Academic Discussion STarter - "EQUITY THEORY"

This is from a web site on term paper topics:

http://ivythesis.typepad.com/term_paper_topics/2009/06/reward-management.html

QUESTION NUMBER ONE

            In a typical organization,
employees have this habit of holding on to their paychecks and then comparing
them to what their co-employees have received.  Comparison between salaries is a
common occurrence and often provides a chance for employees to determine if they
are given just compensation for effort exerted and performance shown.  Equity
Theory explains this situation by stipulating that employees judge the equity of
their pay by comparing the work, qualification, and pay for jobs similar to
theirs. 

            Equity Theory is an effective basis
for executing a reward management system and determining pay differences among
employees.  Each employee in the organization performs specific and distinct
tasks and functions which are mostly interrelated as they are all designed for
the purpose of meeting the general organizational goals. Employees know that
their inputs to the organization should be rewarded with commensurate
compensation. The motivation of employees to perform well is affected if they
perceive that they are not being justly rewarded for the amount of effort they
have exerted in comparison to their colleagues.  In order to maintain the
balance between input and compensation, an organization has to clearly define
performance measures for each employee and each employee must be encouraged to
perform well through effective work behaviors.  The employees must be made to
understand that differences in skills and performance would be individually
recognized through the right compensation.  The organization, on the other hand,
must be able to stick to the specified pay rate for each performance measure in
order to ensure that input and compensation maintain their equilibrium.  

           
Every job position inside an organization from
entry level employees to managers/higher designations are created with specific
descriptions of functions and responsibilities.  Each also follows a hierarchy
as one employee develops seniority and competency. The job descriptions in each
level are related to each other as they are all aimed at accomplishing the
organizational goals and objectives. The relationships in the job levels form
the organization’s Internal Alignment. Internal alignment helps shape a pay
structure that is devised to support the organization strategy and the work
flow, be fair to employees and motivate behavior toward organization
objectives. 

            An organization needs manpower in
order to operate and accomplish its objectives.  All employees are given due
compensation for their contributions to organizational goals. Pay structures are
patterned on either the tasks, behaviors and responsibilities of an employee and
how they perform on the job (job-based) or on the skills, knowledge and
competencies possessed by the employee for the particular job (skill- or
person-based).  For an organization to succeed, it needs employees who have the
ability and skills to contribute to overall organizational performance.  Upon
hiring, these skilled employees are presented with tasks and responsibilities. 
The expectations for effective performance are laid down to them. An
organization needs employees who perform well so that their pay system would
work as well as organizational goals would be met.  Therefore, in reality, pay
structures need to be mixed. Focus can not be given only to the skills and
competencies of the employee without considering his/her task performance.  Real
organizational success relies on both job and person.

QUESTION NUMBER TWO

            Employee motivation and performance
are influenced by an effective reward system. Designing a successful employee
reward system is important in any organization in order for it to motivate
employees to use their skills and abilities to achieve effective performance and
to contribute to overall organizational objectives. One motivational theory
called Equity Theory explains that employees are motivated to perform well when
they perceive that their efforts and the behaviors they show at work are
rewarded with just compensation.  Employees who perceive that colleagues who
execute the same effort are given more compensation would react negatively and
performance might be adversely affected. The organization has to address this
issue by ensuring that increases in performance are matched by commensurate
increases in pay.

            As discussed above, employee
performance is critical to the reward system.  An organization can not reward
performance if it does not have a mechanism for measuring it.  Employee
performance (f) is said to be dependent on three general factors: (1)
skills and ability to perform task (S); (2) knowledge of facts, rules,
principles, and procedures (K); and (3) motivation to perform (M).
An organization needs good-performing employees to succeed.  It needs to hire
people with skills, ability and competency. These people should be able to
maintain good performance during their stay in the organization and the
organization has to constantly monitor employee performance to determine those
who are highly skilled.  After the organization is able to accomplish selection
and maintenance of good-performing employees, it can now shift its focus to
supplementing the employees’ skills and competencies through additional
trainings.  Finally, it can work on the employee motivation by encouraging the
employees to use both their innate and acquired skills in the performance of
their tasks in ways that contribute to organizational performance. Employee
performance becomes the basis for the pay that the employee is due to receive.

            The pay system is usually seen as
an entitlement wherein going to work, performing well and avoidance of being
fired would merit payment for the employee. Companies today, however, advance
the so-called Pay-for-Performance Plan which is a movement from the
entitlement-focused orientation to one that views pay as a varying factor with
some measures of individual or organizational performance. It is a system of
increased compensation (bonuses, incentives, privileges etc) in exchange for
increased performance key to organization success. The purpose is to motivate
employees to strive for excellence. This plan takes into consideration
efficiency, equity and compliance. The pay-for-performance plan measures
performance of assigned work and tasks in line with quality, customer and
stakeholder satisfaction, and costs. The performance of the employee should
surpass the organization’s standards in order for him or her to receive
additional rewards. The organization wants to rewards those employees who do not
only accomplish goals and contribute to effective organizational performance but
also those who develop commitment to the organization’s mission. Two sample
cases of how pay-for-performance plan is adopted are those of NKF and Japanese
companies.  NKF, as a charity organization, needs professional fund raisers to
help in their charity work in order for them to focus on providing services to
their targeted beneficiaries.  The organization wants to incentivize performance
of fund raisers based on funds raised.  There is also a concern as to how much
their new CEO should receive since the former chief executive resigned.  NKF
wants to reward its CEO with the amount due the position by considering the size
of the job, how the pay package was determined, presence of any salary
benchmarking and the measured performance of the chief executive.  The
organization is currently considering basing the CEO’s pay to solutions employed
by well-known charities like Oxfam and also presenting the salary as a ratio of
the charity organization’s total expenses.  Furthermore, a survey conducted by
the Japan Federation of Employers’ Associations in 1998 revealed that about 20
percent of Japan’s companies had adopted a performance-based pay system and
other 30 percent are considering of adopting it.  The companies wish to adopt
the pay for performance system in an effort to cut costs and increase
productivity.  Merit-based pay enables companies to reward workers who produce
more and innovate, thus lowering labor costs as a percentage of revenue.
 Generally, compensation and rewards must help organizations attract and retain
skilled employees; encourage employees to build new skills; and gradually foster
commitment to the organization.

