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
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
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
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
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
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
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
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
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.
is pay that isn’t a central personal issue; inequity
is pay that’s used as a reward or punishment.
is pay that’s equal for all work; inequity is pay
that singles out individuals.
is pay that distinguishes high achievers; inequity is pay
that’s based on service and skills.
is pay that’s based on service and skills; inequity
is keeping unproductive people on the
is more pay than others; inequity is pay based on favoritism.
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
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
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
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
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
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?
PAY AND VALUES MATRIX
= Good Fit • 0 = Neutral • - = Bad Fit
|Values %Workforce *
|Fitness as of % of Population
of dom. value system only. Varies by occupation &
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
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
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
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
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
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
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
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
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
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
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.