What is the meaning of Motivating Value of Compensation?

 Pay constitutes a quantitative measure of an employee’s relative worth. For most employees, pay has a direct bearing not only on their standard of living, but also on the status and recognition they may be able to achieve both on and off the job. Since pay represents a reward received in exchange for an employee’s contri­butions, it is essential that the pay be “equitable” in terms of those contributions. It is essential also that an employee’s pay be “equitable” in terms of what other employees are receiving for their contributions.

Pay Equity

Equity can be defined as anything of value earned through the investment of something of value. Fairness is achieved when the return on equity is equivalent to the investment made. For employees, pay equity is achieved when the compensation received is equal to the value of the work performed.

Pay equity: An employee’s perception that compensation received is equal to the value of the work performed

Internal equity is especially important in an organization where “teamwork” is critical to success. In environments that requires a cross-section of skills and talents and interdisciplinary teamwork, coworkers need confidence in themselves and their colleagues. An important part of creating an environment in which teamwork is effective, is a pay policy that reflects the true value of work to the overall organization, and helps all members of the team respect one another’s contribution and role.

Not only must pay be equitable, it must also be “perceived” as such by employees. Research clearly demonstrates that employees’ perceptions of pay equity, or inequity, can have dramatic effects on their motivation for both work behav­ior and productivity. Managers must therefore develop pay practices that are both internally and externally equitable.

Employees must believe that wage rates for jobs within the organization approximate the job’s worth to the organization. Also, the employer’s wage rates must correspond closely to prevailing market rates for the employee’s occupation. These two goals can sometimes be in conflict.

Pay Expectancy

The expectancy theory of motivation predicts that one’s level of motivation de­pends on the attractiveness of the reward sought. The theory holds that employees should exert greater work effort if they have rea­son to expect that it will result in a reward that is valued. To motivate this ef­fort, the value of any monetary reward should be attractive. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

The chart below illustrates the relationship between pay-for-performance and the expectancy theory of motivation. The model predicts that high effort will lead to high performance (expectancy), and high performance in turn will lead to monetary rewards that are appreciated (valued). Since pay-for-performance leads to a feeling of pay satisfaction, this feeling should reinforce one’s high level of effort.

Thus, how employees view compensation can be an important factor in de­termining the motivational value of compensation. Furthermore, the effective communication of pay information together with an organizational environment that elicits employee trust in management can contribute to employees having more accurate perceptions of their pay. The perceptions employees develop con­cerning their pay are influenced by the accuracy of their knowledge and under­standing of the compensation program.

Pay Secrecy

Misperceptions by employees concerning the equity of their pay and its relation­ship to performance can be created by secrecy about the pay that others receive. There is reason to believe that secrecy can generate distrust in the compensation system, reduce employee motivation, and inhibit organizational effectiveness. Yet pay secrecy seems to be an accepted practice in many organizations in both the private and the public sector.

Managers may justify secrecy on the grounds that most employees prefer to have their own pay kept secret. Probably one of the reasons for pay secrecy that managers may be unwilling to admit is that it gives them greater freedom in compensation management, since pay decisions are not disclosed and there is no need to justify or defend them. Employees who are not supposed to know what others are being paid have no objective base for pursuing grievances about their own pay.

Secrecy also serves to cover up inequities existing within the pay structure. Furthermore, secrecy surrounding compensation decisions may lead employees to believe that there is no direct relationship between pay and performance.