QUESTION NUMBER THREE

            Every organization wishes to retain
good performing employees by recognizing their performance and paying them in a
manner commensurate to their contributions to organizational performance.  Jane
in the case has been with the manufacturing firm for six years as Assistant
Supervisor.  Her length of stay illustrates the commitment she has established
with the company and her position connotes seniority. However, her pursuit of
greater responsibility made her apply for a job of a similar nature with a
foreign multinational firm.  This decision made her realize that her present
compensation is paid more at the new company.  The Human Resource Manager must
orient Jane on the internal alignment concept. She should know that her present
position in the manufacturing company is only one of the many positions that
comprise the organization.  All the jobs in the company are interrelated since
the company has its own unique set of goals and objectives to accomplish for it
to suffice the needs of customers as well as its stakeholders. The employees are
given due compensation based on the prevailing rate among the employees and also
based on how well they do on the job. Jane should be made aware that although
she is applying for a similar position in a multinational company, the pay would
not guarantee to be the same.  The multinational company has broader context as
it operates in different countries. Therefore, job positions in the company
would be of greater extent as various factors are considered in their design
like cultures of countries where the company has offices.  The customer base is
also wider as it extends across national borders.  The broader scope of
responsibility in the multinational company merit higher compensation compared
to the local operation of Jane’s present organization.  These realities must be
explained to Jane in order to address her concern that she is being underpaid in
her present company.

            Furthermore, Jane should know that
every organization has its external competitive policy.  Organizations do not
exist on their own rather it is a part of a larger business environment where
competitors are present. The organization has to make sure that it is paying its
employees based on how they are able to accomplish designated tasks, how they
supplement the organizational performance and how competitors pay employees for
the same job designation.  External competitiveness policy decisions include how
much employees are being paid in comparison to how much competitors pay and what
forms of base pays, incentives, and bonuses would complement the compensation
objectives.  Some employers may set their pay levels higher than their
competitors, hoping to attract the best applicants.  Other tie their base pays
to that of their competitors but has more room for incentives based on
performance. Different employers deliberately choose to pay above or below
competitors’ pay levels which makes a single “going rate” in the labor market
for the same job nonexistent.  The key is for external competitiveness to ensure
that employees are being paid based on the extent of their responsibility and
how good their performance is, to show that the company recognizes and values
its manpower. An organization’s external competitive policy should be strategic
enough to select and retain the best employees and to control labor costs so
that the organization’s prices of products and services can remain competitive. 

QUESTION NUMBER FOUR

            The notion that employee
performance is a critical component of reward system makes Performance
Appraisals and Performance Management of paramount importance to compensation
decisions. After all, employees work to elicit good performance worthy of a good
pay.  Performance Appraisal systems are methods of income justification to
determine if the salary or compensation received by an employee is backed up by
good performance in line with the company’s standards. Performance Management,
on the other hand, is the systematic process by which an agency involves its
employees in improving organizational effectiveness in the accomplishment of
agency mission and goals ( 2006). Both systems aim to monitor and evaluate
performance, rate it and then reward good performance.  However, companies must
be aware of the nine errors commonly encountered in the performance appraisal
process. First is the halo error wherein the appraiser gives favorable ratings
to all job duties based on an overall, general impression of the ratee’s one job
function.  The second is horn error which is the opposite of halo when a rater
gives negative ratings across all performance dimensions based on an unfavorable
performance in one dimension. Third, first impression error occurs when a
negative or positive opinion on the ratee developed by the rater early on the
rating period affects the evaluation of future performance.  Fourth is recency
error wherein opinion on employee performance at the end of the review period
becomes central in the employee’s ratings for the entire period.  Fifth is
leniency error wherein a rater sees everything good on the rater and gives
ratings higher than what is deserved.  Sixth is severity error which focuses on
everything bad about the rater and gives ratings lower than what is deserved.
Seventh is central tendency error which is the tendency of the rater to assign
average ratings for all dimensions.  Eighth, clone error happens when the rater
gives better ratings to employees who he/she sees as having the same behaviors,
attitudes and personality as his/hers.  The last is spillover error which is a
continuing unfavorable rating to an employee for performance errors in previous
rating periods.   In order to correct these errors and maintain the central
purpose of pay system i.e. to reward performance based on evaluation and
appraisal, an organization needs three things.  First, it needs to have a
concise definition of performance which may include the set of competencies that
employees possess or acquire.  Merit increases may be linked to employee’s
ability and willingness to demonstrate key competencies.  Second, there is a
need for a continuum of performance measure that describes different levels from
low to high.  Lastly, the organization has to determine the amount of merit
increase to be given to each level of performance. Organizations must clearly
set specific measure of performance and each performance measure must be given
specific compensation amount.  When the reward and compensation system is seen
as just and appreciative of good performance, employees would deliver more
effectiveness and commitment to organizational objectives.