It’s probably safe to say that the debate over the right pay system has existed since workers were compensated for their time and effort. The conflict centers on several issues. For example, should the company establish a system of pay for performance (variable merit progression) or performance for pay (automatic step progression)? Can workers be motivated with pay, or is the pay system generating dissatisfaction and lowering performance? Is the pay system creating conflict within and among work groups, or does it promote teamwork and cooperation?

Why, if the subject has received so much discussion, does the issue remain unresolved? Mainly because employers fail to consider the value systems of the people they pay. Instead, the paymasters tend to design pay systems that suit their value systems.

This is a good news-bad news situation. The good news is that not all people have the same value system. The bad news is that the designers of pay systems assume everyone has the same value system—theirs.

Differences in employee value systems allow employers to place different kinds of people in different kinds of jobs. Ideally, these jobs match the individual’s particular value system. It’s likely the work some managers find intrinsically satisfying will drive other employees crazy and vice versa.

The same is true for various approaches to paying people. Pay for performance is a highly favored concept to many managers. On the other hand, performance for pay, in which increasing service and added skills are valued, is more acceptable to many nonmanagement people.

Therefore, when managers or human resource professionals create a pay system that makes them feel good, they also should consider other alternatives if remuneration is for employees with significantly different value systems. The corollary is that to make the workforce productive and cooperative, a pay system must be designed that management dislikes but others will appreciate.

The concept of fair pay is partially a matter of employee attitudes. No one is paid fairly until that person believes he or she is being paid fairly. In this case, pay equity is in the eye of the beholder as well as in the statistics. For example, external market equity is necessary for positive attitudes, but not sufficient. Internal equality in rates of pay for different classifications is necessary, but not sufficient.

In addition to external and internal equities, perceived equity on the part of individuals within the pay structure and a process for moving people through a pay range that’s perceived as fair also are needed. These points are obvious. The issue, therefore, is how to design a pay system that considers the disparate value systems of all employees on the payroll.

Is it feasible—or even reasonable—to design several different pay systems to suit the workforce’s value systems? Probably not. It’s possible, however, to analyze the current value and pay systems, attempt to change the procedures that aren’t perceived equally, and then evolve to a more favorable perception. On the other hand, it’s unreasonable to have several different pay systems within a work group, and doing so may be illegal.

Cafeteria pay plans, which are analogous to cafeteria benefit plans, are not the objective. The objective is to search for and design pay systems that will work with a wider range of employee value systems than is possible with the existing approach.

Value systems are how people perceive reality. These systems are the way individuals construct a model of the external reality that’s seen and heard. Related to brain functioning and possibly to hemisphere dominance, such values are deeper and more profound than opinions or attitudes.

A value system isn’t simply a behavior—it’s why a person does what he or she does. Although the definition is too limiting, such a system could be a motivator. Value systems are implicit in the way a person uses words and symbols to understand and remember past and current events. Such systems develop through life’s experiences and may change with time, depending on life’s events.

Although value systems are deep seated, complex, and involved in perceptual and linguistic processes, they are relatively easy to understand for employee relations purposes. Such a statement may sound like a non-sequitur, but managers can work with value systems on an applied, pragmatic basis without knowing everything that’s going on in the brain of every employee.

To help visualize what types of values a pay-plan designer encounters, consider the following value systems that are derived from over 20 years of research and application.

Conscious Values. These people are more interested in doing what they like to do than getting somewhere. Money and promotions are acceptable, but only if they can move them into the type of work they really enjoy. Their big motivator is freedom to do, learn, and experience. Although conscious employees will accept things and people, they need nothing, including security, power, and structure.

Compassionate Values. People with this value system probably are less interested in money and material possessions than they once were, or they’re from an affluent family. They’re more interested in getting along than getting ahead. Because they’re sensitive to others’ feelings toward them, their feelings are easily hurt. They care about people and try to relate well to them, unless they believe the person is exploitative. In addition, productivity doesn’t concern compassionate employees as much as equality in human resource policies and benefits. Group interaction is satisfying; they dislike bureaucratic and impersonal companies.

Competitive Values. These individuals are idea people who can sell their ideas. They work best in jobs that allow room to maneuver, which is part of their plan for career advancement. For competitive employees, money is a way to keep score and buy material possessions. They’re willing to bend the rules and stretch the intent of a policy to achieve their work goals and get the job done. This group is competitive, and they like others like themselves. Management by objectives, which comes naturally, is applied to their career plan. Planning is part of every aspect of their lives. They prefer, for example, to set their goals rather than have someone do it for them. As a rule, these people are impatient with anyone who appears to lack ambition and doesn’t know how to play the game.

