Abstract This research is conducted to make a comparison between the effects and the importance of external equity, internal equity, procedural justice, individual equity and informational justice on the satisfaction towards the pay level among employees within a firm. It is to figure out how the importance of individual, external and internal equity would make the employee feel satisfy on the pay they received. This study also is expected to give a better understanding on the perceptions of the fairness of pay level in the firm.
The research would give the employer in Malaysia on better perspective on how to ensure all the employees are satisfied with the pay they received and how to design a better and more effective pay structure for all employees. The findings and results of this study would also help the management of the firm to align between the external conditions with the internal alignment and settle down any arises conflict occurs. The study also is expected to help the organisation on designing a better compensation programs.
To determine the results of these findings, the policy-capturing methods were used and data from both group and individual analysis were considered and analyse. There are three factors that contribute to the employee’s satisfaction towards the pay level within a firm. The study successfully figures out that the most important factors are individual equity it is shown through the individual analysis. Introduction Pay level and pay mix are among the most important components on the employees satisfaction towards the benefits and reward offered by the organisation.
The employee satisfaction is associated with the pay receive by them and the contribution made. In Malaysia, the most common issue when it comes to compensation is equity and how the employee perceives the fairness of the pay. It is important for the organisation in Malaysia to understand to what extent the pay level satisfaction among employee may be increase. As the turnover rate is increasing in most of the organisation in Malaysia, it is important for the organisation to alter the employee’s perception on the pay level and pay plan for them.
It is the manager’s responsibility to build and design the attractive pay structure in order to attract the competent job hunter. Offering the attractive pay structure not only will attract the competent job hunter but also may increase the motivation of current employee to produce more and to strive and increase their performance thus, increase the organisation productivity. Factor to be consider in increasing the pay level satisfaction among the employees are, the employee’s perception on equity that is, individual equity, external equity, internal equity, procedural justice and informational justice.
Those are the factors that will contribute to the pay level satisfaction. The more satisfy the employee feel, it would alter their perception on the organisation fairness. Equality and fairness perception are very important in managing human resource in an organisation. It requires much afford on maintaining the fairness and equity in the compensation program. The negative perception of the fairness and pay equity may reduce the employee’s satisfaction and decrease the commitment and trust towards the organisation and lead to depression on work (Spector B. , 2001).
The employee may loss trust on the organisation and jump to another organisation. This is why most of the organisation in Malaysia is facing with high level of turnover, so, the negative perception that the employees had towards the fairness of the pay level may worsen the situation. The problem Most of the firms and organisation in Malaysia these days has a weak relationship between the objective pay of the organisation and employee satisfaction towards it. The policy that the organisation applied may leave the employees felt that they were discriminate and there are inequity on the pay structure and pay differentials.
This weak relationship may contribute to the dissatisfaction among employees towards the company pay structure. The satisfaction of the employees is believed to have a connection to the available equity. This study will provide a view on how the organisational justice would affect the employee’s satisfaction towards the pay equity within the organisation. Main factor that may contribute to the dissatisfaction is the huge pay differentials among employees who are in the same organisation and doing the same work. Equity perceptions.
The equity perception of the employees usually focused on the comparisons the employees made between what he or she had contribute compare to the others and the satisfaction on the pay level received as compares to the other. The equity is based on the satisfaction of the employees on their rewards and pay based on what they have contributed to the organisation. It is all between how many the employees contribute to the company and how much he or she should be receiving. There are two types of equity that usually been compares among employee.
That is, comparing with the people who are doing the same job in the organisation and outside of the organisation. There are previous research claims that equity does have relationship with the employee’s satisfaction. This study also explains that in order to remain employees satisfaction on the reward and pay, distributive justice are the main factor and element that need to be taken care of. It is the important element in remaining the pay satisfaction. Those elements are individual equity, external equity, internal equity, procedural justice and informational justice.
Conceptual framework Individual Equity External Equity Pay Level Satisfaction Internal Equity Procedural Justice Informational Justice 1. Individual Equity Individual equity can be defined as a pay comparisons made by the employee among the other employee that do the same thing or the same job within the similar organisation. Within this factor, it assumed that the person who did the same job as the others and contributes to the organisation as the same with the others would expect to be paid at the same amount as the others.
