The Employment Contract: Let’s Make A Deal

Employment is a contractual relationship between two parties… an organization and an individual. The contract may be emotional and not legally binding, which makes if more of an agreement about a relationship. Both parties want the conditions of employment to be fair, competitive and appropriate… from their perspective. The organization wants to get as much value as possible from the arrangement, at the least economic cost. The individual wants to get as much value as possible, at the least personal cost. Given these realities it is necessary to reconcile these diverse wish lists.

Fairness is a concept that must be defined. If an employee wants his or her compensation to be “fair” there must be some measure of fairness and a method of determining if fairness exists. The employee may compare to other employees when determining if fairness (internal equity) exists. If a co-worker who seems to have similar qualifications and responsibilities and is performing at the same level is paid more the employee making the comparison may feel under-compensated. If the person making the determination does not know what the is actually other party is paid a guess will be made. The problem with the guess is that research demonstrates people will overestimate what peers and subordinates are making and underestimate what their managers are making. All of these guesses will tend to make things seem worse (less fair) than they actually are. A second approach is to compare one’s pay rate to the pay range assigned the job. If someone believes they are fully competent and performing well they may believe they should be paid in the upper part of the range. The problem with that view is that research has identified a cognitive bias that makes people believe they better (more competent and a better performer) than they actually are. That bias will be likely to influence how the employee views their pay rate.

Competitiveness must also be defined… competitive with what? There is a tendency for employees to seize upon a newspaper article or a “survey” to show that they are underpaid. And normative data shows most employees feel they are underpaid. The problem is that there is rarely an evaluation of the validity and reliability of the data used to make the determination. Additionally, cognitive bias will cause people to more readily accept information that agrees with what they believe or what they would like to be true and to reject contradictory information. Even though a reliable survey source is used correctly assessing the competitiveness of one’s pay requires a comparison to only relevant data. If the CEO of an organization with five million in revenue compares his or her pay to a survey that includes much larger organizations the comparison lacks validity. A similar problem can occur when the type of organizations included in the data is ignored… or the performance of the other organizations is not considered.

Appropriateness of one’s rewards package is also a challenging determination to make. If base pay rates are tied solely to seniority high performers may think that approach to be inappropriate. A high performing sales representative who does not earn more than someone who performs poorly is bound to be dissatisfied. The mix of the total rewards package may also be thought to be inappropriate. If a significant portion of one’s current cash compensation is in the form of variable pay (incentive or bonus plan) but the criteria for determining the size of awards are outside of the employee’s control that plan will be deemed inappropriate. And eligibility for a plan may also be the source of discontent. Being eligible for stock options is often a prestige item… even if its economic value is not large. If someone else is eligible for options and the individual is not this may result in a perception that the eligibility criteria are inappropriate.

Given all that stands in the way of employee satisfaction it is understandable that the typical employee is at least somewhat dissatisfied with their compensation. Compensation is a metric that can come to represent many things… how much the organization thinks an employee is worth… how much the employee contributes… and even whether that employee is secure in his or her employment.

Understanding that dissatisfaction is widespread does not alleviate the frustration experienced by an organization that attempts to reward its people fairly, competitively and appropriately but finds that its employees are dissatisfied. And even understanding that cognitive bias and the tendency to be self-serving often result in unjustifiable perceptions of mistreatment does not erase the frustration. This is not to say that an organization can afford to resign itself to believing dissatisfaction is inevitable. Dissatisfaction will have negative consequences. One way to moderate frustration is to compare the results of employee satisfaction surveys against normative data, rather than some unrealistic ideal, such as no employee dissatisfaction. And every attempt should be made to provide tangible evidence that policies and programs are designed and administered in a manner that results in fair, competitive and appropriate treatment of employees.