One of the drivers behind the study is our view at Just Rewards that fairness and equity with respect to remuneration practices and processes are not well understood by NZ employers and HR leaders. Yet the perception of fairness is one of the key components of the psychological contract between the employer and employees.

Employee engagement ultimately boils down to the desire and willingness of employees to give discretionary effort in their jobs. Engaged employees are more committed and productive. It is widely agreed that perceptions of unfairness, or a sense of injustice, are hugely detrimental to employee engagement.

Unfairness can show itself not simply in performance and reward outcomes, but through policies, processes and procedures, and in the way employees are treated while they are involved in these processes.

Sifting through the research on equity and justice identified the paucity of quantitative data around employee perceptions of fairness. Moreover, there has been very limited research into the degree to which those perception impact on employee engagement.

The literature search soon identified that survey items on remuneration and performance needed to elicit employee responses around equity and organisation justice. Organisations must consider the three types of equity when assessing their reward mechanisms.

At a deeper level, however, fairness is a function of the level of organisational justice inherent in the systems, policies, processes and procedures that drive remuneration and their application by managers.

Organisational justice is best conceptualised as four distinct dimensions, now commonly recognised as Colquitt’s justice scale (2001):

1. Distributive justice — the fairness of the actual rewards given to an employee
2. Procedural justice — the fairness of the procedures used to determine those awards
3. Informational justice — the fairness of the way these outcomes and procedures are explained to an employee (ideally, they are explained clearly, truthfully and adequately)
4. Interpersonal justice — the fairness of how those that implemented the decisions treated the employee (ideally with dignity and respect). 

The justice literature has clearly established that employees care about the fairness of their outcomes (distributive justice), the procedures to which they are subjected (procedural justice), the communication that they receive (informational justice) and the fairness of interpersonal treatment (interpersonal justice).

The Say on Pay survey which provides the raw data for our on-going research on pay fairness consists of 47 survey items.   The Say on Pay survey which provides the raw data for our on-going research on pay fairness consists of 47 survey items.   

• 36 items relate to internal, external and performance equity, in conjunction with the four organisational justice categories outlined above. The questions relation to the five WorldatWork levers of “total rewards” – remuneration, performance, recognition, learning and development, work-life balance.
• 8 items are designed to measure employee engagement, such as confidence in leadership, commitment to the organisation, intention to stay, being proud to work for the organisation.
• 3 items are focussed solely on future pay, such as paying high performers more than good performers.

Three open-ended survey items allow room for respondents to provide more in-depth feedback about the remuneration and performance systems and processes in their workplace.

To date 16 organisations have participated in our research study, with a total of 2075 employee responses. They are a good cross-section of private sector, Council and not for profit organisations of different sizes, with different business and social drivers.

We have subjected this data to rigorous statistical analysis. In the first instance, we analysed the survey instrument, the 47 closed-end questions, to ensure the categories or groupings are indeed valid and that the items in each group hold together. Reliability analysis confirmed the validity of all but two items. The strength of the correlations indicates the survey instrument is a robust and valid tool for measuring reward fairness and its relationship to employee engagement. We also identified the importance of transparency around how pay is derived and how it moves, and building employee understanding around reward policies and procedures is an important element.

We then subjected the data to bivariate analysis, testing the correlations of each question against every other question, as well as our groupings. Three different correlation techniques were applied to rule out the possibility of random relationships. Peer review has confirmed the strength of the correlations (i.e. the positive relationships) between the key components of our study and overall reward fairness as well between reward fairness and engagement.

External equity is clearly the least important driver of fairness for employees and hence has the lowest relationship with engagement. Surprisingly however, there is a huge HR industry and effort around obtaining and adhering to market pay data. Internal equity is a stronger driver of fairness for employees than external equity. This backs up a 2014 WorldatWork study conducted by the HayGroup among HR professionals world-wide. This examined the concerns reported to HR professionals around pay and rewards.

Performance equity is clearly the strongest driver of employee perceptions of reward fairness. Items around receiving recognition for doing a good job and seeing a strong link between how they perform and how they are paid ranked very highly as drivers of fairness and equity.

The strength of the relationship between fairness and engagement (a 70% correlation to date) suggests that perceptions of unfairness around pay are almost certain to act as a brake on employee engagement, particularly if employees have trust issues with their manager, or if there is lack of appreciation or recognition of employee efforts on the manager’s part. Building fairness into our performance and reward systems, and their associated processes, and their communication, will undoubtedly strengthen employee perceptions of fairness, and indirectly impact on employee engagement.

Just Rewards will continue this research in order to better understand what shapes employee perceptions and how organisations might better reflect fairness and justices in their systems and processes.