Conventional Values. People with this value system work hard at being good employees and subordinates. In general, their work is thorough and finished on time within the specifications and rules. They don’t like bosses or coworkers who aren’t as professional as they strive to be. Furthermore, conventional employees believe in long service and loyalty. Management earns their trust as long as policies are spelled out and the operation is efficient and productive. They’re diligent, although they may be more concerned with procedures than company objectives. This group works hard and resents others who don’t. They possess a traditional work ethic.

Cynical Values. They believe they are more creative and have better ideas about how to perform a job than their coworkers. This is a persistent group of people, sometimes to the point of being stubborn about things they believe are important. Cynical employees prefer working alone, but may like being the center of attention or the leader of a group that follows their orders blindly. These people tend to challenge authority; trouble seems to follow them. They respect anyone who’s tougher minded than themselves. Further, they prefer difficult jobs—either mental or physical—to prove their toughness.

Clannish Values. These people work well in a group and dislike working alone for very long. It’s important for the boss to offer feedback on their job performance many times a day. Their supervisors, who generally set the work pace, are expected to guide and direct work tasks, although this group may need a push get the job done. As expected, clannish employees perform best in a well-organized job/work layout.

Money Means Different Things to Different People

A review of the brief value system descriptions reveals that an entire workforce can’t be of one mind. Therefore, it’s useful to consider the disparities in values when designing or redesigning pay systems.

Pay-plan designers must seek to change or adapt pay systems to the organization’s predominant values. To say that all production workers are dominantly clannish is an overgeneralization. Likewise, all managers aren’t competitive, or all maintenance workers aren’t conventional. It’s possible, however, that there’s a tendency by selection and placement processes for certain groups to lean toward one or two of the value systems profiles. Additionally, whether the organization is manufacturing or service based will make a difference in the values mix. Such a mix tends to occur as part of a natural evolutionary process, unless it’s done deliberately during hiring, placing, and promoting employees.

Because employees and managers don’t possess the same value systems when it comes to the meaning of money and how it should be delivered, companies must use pay systems that work for the people they pay, not use the systems they prefer. One method companies can use is a conscious approach. In this instance, conscious means that one particular value system or preferred pay system won’t be imposed on everyone. The pay-plan designers will act consciously and design pay systems that work with whatever value systems are present in the workforce.

Moreover, there won’t be a corporate standard pay system. The value systems of the various segments of the organization will be considered by type of work and level in the structure. From there, a pay system that’s appropriate for those groups of employees (or at least the majority) will be established. The following examples offer a more definitive listing of perceived equity and inequity of pay for each of the value systems.

 Conscious—equity is pay that isn’t a central personal issue; inequity is pay that’s used as a reward or    punishment.
 Compassionate—equity is pay that’s equal for all work; inequity is pay that singles out individuals.
 Competitive—equity is pay that distinguishes high achievers; inequity is pay that’s based on service and    skills.
 Conventional—equity is pay that’s based on service and skills; inequity is keeping unproductive people on    the payroll.
 Cynical—equity is more pay than others; inequity is pay based on favoritism.
 Clannish—equity is the same pay for the entire work group; inequity is pay that’s used to motivate.

It should be clear from these disparate mindsets that many pay systems popular with managers, compensation directors, and consultants will be as ineffective with groups possessing some value systems as they are destructive. For example, merit pay for clannish people is inadvisable. To a large extent, merit pay also is inappropriate for those employees with conventional values.

Cynical employees and commission or piece rates may be compatible in theory, but cynical employees rarely are satisfied with pay, regardless of the amount. Additionally, because everyone has wants, needs, and families to care for, compassionate employees like to have the janitor paid as much as the chief executive officer.

Although merit pay is understood and appreciated by competitive people, they know that the real money comes from promotions and bonuses. On the other hand, conscious employees really don’t care what their pay systems are called or how they work. If they perceive a personal inequity, they’ll make sure everyone knows.

Before designing a pay system, it’s necessary to understand clearly what’s to be accomplished with the system. Historically, these plans have taken one of two directions. When conceptualizing pay systems, some managers have a system in mind that will provide incentives for increased productivity (quality and quantity). Other managers don’t expect that from a pay system. Instead, they seek only to neutralize pay as an issue so the majority of employees perceive that their pay is fair. The primary manifestation of the former thinking is the so-called merit-pay system, while the latter typically leads to automatic progression for all employees.