The other part within this factor is the employees would assume that their contributions are as equal as pay receives by them. As based on the theoretical framework above, the higher state of equity of an individual, the more satisfy they are. This is associated with the equality of the pay receive with the contributions and equality among other employees working within the same organisation. 2. External Equity The external equity can be translated as a fairness of the compensation offered by the organisation.
External equity can be done and figured out by comparing the contribution given and the pay receive to the same job on the other organisation outside. The first part of this equity is assumed that the current company are paying less compare to the other company outside. The other part of this external equity is assumed that the outside company are paying at the same level as the current company did to the similar contributions and seniority. 3. Internal Equity The internal equity on the other hand is referred to the internal fairness in the organisation itself.
It is about the relationship that was build between jobs with another job within one organisation. For an example, the employee would compare the pay they receive with the upper level position or downward. The executive would compare their pay received with the pay received by their manager. The first part of this equity assumed that the different pay receive was not justified based on the responsibilities and requirements of the job. On the second part, this equity assumed that the pay receive by the higher level position was justified and fit with the requirements and the responsibilities of the job.
4. Procedural Justice The procedural justice can be referred to how the allocation of decision was made by using the fair procedures and processes. It is believed that the procedural justice focus on the thoroughness of the decision making process. Applying the same exact procedure in determining the pay level and the total compensation receive by the entire employee would be considered as fair. There are some researcher said that the appropriate taken procedure would results a fair procedures and results and equitability of the pay structure among employees.
5. Informational Justice Informational justice is the factor that relates to the how complete are the explanation given to the employee in completing certain tasks and how the message were distribute. It is how the information regarding the pay level and the pay structure was distributed and convey to all employees within the organisation. This would encourage the employee to have an open and honest conversation with their superior about the pay levels. The first part of this equity assumed that the information was distributed unequally.
And the other part of it assumed that the information regarding the pay level is not equal not through. To ensure the justice would remain in the conveying messages process within the organisation, the managers should be send for training about how to deliver and convey a message regarding pay level and policies to the employee in an effective way and in timely manner. 6. Pay level satisfaction Pay level satisfaction is in what extent the employee feel satisfied with the pay receives by them and what factor does contribute to the satisfaction.
As the employee felt that there is equity within the organisation, the higher chances for them to be satisfy with the pay level offered by the organisation. Based on this study, all five factors have a positive relationship with the pay level satisfaction. It is the nature of the employee to compare what they receive as results of their contribution and the pay they receive. The comparison would be made based on the upward and lower level. In Malaysia, as we seen that many employees would compare the pay they receive in an organisation with the outside company.
If there is dissatisfaction occurs, the employee would be thinking on hopping to another company that offers a better compensation program and higher pay level. Sometimes, the benefit itself was taken as yardsticks for the employee to compare the equity of the pay receive. As the employee decided to hop to another company with a better pay structure, the effect would be on the current company. The company would have to bear some cost to hire a new employee and increase the turnover rate that would not be a good image to the organisation.
Another scenario within Malaysia is that the organisation would choose to hire the employee from the outside and offer much more better and interesting pay package to them. This would make the employee think that there is no equality in the pay level in the company and would results a poor morale and de-motivate the employees. The higher the disparities would highly increase the pay level dissatisfaction. Most of the organisation in the world is applying the pay-for-performance program to increase and to motivate the employee to perform better and increase their productivity.
Previous research state that the pay-for-performance program would increase the pay disparity among those employees who doing the same job within the same organisation. It will make the employee feel that those who were given a chance to perform only will receive the increment. The larger the disparity the higher the level of pay level dissatisfaction is. Based on the previous findings, pay satisfaction may be enhanced when the organisation provide sufficient information regarding the pay and the pay decision are well understood by the employee.
This issue is well influence by the informational justice within the organisation. The manager have to really understand that the pay comparisons made by the employee would made them evaluate they pay and might create an assumption on the pay equity. Such comparison will occur whether the organisation choose to share the information or not. This study also suggests that the HR practitioner in every organisation should be well aware that the pay comparisons have a big influence towards the pay satisfaction.
Some organisation would suggest eliminating the pay secrecy would made the employee understand the rational and the reasons behind the differential among them and the organisations doesn’t have to explain on the differentials. Organisation also may think that by eliminating the pay secrecy might bust the envy feeling among employees and increase their motivation to contribute more to the organisation. But this kind of decision has an impact on the turnover due to the high level of pay dissatisfaction.
