Pay Equity and Performance in the Public Sector

  • Pierre-Yves SanséauEmail author
Living reference work entry



Pay equity

Pay equity literally means “pay fairness.” The concept of equity implies that one receives proportionally fair outcomes in return for what one invests in a relationship or situation, when comparisons are made with appropriate others (Adams 1965).


Refers here to job performance – those scalable actions, behaviors, and outcomes that employees engage in that are linked with and contribute to organizational goals.


Public sector is commonly based on values of equality, integrity, dedication to others, and fairness. So, in most countries, pay equity in the public sector should not be a major issue if it was integrating these values and principles. But pay policies and practices in the public sector bring us to other realities. Historical practices, impact of traditions, economic crisis, lack of resources, and classical managerial approaches highlight the fact that pay equity is a major issue in public sector. In the 1970s, the introduction of new managerial practices related to “new public management” helped us to take stock on two central subjects: pay equity and job performance. Firstly, pay equity was not at all a reality in public service; secondly, job performance became a central issue to save money, to be more efficient, and to move to a real culture of service; and thirdly, pay equity could be related to job performance and not only to gender, age, seniority, or level of qualification.

Pay Equity

In designing an effective and efficient compensation system, one important factor that management would have to consider is the perceived equity or fairness of the system. In a well-designed compensation system, all employees feel that they are treated fairly by management. Pay equity has been defined as an employee’s perception that compensation received is equal to the value of the work performed (Bohlander et al. 2001).

The equity theory (Adams 1963), from which pay equity is derived, is a motivational theory that seeks to determine how employees feel and behave when they are fairly or unfairly treated by employers. Central to the equity theory is the assumption that employees would always compare the fairness of their situations by comparing their input-output ratio with that of relevant others. If they perceive the situation as being unfair in terms of the treatment they receive, they usually would try to restore equity by either altering their inputs or outputs in the right direction.

There are two general classifications of equity: the distributive equity and procedural equity. Distributive equity is defined as the fairness with which people feel they are rewarded in accordance with their contribution to organizational accomplishment. Procedural equity, on the other hand, is concerned with the perceptions employees have about the fairness with which procedures in such areas as performance appraisal, promotion, and discipline are being operated. The perception of inequity compels the individual to experience an unpleasant emotional condition that may cause employees to reduce their future efforts, change their perceptions regarding rewards for their work efforts, or, as often is the case, quit the organization (Adams 1965).

In designing an equitable pay system, management must pay attention to the three forms of equity, namely, the internal, external, and individual equity. Internal equity has been defined as the perceived fairness of pay differentials among different jobs within the same organization. In an attempt to establish internal equity, employees compare their jobs with other jobs. These other jobs may be lower, equal, or higher than the job the employee is performing presently. These comparisons may influence the general attitudes of employees; their willingness to transfer to other jobs within the same organization; their willingness to accept promotions; their inclination to cooperate across jobs, functional areas, or product groups; and their commitment to the organization (Noe et al. 2006).

External equity has also been defined as the employee’s perception of the fairness of their compensation relative to those outside the organization. External equity comparisons are based on what other employees receive for doing similar or the same jobs in other organizations. The management of this type of equity is important because it can greatly influence the decisions of potential employees who often try to compare the levels of employee compensation across various companies before reaching a decision as to which company to work for. It also affects the attitudes and decisions of existing employees with respect to whether they must quit or stay with their present employer (Mello 2002).

Most frequently, employees tend to make equity comparisons by choosing relevant others doing the same job. This is termed individual equity. Individual equity involves employee perceptions of pay differentials among individuals who hold identical jobs in the same organization. Determining individual pay levels and differentials among employees in identical jobs can be done in a number of ways. The most basic is basing pay on seniority. Seniority-based pay systems determine compensation according to the length of time spent on the job or length of time an employee has stayed with the employer. Employee’s assessments of equity are, in fact, perceptions; they may be based, in part, on incomplete or inaccurate information, but, nonetheless, these perceptions greatly impact motivation, commitment, job satisfaction, labor relations, and performance.

Individual Job Performance

The accomplishment of some organizational goal by a single person is often described as “Individual Job Performance.” Campbell (1990) defined individual job performance as those actions or behaviors under the control of the individual that contribute to the goal of the organization and can be measured according to the individual’s level of proficiency. Job performance may be measured at the individual, group, unit, or organizational level according to quantity or quality of output, creativity, flexibility, dependability, or anything else desired by the organization. But performance at the individual level does not only depend on the amount of time the individual is physically seen doing the work but also the amount of mental concentration that is made available during the performance of the work.

There are three variables which are very important in assessing employee job performance: the requirements of the job itself, the goals and objectives of the organization, and the behaviors that are most valued by management in performing the job. Task activities and contextual behaviors are both important in conceptualizing the job performance of individual employees. Because of the increased attention that is now paid to contextual performance, job performance is no longer assessed on the basis of the tangible activities associated with the production of physical goods and services alone.

As societies are now moving from the physical world to knowledge-based economies, employee perceptions and expectations have expanded. In addition to performing the task, they also can indulge in certain innovative behaviors that can help their organizations to achieve competitive advantage. Contextual performance, such as volunteering for additional work, following organizational rules and procedures, and assisting and cooperating with coworkers and various other discretionary behaviors, is beginning to be viewed as equally important to task performance.

In his famous concept of aggression-approval proposition, Homans (1974) observed that each time an employee happens to receive outcomes in excess of what he or she expected or is given punishment less than what was expected, there is the tendency that the said individual may indulge in approving behaviors which can translate into desirable performance. The satisfaction that goes with the excess rewards or less punishment results in an emotional state that voluntarily directs the behavior of the person toward organizational objectives.