Pay for performance. These systems are characterized by broad ranges, usually a 50% spread from bottom to top. In addition, they have simple structures with only a minimum, midpoint, and maximum identified. Such progression points, however, are misnomers because the midpoint is actually the maximum, and the maximum is fiction for most employees.

Progression through the range is based on a bell-curve distribution of performance of incumbents, with salary increases corresponding to the performance. A significant characteristic of such systems is that performance measurement is variable and assumes a wide variance in performance levels. Employees compete against each other, not against a predetermined standard.

Automatic progression. Such systems are structured more rigidly. The range from minimum to maximum typically is less than a 25% spread. Progression steps are identified clearly, and all employees, regardless of performance variables, receive the same increase. This system assumes no performance differences, and progression is a function of time served in the pay grade. All employees move to the maximum.

Case Studies of Ways to Customize Pay Systems

Case study 1. The first study involves the redesign of a pay system of a 1,000-employee manufacturing factory. Each year, only about 50% of the employees felt they were paid fairly. The external market equity placed the company among the top three of ten major employers in the community. Employee attitudes focused primarily on the internal equity issues. The existing pay system was designed with ten pay-grade levels accompanied by a pure merit-progression system. Performance appraisal data determined individual pay increases.

Several factors moved management to redesign the pay system completely. First, there was a major anomaly between high-average rates versus the community. In addition, there were constant complaints about favoritism and subjectivity in awarding merit increases. With management’s full involvement, the redesigned structure has five pay-grade levels. Merit progression changed to automatic time-based progression. (Progression is automatic in the sense that all employees in a pay-grade level ultimately will reach the top of the range and make the same hourly rate, and nonperformers will be subject to corrective action.) Progression means that employees move either up or out.

Productivity, quality, and attendance were tracked for several years after the redesign, and no decline was found in employee attitudes. In fact, attitudes about fair pay (measured before and after by anonymous surveys) showed a dramatic and sustained 27% improvement.

Given the two predominant goals of managers—to motivate performance and/or to eliminate unfavorable attitudes—it’s more likely that automatic progression will be accepted by most employees, which results in more favorable attitudes. As shown in Figure 1, only 15% of the workforce has value systems that conflict with automatic progression, while it’s likely that 75% believe merit pay is unfair. What about management’s goal to motivate performance?

Figure 1 PAY AND VALUES MATRIX
+ = Good Fit • 0 = Neutral • - = Bad Fit
Values %Workforce *	Merit Progr.	uto Progr.	Individ. Bonus	Group Bonus	Service Prem.	Versat. Prem.
Conscious (10%)	0	0	0	0	0	0
Compassionate (10%)	-	+	-	+	+	0
Competitive (15%)	+	-	+	-	-	+
Conventional (40%)	-	+	0	+	+	+
Cynical (Nil%)	+	-	+	-	-	-
Clannish (25%)	-	+	-	+	+	0
Fitness as of % of Population	5% + 10%0 75% -	75%+ 10%0 15% -	15% + 50% 0 35% -	75% + 10% 0 15% -	75% + 10% 0 15% -	55% + 45% 0 0% -
* Approx. of dom. value system only. Varies by occupation & other demographics.

Assuming pay systems can provide an incentive to move most employees to improve their performance, which of the two systems creates an environment to achieve this goal? The answer is neither one. Generally, it’s assumed that a merit-pay system yields higher quantity and/or quality levels for the organization, but this remains an assumption without proof.

Some of the confusion derives from the fact that several studies have found that incentive pay systems (individual and group) often result in increased performance in areas on which the incentives are based. The data seem to indicate that if management seeks improvement in an area, it’s necessary to put a bounty on it.

Experiences with individual piece rates and group gainsharing have shown that this approach can work. When such systems work, it’s because there’s a clear standard—a direct and understood connection between performance and reward—and an easily calculable payout. The reward is based on objective, relevant measurements of the job. All of these characteristics are absent from typical merit-pay plans.

Although merit pay isn’t the answer, progression based on blind seniority may not fill the bill either. Therefore, why not combine the two concepts to maximize the positives and minimize the negatives and discontinuities among pay and values? One possible conscious approach is a generic pay-system model. In this model, plan designers follow a series of steps, including...

