The Compensation Committee recognizes that the following approach to defining equity depends on analysis of external markets to determine the appropriateness of pay levels and acknowledges that the validity of this type of analysis is dependent on the validity of the market data. The committee also recognizes that no mechanical formula can capture all the factors that influence pay levels and we acknowledge that subjective judgment plays a necessary role in salary determinations.
Definitions of Equity
There are many ways of defining equity. The Compensation Committee summarizes our definition of pay equity as a guide to unit administrators to offer a workable operational definition of pay equity as it relates specifically to our committee’s proposals and recommendations.
In the compensation field, equity is defined in terms of both processes and outcomes. Employees’ perceptions of fairness come from having a compensation system that has both fair processes (procedural justice) and fair outcomes (distributive justice).
Procedural Justice in the Recommendation
The aspect of procedural justice implies that policies for establishing pay and pay increases are developed with opportunity for input by those affected by the policies, that the policies are well communicated and understood, and that they are perceived as policies that are applied equally and uniformly across all individuals.
Distributive Justice in the Recommendation
Distributive justice is more complex. This refers to the outcomes: the pay decisions and, ultimately, the pay levels and differentials that are established through the application of pay policies. Equity in outcomes is defined in terms of both internal and external equity. Internal equity focuses on pay relationships among jobs within the organization. External equity describes how pay levels within the organization compare to some set of relevant external labor market data. Thus, employees may be satisfied with internal equity because pay differentials within the organization are perceived to be fair; however, if all employees are 30% below market means, external equity will be perceived as unfair. Similarly, employees may be generally paid above market but still experience perceptions of inequity as they make pay comparisons with other employees in the same organization. In practice, it is often difficult to separate problems of internal and external equity. Pay relationships at Missouri State University are complicated by the fact that problems of both internal and external equity exist. Internal equity problems often stem from the fact that pay levels in external markets change at different rates than do internal pay levels.