Authors: Ramzi Suleiman
Pay satisfaction and pay fairness are of vital concern to employees, employers, and hence the entire economic structure. Although the importance of fairness to compensation decisions is widely acknowledged, the research examining how fairness perception relates to components of pay is relatively scarce. Here, I model a dyadic employer-employee interaction as a two-person game in which an allocator (an employer) divides a monetary amount (a workplace net profit) between herself and a recipient (an employee). Assuming self-interested players, I propose a level-of-aspiration model, according to which players’ pay satisfaction is proportional to their actual payoffs relative to their aspired payoffs. Solving for the points of equality between the players’ levels of pay satisfaction, yields two “harmony” points, depending on the assumption made about the recipient's aspirations. Assuming that the recipient aspires for 50% of the total amount, the predicted harmony allocation is (2/3,1/3) for the allocator and recipient, respectively. On the other hand, assuming that the recipient aspires to receive the same amount as the allocator, the predicted harmony allocation is (φ, 1-φ), where φ≈0.62 is the famous Golden Ratio. For a dyadic employer-employee interaction, the above solution prescribes that a fair salary is any percentage of the net profit between ≈33% to ≈38%, with strong preference for the upper limit, which in addition to yielding higher pay and pay satisfaction, is also aesthetically pleasing. Tests using field data on attitudinal pay fairness, actual pay data, and allocation behavior in experimental ultimatum bargaining, lend strong support to the proposed model.
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