Abstract
As U.S. businesses shift from individual rewards toward more aggregated pay systems, they must address the issue of reward allocation within groups. Specifically, should aggregate rewards be allocated equally to all group members, or should individual contributions be recognized? In this paper, the multiprinciple view of distributive justice is used as a starting point to predict employee reactions to different allocation methods. Propositions for future research that could facilitate the implementation of alternative pay plans are offered.
Introduction
The decade of the 1990s has been one of change in American compensation practices. Restructuring the nature of work from an individual, job-based focus to more flexible team-based management systems (Bridges, 1994) has led many companies to look for compensation systems more compatible with a team-oriented environment Lawler, 1992, Seaman, 1997 and Sisco, 1992, and outcome-oriented, group-level systems such as profit sharing and gainsharing have grown in popularity Gomez-Mejia & Balkin, 1992, Hansen, 1998 and Lawler, 1990. Additionally, many companies are changing their compensation plans through broadbanding, which involves collapsing many salary grades into a few wide bands (Abosch & Hand, 1994). Broadbanding is used to flatten organizational structures, so pay is less tied to hierarchical level, which often leads to difficulty in determining rewards (LeBlanc & Ellis, 1995).
One type of compensation that fits the needs of these changing organizations is aggregate pay plans. These plans, which are “… any arrangement for a group of employees to receive a variable award based on increased performance against a target” (DeMatteo, Eby, & Sundstrom, 1998), can apply to small teams or entire organizations. Some of the most popular types of aggregated pay plans are profit sharing, gainsharing, and team-based performance bonuses. Profit sharing is a group- or organization-based pay plan in which payments to employees are based on the profit of the group or organization (Gerhart & Milkovich, 1992). Gainsharing is also a group- or organization-based pay plan, but payments are based on productivity measures, rather than profits, and tend to be distributed more often than profit-sharing bonuses (Gerhart & Milkovich, 1992). Finally, team-based performance bonuses are based only on team performance, and payments may be distributed evenly among members or can vary based on performance levels of team members.
A challenge associated with all of these aggregate plans involves the allocation of group-level reward to individual group members. For instance, if the bonus for a team of five members is US$1000, how should that money be allocated to individuals on that team? Should it be divided equally so that each member received US$200? Should the US$1000 be allocated based on the existing salaries of the employees, with those earning more receiving a larger bonus? Alternately, should the reward be distributed based on evaluations of individual performance within the group? Because there is no one right answer to this question, effective allocation of aggregate pay is a difficult decision. Many practitioners have lamented the difficulty of determining allocation of rewards to individuals in groups (e.g., Hayes, 1997, LeBlanc & Mulvey, 1998, Masternak, 1997 and Weinberger, 1998).
In this paper, we use an existing theoretical framework of distributive justice to address the issue of allocation of group rewards. We begin by discussing the importance of employee reactions, specifically fairness, to aggregate pay plans. We then address several contingency factors that may influence the effectiveness of different pay plan decisions. After addressing the contingency factors individually, we examine several combinations of these factors and their effects on pay plan acceptance. Finally, we identify priorities for future compensation research in this area.
6. Conclusion
This paper provides an introduction to the contingency view of distributive justice and discusses how that literature can be relevant to the study of pay plan survival. In applying this material to compensation contexts, we may be able to improve upon existing distributive justice research by including multiple contingency factors and incorporating time as a factor. This contribution would supplement the very practical advantages associated with better understanding of the circumstances under which certain pay plans are more likely to succeed.
An acknowledged limitation of the present paper is that it focuses on one particular aspect of group-based pay plans: their capacity to allocate rewards in an egalitarian fashion. Clearly, these plans have other features to which employees might react, including but not limited to the processes by which they are implemented. A complete understanding of reactions to innovative pay plans would require investigation of both distributive and procedural justice issues, and would also require attention to considerations unrelated to justice. Recent work in the area of procedural justice (e.g., Brockner & Weisenfeld, 1996) offers a rich framework for future research in this area. However, the need for research beyond distributive justice does not diminish the need for further investigations into this issue.