Applying these policies might be the wrong decision and the organisation may want to rethink back their policies. Fairness and equity in the pay structure is important which, the lack of it would lead to the dissatisfaction and made the employee felt they have been discriminate. It is important to ensure that the employee understands what the organisation had plan for them in terms of pay and benefits. As this study state that among all of the equity that should be obvious to the employee is the individual equity.
When the employee feel satisfy at the moment when they made the comparisons, the satisfaction towards the pay level offer will never be a thing to be worried over. Employees are most interested in knowing the pay level and raises offered by their employer, and they are more concerned on looking for the information regarding how the process of determining the pay level and raises were conducted. Due to this, they tend to ask their supervisors and it is the supervisor’s job to explain and communicate to their subordinates regarding the rational of the pay receives and the process incur in determining the pay level and raises.
This shows that the informational justice does have a relationship with the pay level satisfaction among employees and the better their communication associated with the high level of satisfaction. On previous research shows that the distributive justice suggests that paying people fairly would increase the satisfaction with pay. But most of the organisation would suggest in compensating the employee it should be based on the performance. An employee with a good performance shall receive a better pay compare to the other. With this the employer should prepare information to the employee regarding the pay plan designed.
Organisation would view this kind of plan as the fairest one and relative to the inexpensive approach and might increase the satisfaction of their employee. Each reward can relate to a specific equity such internal, external and individual equity. Each employee perceives the reward receive differently. The way they perceive, thus has its own advantages and disadvantages. Literature Review In determining the pay satisfaction, the most common model used involves the importance and the process that the organisation used to determine the pay level (R.L Heneman, 1988).
Research has shown that the pay satisfaction related to what the employees perceived and fairness they believe they should receive (William et al, 2006). The procedure to make decision on the compensation program and structure and the way the information of the compensation are communicated is the pivotal role in creating the shape of compensation system (G. T Milkovich, 1972). Kotler et al. (2009, p. 120) explains satisfaction as a pleasure that a person feels after comparing a product’s performance or outcome that meets their expectation.
Satisfaction also may results from the product’s performance meets its expected outcomes. The satisfaction towards the pay level would give the employee perception of fair equity are applied within the organisation. Equity can be explained in a terms of the fairness in distributing rewards to the person or individual that made a contribution to the organisation productivity and performance (Deustsch, 1985). On the other hand, equality can be defined as an equal payment and reward given to the all members in an organisation (Cheng, 1991).
“Equity theory suggest that the employee tend to compare themselves with relevant others” (Adam, 1965) especially when it comes to the pay and benefits received. The pay level refers to the current rate that the employee receives based on their job description and specification. Benefits are the indirect compensation in terms of non monetary pay to the employee (R. L Heneman, 1988). Most of people believe that they should be rewarded based on the performance and contribution to the organisation (Gomez-Mejia, 1991).
As to that, the employee are tend to be more sensitive when it comes to their pay raises and the process and procedures used to determine the pay increases and benefits they shall receive (Harris, 2008). As the result, the fairness in the process determining the pay level and pay increase is very important in maintaining the employee satisfaction towards the pay raises. The nature of the internal equity is based on the comparison that the employees both upward and downward from their current position to the other position within the organisation.
(Wills and Martin, 2008). The previous research has shown that the employee is very sensitive to the pay equity among them within the same organisation. Further, the bigger the differentials between them in the same organisation may impact the level of production and performance. People in the same position with the similar responsibilities tend to compare what they receive with someone else to ensure the internal equity as for the external, the employee tend to compare the pay receive with the person outside of the company.
There are research that shows there is a relationship between the internal and external equity and pay satisfaction (Judge, 1993) (Sweeney, 2004). But the most significant type of equity that effect the pay level satisfaction is not discovered yet. There are some study states that the employee might make comparisons to the referent with similar qualifications as theirs. The individual is how the employee compares the pay receives with the other who does the same work and the same responsibilities. The perception of the pay receives by the employee are associated the satisfaction (Goodman, 1974) .
