Perception of Pay is More Important Than Level of Pay

The idea that one’s perception of pay is a core component of pay satisfaction is a simple – perhaps even intuitive – concept.

If someone perceives they are being compensated at an appropriate rate then the actualities of the market are almost besides the point.

In point of fact, however, this principle is not in wide use. Companies routinely spend significant sums of money raising pay (base and at risk) to drive performance. What they should be doing is looking at how employees perceive the plan design and tinkering with it in more cost effective ways.

Anna Krasniewska Shahidi has an interesting spotlight on World at Work TV that touches on just this idea.

She goes on to expound on sales compensation best practice (individual performance incentives, team based incentives, the role of compensation1. It really is a good video (and it’s less than 7 minutes long). I’d recommend watching the whole thing. functions in administering sales comp etc. 1), but what I want to focus on are three core elements of pay perception that she says drive performance:

1. Fairness – Is effort aligned with returns?
2. Complexity – Is the plan design easy to understand?
3. Risk Component – Is the employee population / individual employee comfortable with the level of pay at risk?

If the answer to all three of these questions is yes then one is well on the way to achieving the most difficult – and important – component of effective plan design:

The sense that the employer has the employee’s best interests in mind. 

If a company’s employees believe they are being taken care of, the details of the compensation plan just become a series of affirmations supporting that belief.

Or do I have it wrong?


Categories: Compensation