Establish the smallest number of pay grades that can be devised to avoid making imperceptible differences in minimums and maximums. Also, have the smallest number of levels feasible from the top to the bottom of the organization chart. This aids all value systems except competitive in perceiving internal equity.
Establish maximums for each pay grade based on market price plus some percent. Keep in line with the industry or community through annual adjustments, as needed, and show people what’s being done. This aids all value systems in perceiving external equity.
Determine progression steps for each range based on expected and required time to acquire the skills and performance associated with the jobs clustered in each range. Thoroughly communicate these steps. This aids most value systems (except competitive) to perceive equity. (Competitive employees want to be superstars.)
Step individuals through their job range, based on meeting the timetable with demonstrated skills and performance against established standards for that step. (To the greatest extent possible, build ownership by getting the workgroup members to help establish the standards.)

Disciplining anyone who doesn’t meet expectations helps most value systems (except system 6) to perceive equity. It’s especially meaningful to clannish and conventional employees. If nonperformers are transferred to areas where they can be productive, the inequity perceived by compassionate employees who remain with the work group is alleviated.

Note that because the generic model doesn’t contain any form of merit progression with the pay range and it lacks internal competition, competitive employees think it’s equitable. The presence of competitive employees in a work group that has other value systems creates obstacles to perceived equity. Most competitive employees, however, aspire to management and are likely to be clustered in management positions. Therefore, the managerial-pay system probably is quite different from the pay system used for other employees, such as staff professionals, office clericals, or production and maintenance. Additionally, competitive employees also should be paid on step progression up to a modest maximum that’s no higher than market price base. It should include a significant at-risk bonus for high achievement.

This last step involves creating a group bonus that’s over and above the entire pay system, which could be a profit-sharing-type plan. As an interim step toward profit sharing, a gainsharing plan with a simple formula might be an appropriate process to add to existing pay systems, so long as the existing systems aren’t merit pay. Make sure the formula for a gainsharing plan remains simple. A highly competitive gainsharing-type plan can confuse clannish people, appear to be exploitative to compassionate people, and conventional employees could find it unnecessary because they work hard anyway.
Case study 2. The second case study concerns office/clerical pay. A large manufacturing organization’s recent experiences are typical of how individual value systems perceive different pay systems.

During the planning stages of plant start-up, this company committed to establish and maintain pay at a level that placed the facility between the 80th and 90th percentile of local community wages. The pay systems, particularly the methods by which individuals progressed within the pay levels, were designed along rather traditional lines. Salaried-exempt and salaried-nonexempt employees were placed on a merit-pay plan, and hourly workers were put on a variation of automatic increase/pay-for-skills plan.

In the first year of operation, the results of CVR’s Employee Attitude Survey in relation to pay were predictable. In response to the statement, "I am paid fairly for the kind of work I do," all three of the job families scored above the 90th percentile when compared to survey norms throughout the U.S. and Canada. Employees were earning more money than they ever had—and they knew it.

One year later, with no change in the pay systems and after a larger-than-average wage increase, employee attitudes about pay had changed significantly. The survey results showed the hourly group’s attitudes remained favorable and the nonexempt group’s scores reflected unexpectedly high levels of dissatisfaction. The obvious questions were, "How could this be," and "What caused such dissatisfaction?"

The answer, obtained from follow-up meetings with the nonexempts, was internal equity concerns. The nonexempt employees still thought the amount of pay was good (relative to other companies in the community), but they felt the system by which the pay and pay increases were decided was flawed. The primary causal factor was internal equity—employee observation of how their system worked versus how the hourly system worked.

One important factor leading to this situation was the composition of the nonexempt workforce. This organization used a values-based hiring and selection process and, thereby, screened out cynical and competitive employees from the hourly and nonexempt workforce. A merit-pay system was therefore unlikely to be viewed as fair, regardless of the total pay received by either of these groups. The exempt group, being more competitive, had a higher acceptance of merit pay.

After sufficient dialogue with employees to understand why the pay system was not working, changes were made to convert the nonexempt system to more closely resemble the hourly practices. The new system features fewer pay grades (three versus the previous seven), job slotting by managers (rather than scientific job evaluation), and progression based on time/versatility (compete against the job, not against peers). Subsequent surveys showed nonexempts’ attitudes about pay improved drastically, almost to the level of the first-year results.

The generic model is not a script and scenario to be adopted completely by any organization. It is simply a set of clues to solve the mystery of perceived equity. Its purpose is to point out that pay equity is a value-system problem, and until competitive managers stop imposing the type of pay system they like on people with disparate values, perceived equity never will improve.

A conscious approach to pay means setting aside one’s own value system when thinking of other employees. It also means recognizing that not everyone sings from the same song sheet.

Written by Dr. Charles Hughes of the Center for Values Research, Dallas, TX. For more information contact Dr. Charles Hughes, President of CVR at 972-720-9100.