Communicating About 'Fair' Reward

‘Fair’ reward can be a controversial issue, dividing employers and employees. The perception of fairness when determining reward applicable to directors and executives can have significant knock-on factors. For example, a perceived overspend on remuneration can cause upset amongst shareholders.

“Shareholder revolts over pay at FTSE 250 companies rose sharply last year as investors tried to rein in excessive executive remuneration”, says the Financial Times in February 2020. According to The Investment Association, this will dominate investor-corporate board discussions this year.

Is the implication a lack of trust in corporate leadership to behave responsibly? It’s thought that much attention will be focused on whether or not companies have paid attention to the dissent among the capital investment community in previous years’ votes on remuneration policy. And, of course, this year sees another key disclosure indicator mandatorily released: the ratio between pay at the top and ‘average’ employees.

Employee v Employer Viewpoint

In the CIPD's latest annual survey published in December 2019, for the first time, the view of HR respondents was matched with the voice of the workforce at large.

On questions that may be inferred to indicate levels of trust, the HR view that in 60% of cases dialogue within the organization takes place under the heading of fairness, is shared by only 10% of employees. Part of the problem seems to be that, in two-thirds of cases, organization managers hamstring themselves by not even having a clearly articulated sense of what ‘fairness’ in managing remuneration throughout the organization means.

Where employers do have a working definition of fair pay management, we find that they also tend to encourage more dialogue between managers and employees about remuneration issues. And, interestingly, where there are more women in management within an organization, talk about fair pay increases. When management is majority female, some 80% of employers engage in dialogue with their employees about the fairness of processes for managing remuneration, and three-quarters discuss the fairness of outcomes from them.

We found that employers were missing a trick even when they could evidence having policies in place to communicate about remuneration, including its fair application. They may have action plans and corporate narratives but, based on the view from the workforce at large, these tend not to make it into employees’ consciousness. All pointing to problems in creating and sustaining trust.

The survey evidence again shows the contrast between policy shapers and those targeted by it. In three-quarters of cases, HR respondents claim that a majority of the workforce is fairly paid, with only 5% saying that fair pay applies only to a minority of the workforce.

By contrast, only a third of employees, when asked the same question, feel that a majority of the workforce is fairly remunerated and almost a quarter of respondents believe that no-one or only a minority are paid fairly.

What about the workers’ view on top executive pay? Contrasting with over 90% of HR specialists who say their CEO is fairly paid, just 20% of employees feel their boss’s pay is about right; and a third think it’s too high.

Reflecting on Trust

OK, so there seems to be research evidence to suggest that not only investors but also employees don’t trust their top managers and, by extension, the non-executive directors whose task is to regulate corporate pay determination.

But why is trust important in organizations? How is getting an understanding of trust and ways of creating and cementing it important to corporate leaders?

It has been forty years since the publication of this statement by psychologists John Cook and Toby Wall:

"In general, the consensus of opinion is that trust between individuals and groups within an organization is a highly important ingredient in the long-term stability of the organization."

They related this also to "the well-being of [an organization's] members".

However, while trust is a valid concern when thinking about organizations and leadership, including the sub-theme of rewarding leaders and others in comparative terms, it has been remarked that scholarly attention leaves a lot to be desired.

In a mid-1990s analysis, Roger Mayer and his colleagues, writing in the  Academy of Management Review, included problems of definition, of linking what precedes trust and its maintenance in organizational relationships, and inadequate attention to both the trusting party and the party to be trusted. To make progress they recommend adopting a more holistic view of trust, using knowledge from a variety of disciplines, rather than limiting consideration to a single perspective.

Space considerations in this short commentary preclude following up on this call to action here, but it’s something that the thoughtful manager may wish to investigate to inform practice. To repeat, our finding from the 2019 survey was that fairness has been poorly defined if at all, with negative consequences for outcomes. The same conclusion probably applies to trust, and the interrelationship between the two.

In 2017, Ronald W. Perry and Lawrence D. Mankin analyzed the interrelationship between trust in the chief executive and employee satisfaction at work. And, also in the USA, some recently reported research discusses the implications of corporate ‘spin’ in the language used to communicate publicly about the ratio of CEO pay compared with that of the ‘median employee’.

Data analysis by Audra Boone and colleagues in 2019 finds that US firms with the largest pay ratios tend to use scope within the regulations to 'finesse' the picture painted in an attempt to mitigate against the position reported and that the language used in the disclosures is consistent with such a priority.

These initiatives apparently run contrary to the advice from firms’ consultants to keep reporting strictly factual to avoid appearing defensive. And media reporting suggests that the more spin, the less convinced observers are about the legitimacy of the disparity and its rationale. An obvious question is ‘what are they trying to hide?’

Thus, it seems trust in an organisation’s management can be undermined not just by zero communication about relative reward management outcomes and processes. There are questions surrounding the character of the communication - and here one of the definitional issues Mayer and his colleagues' highlight is key: paying attention to how the non-managerial party being asked to trust will view the communication. Not just to get it past those overseeing internal corporate governance arrangements.

So what?

What are the implications for practice?

1. Corporate leaders may wish to spend some time getting a working definition not only of policies for managing reward, but also ways of contextualizing them, with a fit for purpose shared understanding of what their application imply for perceptions of fairness and trust within the particular organizational setting. Reward management is not simply an economic factor of production - it has a psychological and social character.
2. Top managers and those who advise them, as well as those accountable for internal oversight of executive decision making, would do well to stand in the shoes of those on the receiving end of their communications. When talking about the organization’s approach to reward and the outcomes of its application, time devoted to consideration of the amount and choice of language may be a sound investment of executive time, avoiding a lack of authenticity and the consequent need to spin the message, even more, when the rhetoric is judged by others to fall short of perceived reality.
3. They might also want to reflect on ways in which greater leadership diversity – not just in terms of gender, but that’s a starting point according to our survey evidence – may help broaden thinking about managing reward in its socio-economic contexts, so as to build sustainable legitimacy for the decisions made and how they are arrived at.

In summary, plenty of controversy remains in respect of reward management, in particular with greater public scrutiny of how pay at the top compares and contrasts with that applicable to other organization members.