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Equity in
Compensation
NURLIYANA BINTI MOHD SAIFUL BAHREN
2012888658
BM7703F
1. Compensation Model
2. Equity
-

Other terms
Definitions
Importance
Equity Theory
Types of Equity of Compensation

3. Or...
POLICIES

TECHNIQUES

OBJECTIVES

INTERNAL
ALIGNMENT

INTERNAL
STRUCTURE

•EFFICIENY

COMPETITIVENESS

PAY STRUCTURE

• FA...
FAIRNESS

Other Terms
Perceived of Inequity?
“Pay equity influences those
behaviors which determine
organizational effectiveness and their
behaviour towards absenteeis...
Ability to
recruit and
retain the best
and the
brightest

Avoid
inefficiencies
and costs that
detract from
companies

Empl...
Equity Theory
(Adam’s Equity Theory, 1963)
Individuals develop
perception of fairness
by calculating their
inputs & outcomes,
then compare with
others

If comparison...
Types of Equity
of
Compensation
Stock
options

Restricted
options

Employee
stock
purchase
plan

Stock
appreciation
rights
Internal Equity
of
Compensation
A company uses internal
alignment if it:
Supports organization strategy
- To structure the organization through the
nature...
Structures vary among organizations,
internal pay structure can be defined:

Number of levels
- Reporting relationships

D...
External factors

Organization
factor

Internal structure

• Economic pressure
• Government policy
• Stakeholders
• Cultur...
External Equity
of
Compensation
Expressed through such
practices:
Pay level
that is
above than
competitors

Pay level
that is
lower than
competitor

OBJEC...
Labor market • Nature of demand
• Nature of supply
factors
• Degree of competition
Product
market factors • Level of produ...
How an employee judges the behaviour of the organization and
their resulting attitude and behaviour that comes from this.
...
ORGANIZATIONAL
JUSTICE

DISTRIBUTIVE
JUSTICE

PROCEDURAL
JUSTICE

INTERACTIONAL
JUSTICE

INTERPERSONAL
JUSTICE

INFORMATIO...
Types of
Organizational
Justice
DISTRIBUTIVE
JUSTICE

(Adams, 1965)

Associated with decision
outcomes and
distribution of resources.
The outcomes can be
...
PROCEDURAL
JUSTICE

(Leventhal, 1980)

Processes that lead to
outcomes which
involves consistency,
accuracy, ethicality an...
INTERACTIONAL
JUSTICE

(Bies & Moag, 1986)

Treatment that an employee receives as
decisions are made with 2 other
compone...
DISTRIBUTIVE JUSTICE
Equity Principle
Allocation of rewards in proportion
to each individual’s contribution
towards group
...
Where Does Malaysia Stand
in Equity in Compensation?
Gini Coefficient:
Measures the income/
consumption of
individuals from an equal
distribution.
Index Level
0 = perfect equa...
WHY
DOES
THIS
HAPPEN?
This shows that Malaysia is in the Top 10 in the world &
No. 7 in Asia with the Highest Employment Ratio that
Underpins So...
This shows that Malaysia is in the Top 15 in the world &
No. 5 in Asia with the Highest Per Capita Incomes that
Supports S...
Income equality can also be
affected by:
- Demographics
- Older populations with
wealth accrued over time
- Economic downt...
Cause-and-Effect
of Equity on
Compensation
MOTIVATION

TURNOVER

Equity in
Compensation

SATISFACTION

PERFORMANCE
Examined the
Relationship
between
Organizational
Justice and Job
Satisfaction
encompassed by 3
components,
distributive,
p...
• Employees feel the sense of belonginess
due to fairness
• Company will maintain its marketability
comparing with its com...
Equity in Compensation
Equity in Compensation
Equity in Compensation
Equity in Compensation
Equity in Compensation
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Equity in Compensation