Perception of Pay Equity and Performance

Employee’s perception of what is equitable may have significant effects on his or her work motivation and performance (Adams 1963). This implies that managers who have the desire to encourage employees for maximum performance would have to carefully develop equitable pay structures so that pay differences among individuals with different levels of experience and performance can be reduced to the bearable minimum. The traditional practice of designing reward systems and imposing them on employees does not allow employees to understand the system, let alone to perceive it as equitable. Though it is believed that the top-down process of designing employee compensation may ensure consistency in the system, this practice is likely to compel employees to perceive the system wrongly. Consequently, they would be more likely to develop negative perceptions about management and the system, and this may cause employees to indulge in counterproductive behaviors.

The compensation system can influence employee behavior when there is a correlation between rewards and performance. The perception of equity in the compensation system often depends on employee comparisons. These comparisons, which are based on employee perceptions, may be factual or otherwise, as few employees really have concrete information about the situation of their comparison others.

Another aspect of equity which is based on employee perception relates to whether or not the system is open to or hiding from employees by management. Pay information that is kept secret in closed systems does not allow employees to make more accurate equity comparisons. Advocates of the open pay system believe that the system promotes equity and motivation. In their opinion, to the extent that high-performing employees are known to be making more money than low-performing individuals, it follows logically that people throughout the organization will be motivated to work harder under the assumption that they too will be recognized and rewarded for their contributions. However, critics of pay openness argue that what an individual gets paid for is his or her own business and not for public consumption. They also underline that if pay levels are made known to everybody else, then jealousy and/or resentment may result.

In the past, human resource managers viewed employees as factors of production that were employed to produce the needed goods and services for profit. During that time, pay and other monetary factors were considered as the best way to motivate employees for maximum performance. Based on the Hawthorne studies which were conducted by Elton Mayo between 1924 and 1932, some managers began to realize that employee performance was affected more by psychological and social factors rather than physical or objective influences.

Employers have a duty of energizing employees to work harder, more efficiently, and intelligently. This requirement is true of any manager of any organization as long as that manager is engaged to work with others to achieve group goals which do not only depend on the ability of the employee to perform specific jobs but also on the willingness and commitment of employees to initiate, direct, intensify, or sustain constructive behaviors.

Herzberg et al. (1959) discovered two forms of motivation: the intrinsic motivation and the extrinsic motivation. Intrinsic motivation depends on the personal factors that induce an individual to behave in a particular way: responsibility (feeling that the work is important and having control over one’s own resources), autonomy (freedom to act), scope to use and develop skills and abilities, interesting and challenging work, and opportunities for advancement. Intrinsic motivation is likely to have deeper, enduring, and longer-term effect because they are inherent in the individual and not imposed on him.

Extrinsic motivation originates externally. It relates to rewards that are given by another person, typically a manager, and include promotions, pay increases, and bonuses. Although extrinsic motivation is important, good managers strive to help employees achieve intrinsic motivation as well. In his opinion, the most talented and innovative employees are rarely motivated exclusively by rewards such as money and benefits or even praise and recognition. Instead, they seek satisfaction from the work itself. People are energized by the psychic rewards they get from working on intellectually stimulating and challenging technical problems, as well as by the potentially beneficial global impact of their work.

An understanding of employee motivation has become even more critical due to the rapidly changing nature of organizations in recent times. Organizations in the public sector are becoming global and are shifting from traditional hierarchical structures to decentralized structures and adopting the concept of teams. These changes, along with the trend of downsizing and a shift to performance, have resulted in employees harboring higher levels of anxiety which have great impact on the employee at the workplace. In fact, motivation affects almost all major aspects of the organization, including satisfaction, performance, organizational commitment, job design, benefit programs, and job involvement.

Managers trying to enhance the motivation of their employees can draw on any of the three main theories of motivation (content, process, and reinforcement). In applying these approaches, however, managers must understand that there are approaches to motivating people that are destructive, for example, fear and intimidation. While these approaches may seem very effective in promptly motivating people, they hurtful, and in addition, they usually motivate employees for only the short term. There are also approaches that are constructive, for example, effective delegation and coaching. It is also important to note that different people can have quite different motivators, for example, by more money, recognition, promotions, or opportunities for learning. Therefore, when attempting to motivate people, it is important to identify what actually motivates each of (Vroom 1964). Motivation is clearly a major key to performance.


Managing performance of employees in the public sector is a central issue in most countries. New public management (NPM) approaches had among its main goals to revisit managerial practices in the public sector, and pay equity was one of (Arnaboldi et al. 2015). But some limitations have been finally highlighted as NPM implementation had also specific and potentially negative psychosociological and organizational effects: increase of stress; illness; low morale; decline in job satisfaction and motivation; fear; competitive, adversarial, and punitive ethos; distrust between people and an invisible net of managerial power and domination; and over-bureaucratic and expensive audit procedures (Diefenbach 2009). If pay equity is still a positive and central objective in public sector management, it is may have been altered by the side effects of NPM. The new performance approach seems to have deeply modified the stakes and has also brought more complexity, more uncertainty, the introduction of new technologies to measure performance based mainly on budgetary indicators, the introduction of private sector tools in non-adapted organizations, a misunderstanding of what was management and the new role of the managers, etc. Therefore, pay equity will remain a major concern in the coming years as public sector will stay a changing sector in fast-changing contexts.



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© Springer International Publishing AG 2018

Authors and Affiliations

  1. 1.Grenoble Ecole de ManagementGrenobleFrance