The Role of Equity in Improving Workplace Productivity

The Role of Equity in Improving Workplace Productivity

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Human performance rarely goes in a straight rising line. If often fluctuates around a mean, as people’s concentration and energy are affected by their emotional and mental states, which in turn are affected by a plentitude of factors such personal experiences, relationships, and others. For managers, the challenge is to keep the performance improving steadily and deal with it in case it starts to decline noticeably. When people join an organization, they are usually on their best performance initially. But often afterward, this performance tends to go towards the average performance of the person in the work environment he or she is placed in. The work environment consists of the major and minor conditions. And one of the most effective ways for managers to manage the performance of their team members is to adjust those conditions. Arguably, one of the major conditions that mangers can manipulate to improve performance is equity (to be defined in the next paragraphs), and research confirms that it is by far one of the best levers of human performance.

Great companies compensate their employees differently

Companies with remarkable performance have different compensation practices. Google, for example, rewards its employees in a variety of effective ways. The way it structures its bonuses and pay to its employees not only fosters a climate of cooperation and positive reinforcement (since some of its bonuses rely on nomination for this bonus by a peer), but it also encourages a sense of ownership by giving employees a stake at the company by offering them stock grants from the moment they are hired (those grants are also refreshed later). The reward and compensation scheme this company has designed improves employee engagement and is probably one of the factors behind the massive success it enjoys currently in attracting the best people and revenue growth. The company has succeeded in cultivating a climate where its EQUITY AND WORKPLACE PRODUCTIVITY 4 employees feel justly rewarded for the value they bring in, which sheds light on how compensating employees in a fair manner can positively reflect on organizational performance.

Extravagant CEO pay

In other firms, the situation is different, especially in some developing countries with different cultures. Compensation in those countries mostly consists of a fixed salary over a predefined period of time, usually a month, or a week in some cases. There is a pressing unaddressed question about how this compensatory scheme reflects on employee productivity measured by employee effectiveness and efficiency. It also raises questions about how disproportionate the salary of the manager is in relation to the salary of his employees. These compensatory schemes based on fixed wage are associated with a high level of inequity since they are not linked to performance (they are constant regardless of productivity). They don’t account for varying levels of skill or productivity among employees, and from observation, one might induce that these schemes lead to slack in performance. This draws attention to the missed potential in productivity that can be achieved by switching to more equitable compensation practices in those firms.

Inflation can exasperate inequity

Additionally, the concern of high inflation rates in most countries raises the issue of whether these employees are rewarded in fair amounts in terms of purchasing power (not the nominal amount). When inflation rates increase, and the nominal wage remains the same then those employees are receiving less value (or purchasing power) in exchange for the same output they are producing. This also raises the issue of equity in pay and whether employees are being rewarded justly over a long period of time (during which inflation rate changes) and to consider studying how those employees respond to those considerably high levels of inequity.

Favoritism is another factor adding to inequity

Another factor that can also decrease equity in pay is favoritism, which also leads to unfair compensation to some employees. Managers may overcompensate favored employees and undercompensate unfavorable employees for the exact same amount of work.

Equity is more conducive to productivity than equality

Differences in pay, particularly in the nominal amount paid, don’t mean that there is an inequitable treatment to employees. Rather, it could occur when some employees outperform others and get rewarded for their higher level of performance. While this seems as inequality, it is still equitable compensation (Trevor, Reilly, & Gerhart, 2012).

Higher productivity but stagnant wages

An analysis conducted by Economic Policy institute (The Top Charts of 2015, 2015), by using data adopted from an article by Josh Bivens and Lawrence Mishel (2015), found that the difference between the growth in average worker’s hourly pay and productivity was considerable, signifying a form of disproportion between contribution by the employee and his or her wage. Between 1973 and 2014, productivity grew by 72.2 %, whereas the hourly compensation had grown by only 9.2%. The divergence might even grow bigger in the following years (Bivens, Mishel, 2015).