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Equity in Compensation

  1. 1. Equity in Compensation NURLIYANA BINTI MOHD SAIFUL BAHREN 2012888658 BM7703F
  2. 2. 1. Compensation Model 2. Equity - Other terms Definitions Importance Equity Theory Types of Equity of Compensation 3. Organizational Justice - Types of organizational justice 4. Where Does Malaysia Stand in the World in terms of Equity of Compensation 5. Cause-and-Effect of Equity on Compensation Outline
  3. 3. POLICIES TECHNIQUES OBJECTIVES INTERNAL ALIGNMENT INTERNAL STRUCTURE •EFFICIENY COMPETITIVENESS PAY STRUCTURE • FAIRNESS •COMPLIANCE CONTRIBUTIONS PAY FOR PERFORMANCE MANAGEMENT EVALUATIONS Compensation Model (Milkovich, Newman & Gerhart (2011) •ETHICS
  4. 4. FAIRNESS Other Terms
  5. 5. Perceived of Inequity?
  6. 6. “Pay equity influences those behaviors which determine organizational effectiveness and their behaviour towards absenteeism, productivity, and the quality of work” (Lawler, 1981) “Equality principle of reward allocation serves to emphasizes the common elements and similarities based on the same qualifications” (Deutsch, 1975) “Organizations that ignore equitibility concerns run the risk of endangering negative organizational outcomes of decisions, noncmpliance with procedures and lower satisfaction” (Lind & Tyler, 1988) “Role of fairness that is concerned with the ways in which employees determine if they have been treated fairly in their jobs and which will influence work-related variables (Moorman, 1991) The equitable compensation and awards that should be received accordingly based on KSAs, experience, contribution. All these will give a positive behaviour to motivate the employees to perform better without doubting the system. Definitions of Equity of Compensation
  7. 7. Ability to recruit and retain the best and the brightest Avoid inefficiencies and costs that detract from companies Employees will not be taken for granted by the employer Importance of Equity of Compensation (Burns, 2012) To maintain company’s marketability
  8. 8. Equity Theory (Adam’s Equity Theory, 1963)
  9. 9. Individuals develop perception of fairness by calculating their inputs & outcomes, then compare with others If comparisons done perceived to be unfair by the individual, hence inequity exist The greater the tension due to perceived inequity, the harder an individual will work to decrease tension & increase perceived level of equity As differences in equity increases, tension & distress felt by the individual increases Basic Proposition of Equity Theory (Huseman, Hatfield & Miles, 1987)
  10. 10. Types of Equity of Compensation
  11. 11. Stock options Restricted options Employee stock purchase plan Stock appreciation rights
  12. 12. Internal Equity of Compensation
  13. 13. A company uses internal alignment if it: Supports organization strategy - To structure the organization through the nature of business and according to their qualifications Motivates behaviour - The challenge is to design structures that will engage to achieve organization’s objectives INTERNAL EQUITY: The pay relationships among different jobs/ skills/ competencies within a single organization Supports work flow - Process by which goods/ services as delivered to the customers
  14. 14. Structures vary among organizations, internal pay structure can be defined: Number of levels - Reporting relationships Differentials - To motivate, pay is determined by KSA & value added Criteria: Content & Value - Work & how it is done - Contribute to objectives of organization
  15. 15. External factors Organization factor Internal structure • Economic pressure • Government policy • Stakeholders • Cultures and customs • Strategy • Technology • Human capital • HR policy • Employee acceptance • Cost implications • Levels • Differentials • Criteria What Shapes Internal Equity?
  16. 16. External Equity of Compensation
  17. 17. Expressed through such practices: Pay level that is above than competitors Pay level that is lower than competitor OBJECTIVES: - Control costs - Increase revenue - Attract & retain employees
  18. 18. Labor market • Nature of demand • Nature of supply factors • Degree of competition Product market factors • Level of product demand Organization • Industry, strategy, size • Individual manager factors What Shapes External Equity?
