can lead to burnout. And Simon explains that while this isn’t necessarily a conscious choice, the employee feels that they must make up the difference, in order to justify their salary – which, in their perception, is unfairly in their favour.

Underpaid employees may find creative ways to balance the books

When an employee feels underpaid, they often balance the books in a different way. Simon says that they can get really quite creative! For example, they may:

  • make less effort during working hours
  • leave early, arrive late and call in sick more often
  • steal items or inventory from work

The stealing element isn’t often anything big or consequential. Simon says that thefts of this nature are often as petty as items from the stationery cupboard.

But while equity theory doesn’t provide a legal defence for stealing from work, it can certainly help you to understand one of the reasons why this might be happening. The stealing is just a symptom of something. Is it possible that a perception of pay inequality is the cause?

Having a clearly structured pay scale can help

Employees all tend to determine their perception of fair pay in a slightly different way. But if equity theory is to be believed, we can assume that many judgements are made based on a comparison against others.

According to Simon, the public sector has fewer issues with perceptions of pay inequality. This is because there are clear pay scales that career paths follow.

“The private sector is less regulated,” he says. “The law says you have to pay minimum wage, and there are guidelines set by industry averages, but beyond this, it’s a free for all.”

More ways to improve perceptions of pay equality

What’s important to remember is that it’s as much about how the employee reaches a conclusion, than it is about the actual amount itself. The way an employee perceives what is fair can be quite inaccurate – subjective, imprecise, and even rumour-based.

So once you’ve made sure your employees are all being paid fairly, there are a few things Simon suggests you can do to support the perceptions of fair pay:

  • Link pay to performance: make sure performance reviews clearly show how pay is linked to job performance.
  • Circulate information about benefits: make sure employees are aware of all the non-financial benefits they are entitled to.
  • Be proud if you pay more: if you pay employees more than industry averages, don’t be afraid to point this out!

About the author

John Crowley writes about HR, people management, and cloud technology. He edits the People HR blog, tackling topics ranging from building a stronger culture, to navigating the treacherous waters of HR technology.

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