Pay Levels and Pay Raises

Research by Kathryn Bartol

RESEARCH SUGGESTS THAT A MAJORITY OF EMPLOYEES FEEL THEIR EMPLOYERS COMPENSATE THEM UNFAIRLY. ORGANIZATIONS NEED TO UNDERSTAND HOW WORKERS PERCEIVE THE FAIRNESS OF PAY ALLOCATION IN ORDER TO EFFECTIVELY MOTIVATE AND RETAIN THEIR BEST EMPLOYEES. KATHRYN BARTOL, ROBERT H. SMITH PROFESSOR OF MANAGEMENT AND ORGANIZATION, WITH COAUTHORS AMANUEL G. TEKLEAB OF CLARKSON UNIVERSITY AND WEI LU OF CHUNG KONG GRADUATE SCHOOL OF BUSINESSEXAMINE THIS ISSUE IN A FORTHCOMING PAPER, "IS IT PAY LEVELS OR PAY RAISES THAT MATTER TO FAIRNESS AND TURNOVER?"

Bartol and her co-authors consider how distributive and procedural justice influence pay satisfaction, specifically the pay level and pay raise dimensions of pay satisfaction. Distributive justice refers to the degree to which workers feel their pay amount is fair, and procedural justice describes the perceived fairness of the means or method used to determine the amount of pay. Bartol examines the separate impacts of pay level and pay raise on turnover intentions and actual turnover within a framework that includes these justice considerations. Their findings provide evidence that justice considerations influence pay satisfaction and ultimately impact turnover.

Bartol conducted two cross-sectional field studies with a lagged measure of turnover. The first surveyed 288 managers from the corporate and branch offices of a professional and support services organization located in the mid-Atlantic and southeastern United States. The second study involved employees from a number of different organizations over a two-year period. Employees were surveyed about both their pay raise satisfaction and their pay level satisfaction; two years later their voluntary turnover was tracked.

These studies are the first to show that pay level satisfaction and pay raise satisfaction operate differently in regard to voluntary turnover. Bartol found that distributive and procedural justice also played different roles in regard to pay level satisfaction and pay raise satisfaction. Distributive justice significantly affected pay level satisfaction, more so than pay raise satisfaction; whereas procedural justice played a more important role with respect to pay raise satisfaction.

The studies showed a strong correlation between low pay raise satisfaction and actual turnover. There are a number of hypotheses that would explain this connection. Employees use pay raises to gauge the fairness of how they’re being treated and a perceived lack of fairness appears to make turnover more likely. Pay raises also seem to convey to employees some information about their current worth within the organization.

Bartol concludes that turnover is heavily influenced by the perceived fairness of pay allocation within an organization. "A lot of times we hear that people leave because they’ll receive more pay somewhere else, but this research indicates that people really leave an organization because of concerns about the fairness of the way they have been treated based on their pay raises."

Pay raises seem to indicate to employees their relative velocity within an organization, especially as compared to others. Employees benchmark their pay raises in respect to those of others within their organizations and also with respect to their own previous raises. An employee who is dissatisfied with pay raises may use the pattern as a signal that relative progress is insufficient, which may drive the employee to look elsewhere.

The results of this study suggest that organizations and managers need to pay increased attention to pay raise procedures and outcomes. As raises depend more on performance, which usually involves some subjective assessment by supervisors, procedural issues become more complex and are more likely to result in perceptions of inequity and unfairness. Ultimately, satisfaction with pay depends less on the dollar value of a raise than on the employee’s perception of fairness, velocity and his or her own worth to the organization.

Unfortunately, pay allocation resources are limited, and constitute an imperfect signal of an employee’s worth to his or her organization. Bartol recommends employers consider other types of rewards in addition to pay raises in order to retain their employees. "There are other types of rewards than pay, and managers need to get away from the notion that everyone needs the same exact set of rewards," says Bartol. "One employee may value a certain training opportunity, while another wants flex time and a third wants a particular office location. As long as they are comparable and done in an upfront manner, such reward combinations can help managers creatively meet workers’ needs to feel their contributions are valued and the organization is concerned about their well-being." 

This research will appear in a forthcoming issue of the Journal of Organizational Behavior. For more information about this research, contact kbartol@rhsmith.umd.edu.