The information regarding how the pay level and pay structure was design and based on what criteria is important to avoid the consequences of turnover and dissatisfaction. By providing the justification on why the pay level and pay structure were design in such ways might decrease the uncertainty that the employee might feel and the perception of the discrimination on the pay level (Greenberg, 1993). The sufficient information provided by the employer might increase the commitment of the employee towards their performance and satisfaction on the pay level (Masterson, 2000)ю
The fairness of the steps and procedure taken by the organisation in making the decision on determining the pay plan for the employee can be called as the procedural justice. It is how the employee perceives the value and the equity on the pay they receive. A correct and justice procedure and process will allow the right decision to be made on the pay plan (Leventhal, 1980) Proposition As the study shows the individual equity gives the most significant effect to the pay level satisfaction, all managers should consider the way of remaining and sustaining the pay equity within the organisation.
The equity and the fairness that the company apply would be the image of the organisation to the external competent applicants. In order to eliminate the pay differentials between employees is by using the job evaluation in determining the pay level rather than depending on the external market pay rate. Other than that, the organisation shall consider on applying the same and equal pay level to the employee who are in the same field and doing the same job with the same responsibilities. Applying the pay for performance that would increase the motivation of the employees would be good steps in increasing the pay level satisfaction.
Pay for performance policy is where the organisation would compensate their employee based on their performance. In designing the pay structure, the organisation may want to consider how to plan a better pay plan for the employee and consider the pay level that the other organisation applied. For informational justice, it is suggested to the organisation to train the manager who is responsible in delivering the information regarding the pay level and the pay plan in a proper way and in a timely manner (I.M. Jawahar, 2011).
The effective way of delivering the pay level information will increase the pay level satisfaction and the employee might be well aware on the organisation ability to pay them on their contribution. Another way to increase the pay level satisfaction among the employee in Malaysia is that the organisation may design their pay plan by making reference to the pay plan applied by the competitors or the outside organisation.
When the employee tends to compare their pay to the other employees outside the company, there are no distance and high differences between the pay they receive and create an external equity perception of the employees. Thus, would increase the pay level satisfaction among employees. Another way to increase the pay level satisfaction is the organisation may introduce a pay equity process that is more flexible in the collective agreement for unionised organisations.
This can be done by listening to what extent and how the employee would be satisfy with their current pay level and how to make the pay mix became more interesting and attractive (Skipton, 1991, pp. 17-23). This would strengthen and create a positive relationship between the employer and employee as they would communicate on how to satisfy the employees and to help the organisation make a plan for the compensation without neglecting the organisation’s objectives in minimizing the cost. Implementing the pay equity may reduce the gap between the pay among employees in an organisation.
The Malaysian employer should consider to design the pay program that is has element of equity rather than just attractive as most common problems in managing compensation in Malaysia is the are high gap of equity when it comes to the pay level offered to the external rather than internal. Conclusion and Implication Implication The study would have an implication on the management and the organisations as whole. It would be a challenge for the managers and the organisations to balance between the demands for the internal alignment and competition from the outside of the organisation that is from the external competitiveness.
The study also would give and lead the managers in every organisation on how to influence the employees and alter their judgement about the organisations pay structure. Understanding the employee’s perception on the current pay structure of the organisation would help the managers to create a more effective compensation program for the organisation as with the effective compensation program, equality will be more easily to be practice in the organisation. The pay equity and the effective pay structure would help the organisation decrease the turnover rate of the organisation and attract that competent applicant into the organisation.
Thus, the study has given a clear image on how to manage and remain the equality of pay and how the managers would design the attractive and effective pay structure to avoid such situation. Among those five elements of equity stated, the most important equity that would contribute highest pay level satisfaction is individual equity as it has the biggest influence rather than the 3 other equity. Conclusion The result of this study show the way how the justice and fairness in developing the compensation programs and determining pay level impact the individual’s satisfaction.
Other than that, it makes it clear to the managers how equity dimension would determine the pay satisfaction. The results also prove that the individual equity had a significant and better impact on the employee’s perception towards the pay level and increase the satisfaction (Martin, 1982). Sometimes the employee tend to be more concerned on their pay level when the organisations fails to provide the pay level as equal to the external market rate and fails to apply a fair internal compensation program.
As whole the most significant equity that would affect the pay level satisfaction the most is the individual equity. When the pay information and pay decision made by the organisation are understood by the employee, the level of pay satisfaction may be increase (Till, 2011). The human resource managers and professionals should be well aware in making the decision on the compensation and should consider the environment and pay comparison they would affect the pay satisfaction.
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