  19. 19. How an employee judges the behaviour of the organization and their resulting attitude and behaviour that comes from this. Employee are ATTENTIVE & REACT to actions and decisions to the justice of events in their everyday lives and have PERCEPTIONS whether fair or not. The everyday’s decisions made by the organization is the central interest because it impacts JOB ATTITUDES & PERCEPTIONS of fair pay, equal opportunities for promotion and personnel selection procedures. Organizational Justice (Greenberg, 1987)
  20. 20. ORGANIZATIONAL JUSTICE DISTRIBUTIVE JUSTICE PROCEDURAL JUSTICE INTERACTIONAL JUSTICE INTERPERSONAL JUSTICE INFORMATIONAL JUSTICE
  21. 21. Types of Organizational Justice
  22. 22. DISTRIBUTIVE JUSTICE (Adams, 1965) Associated with decision outcomes and distribution of resources. The outcomes can be tangible & intangible
  23. 23. PROCEDURAL JUSTICE (Leventhal, 1980) Processes that lead to outcomes which involves consistency, accuracy, ethicality and lack of bias
  24. 24. INTERACTIONAL JUSTICE (Bies & Moag, 1986) Treatment that an employee receives as decisions are made with 2 other components: - INTERPERSONAL JUSTICE: Perceptions of respect in one’s treatment - INFORMATIONAL JUSTICE: Adequacy of the explanations given in terms of timeliness, specificity and truthfulness
  25. 25. DISTRIBUTIVE JUSTICE Equity Principle Allocation of rewards in proportion to each individual’s contribution towards group Equality Principle Rewards to all individuals regardless of differential inputs Can directly influence interpersonal culture and productivity of individuals, groups and organization (Folger & Konovsky, 1989) Need Principle Allocation of rewards based on individual needs More an important factor to predict organizational commitment, turnover and behaviour to predict job satisfaction compared to procedural justice (Dailey & Kirk, 1992) Which Justice is More Significant? (Deutsch, 1985)
  26. 26. Where Does Malaysia Stand in Equity in Compensation?
  27. 27. Gini Coefficient: Measures the income/ consumption of individuals from an equal distribution. Index Level 0 = perfect equality 100 = perfect inequality MALAYSIA = 46.2 Gini Coefficient of Malaysia against Other Countries (World Bank, 2013)
  28. 28. WHY DOES THIS HAPPEN?
  29. 29. This shows that Malaysia is in the Top 10 in the world & No. 7 in Asia with the Highest Employment Ratio that Underpins Social Stability (World Bank, 2013)
  30. 30. This shows that Malaysia is in the Top 15 in the world & No. 5 in Asia with the Highest Per Capita Incomes that Supports Social Stability (World Bank, 2013)
  31. 31. Income equality can also be affected by: - Demographics - Older populations with wealth accrued over time - Economic downturns - Rigid labor market (Bloomberg, 2013) According to Maestri and Roventini (2012), there is a negative relationship between income inequity & economic growth. This shows Malaysia can still be considered as average, under 50.
  32. 32. Cause-and-Effect of Equity on Compensation
  33. 33. MOTIVATION TURNOVER Equity in Compensation SATISFACTION PERFORMANCE
  34. 34. Examined the Relationship between Organizational Justice and Job Satisfaction encompassed by 3 components, distributive, procedural and interactional justice 229 employees from Electrical Industries Companies in Jordan which was selected through a stratified random sampling . . Relationship between employees’ perception of organizational justice and personal traits: Significant relationship: Gender No significant relationship: Age & educational level OBJECTIVES: 1) Levels of organizational justice as perceived by employees 2) Employee perceptions on job satisfaction & organizational justice 3) Relationship of personal traits and organizational justice 1) Distributive justice:(-) Workoad, level of pay (+) Work schedule, rewards, job responsibilities Relationship between organizational justice and job satisfaction: STRONG RELATIONSHIP 2) Procedural justice:(+) Managers unbiased 3) Interactional justice: (+) Managers treat with respect , sensitive to personal needs, discuss implications Relationship of Equity in Compensation with Job Satisfaction (Al-Zu’bi, 2010)
  35. 35. • Employees feel the sense of belonginess due to fairness • Company will maintain its marketability comparing with its competitors • Equity in compensation help to retain their employees • Acceptance and rejection of the compensation system plays a big role in maintaining or changing a system Conclusion

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