Fixed pay does not motivate employees to develop

When an employee works for the same company over a long period of time, such as five or ten years, his productivity seems to improve, due to his increased knowledge of both the external and the internal work environments, and because the employee begins to rise on the learning curve along that period. Compensatory schemes that are based on fixed wages with fixed percentage increases every three or six months don’t seem to compensate employees fairly for the level of development or skill they are bringing to the workplace.

Multiple studies and theories confirm the benefits of equity

There are numerous theories that are pertinent to the issue of equity. Namely: Equity theory, reinforcement theory, psychological contract, and expectancy theory. According to Equity theory developed by Stacy Adams (1963), employees look at the ratio of contributions made by them to the compensation they receive and compare it with the same ratios of other employees. The result of the comparison can be positive (reflecting equity, where the ratios are equal to one another), or negative (inequity when the two ratios are unequal). A state of equity means that the ratios of contributions to compensations of all employees are equal. In cases of inequity, individuals can be under-rewarded or over-rewarded, in which cases both employees might seek to restore equity. It can be implied from this theory that if we change the compensation practices by making them more equitable, then employees will seek to try to maintain this state of equity by trying to maintain their high performance, in order to prevent their pay from being less than that of others. This is because being paid less than others might induce feelings of envy.

Inequity leads to poor engagement and job dissatisfaction

It was found when working with employees with different nationalities, a situation that might affect perceptions of inequity, it was found that pay dissatisfaction which can be attributed EQUITY AND WORKPLACE PRODUCTIVITY 7 to many factors, can lead to less engagement with tasks on the job leading to negative effects on performance. Inequity was found to increase job dissatisfaction, which confirms the negative effect of inequity perceptions on individual output (Shaffer, Singh, & Chen, 2013). A high level of inequity can reflect on both employee satisfaction and employee attitude. Furthermore, it could encourage the individual to focus on his own individualistic goals and interests rather than the goals and interests of the group, so the impact of high inequity might be high especially in fields where cooperative behavior is highly required for overall productivity. With a deteriorating attitude, the employee might willfully seek to leave the company for a better place to work (Sabine Geurts, Wilmar B Scheufeli, C G Rutte, 1999).

Asymmetric results

But despite the established positive effect of equity and productivity, this impact is not equal to all employees. Different people have different levels of sensitivity to inequity, and this sensitivity can be influenced by factors such as employee consciousness and other personality traits. Therefore, improving equity in the workplace may yield asymmetric results in different work places. Other theories also support the case of improving equity in the work place but it is worth noting that not all people weigh the same rewards equally. People are motivated by all sorts of rewards, not only monetary gain. They can be motivated by status, recognition, and the possibility of promotion, financial incentives, and others. Relationships in the work place matter as much as financial incentives, especially on the longer term. The evidence supporting that reducing the levels of inequity in the organization are likely to be associated with both changes in employee performance and the turnover rate.

Recommendations for executives

It is highly expected that an improvement in equity will result in improvement of employee attitude and motivation, leading to better performance. As a result of improved equity, the work environment conditions would become better and the employee will expend less focus and energy on finding ways to resolve the issue of being under-rewarded and would focus more on increasing their contribution instead in order to increase their compensation. Furthermore, improved equity is likely to decrease the turnover rate in the company, leading the company to retain its best employees. This is expected because with improved equity the employee will have no motive to leave the company in search of a better work environment. When the employee is aptly rewarded for his contributions then his rewards will grow in similar percentage with the percentage of growth in his productivity. Although we advocate for linking a part of the compensation to employee performance, we do not advocate for linking all of the compensation. Linking the entire compensation to performance can have an adverse effect, and it is highly unadvisable since it shows disregard for the time and effort that employees have put forth and focuses solely on output – also an unfair practice. Further scrutiny is still required to provide evidence regarding if improved equity will lead to more cooperative behavior in the workplace. The solution for this is to also consider the output of the team as a whole and base a part of the reward on collective performance. EQUITY AND WORKPLACE PRODUCTIVITY 9


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The Role of Equity in Improving Workplace Productivity