Compensation and benefits

This article is about the professional discipline that oversees compensation and benefits in an organization, and the policies involved. For types and levels of compensation, see Remuneration.

Compensation and benefits (C&B) is a sub-discipline of human resources, focused on employee compensation and benefits policy-making. While compensation and benefits are tangible, there are intangible rewards such as recognition, work-life and development. Combined, these are referred to as total rewards.^[1] The term "compensation and benefits" refers to the discipline as well as the rewards themselves.

Systems of pay

A key driver for many organisations especially in the public sector is attracting and retaining high performing and motivated staff alongside ensuring salaries are affordable and within budget.

Various pay systems are used across the public sector with mixed views on their effectiveness.

The systems of pay in the public sector include:

1.     Fixed pay (guaranteed pay/base pay) – the guaranteed portion of an employee’s salary, including basic pay, allowances and fixed benefits excluding bonuses[1]. In the public sector this is the salary or wages that every public servant receives regularly linked to their position and pay band and is similar to other positions[2]. It is one component of a public servant’s rewards. Fixed pay is associated with automatic pay increases (promotions, service based increase). Public sector (local government) pay bands in New Zealand are often benchmarked against market data such as the Strategic Pay Local Government Survey[3].

2.    Tenure-based pay (seniority based pay) – a form of fixed pay that was prevalent in the OECD and New Zealand’s public sector particularly in the 1980s. Pay was linked to length of service and was viewed as not incentivising high performance. Major government reforms in New Zealand and other countries led to performance related pay through decentralising government services[4].

3.    Variable pay – compensation paid based on performance or results. Examples are bonuses, commissions or incentives.[5]

4.    Performance related pay – generally a subset of variable pay which refers to the amount of pay that is awarded based on individual, team or group basis depending on performance. This type of pay is not as common as fixed pay in the New Zealand public sector, but are applied to some senior roles.[6] There are mixed views on performance pay which can have unintended consequences such as less teamwork and collaboration, measurement difficulties, management capability, intrinsic motivation which is “the doing of an activity for its inherent satisfactions rather than for some separable consequence[7]” and equity concerns, i.e. based on gender and ethnicity where these groups are disadvantaged in terms of self-promotion over performance[8].

One study found that there was no significant difference between fixed pay and performance pay when it comes to pay satisfaction, staff commitment and turnover intention. The perception of fairness and equity is an important consideration for performance pay systems whereby high performers can be rewarded while there are perceived inequality impacting employees’ satisfaction and commitment.[9]

There are positive benefits of performance pay for routine, simple tasks, e.g. clerical work in the public sector[10].

Results of current research into performance pay are highly variable and are influenced by many factors.

5.    Competency/capability-based pay – employees receive pay increases based on skills and competencies rather than achieving performance targets. This system of pay is useful for recruitment and training while being used less often for pay reviews.[11]

6.    Pay thresholds – a way of providing higher remuneration where employees need to meet specified criteria. It is not widely used and can be biased due to the “subjective nature of performance appraisals[12]” based on gender.

7.    Single pay spine – this system is used in some areas including universities in the UK[13] and is recommended by the World Bank[14]. Salaries are mapped to a single point scale and is generally reviewed annually through union negotiations.

8.    Note in New Zealand, particularly in the public sector, pay can be aligned with Living Wage adjustments[15]. This involves an annual increase which is independently assessed and is viewed as “the income necessary to provide the basic necessities of life.”[16] Many local councils in New Zealand, including Hutt City Council, are accredited Living Wage employers.[17]

9.    Collective employment agrees set pay and conditions and are common in the public sector in New Zealand. These are negotiated by unions[18].

10.  Other types of employee compensation can include fees for Directorships, and remuneration for advisory roles. These are often governed by Te Kawa Mataaho guidelines for Crown entities.[19]

11. Non-monetary compensation includes leave, paid healthcare, flexible working arrangements, training and development and recognition. These are often described as an employee benefits programme[20]. This can also include Employee Assistance Programmes[21] particularly in the New Zealand public sector.

---

[1] Fixed Pay. (n.d.). AIHR. Retrieved from https://www.aihr.com/hr-glossary/fixed-pay/

[2] Organisation for Economic Co-operation and Development. (2005). *Performance-related pay policies for government employees*. OECD Publishing. Retrieved from https://www.oecd.org/content/dam/oecd/en/publications/reports/2005/05/performance-related-pay-policies-for-government-employees_g1gh4c7d/9789264007550-en.pdf

[3] Strategic Pay. (n.d.). *Survey reports: Reports - Local Government*. Retrieved from https://www.strategicpay.co.nz/survey-reports/reports-local-government/

[4] MartinJenkins. (2022). Designing Effective Pay Systems for the Public Sector. Retrieved from https://www.publicservice.govt.nz/assets/Designing-effective-pay-systems-for-the-public-sector-FINAL.pdf

[5] Variable Pay. (n.d.). AIHR. Retrieved from https://www.aihr.com/hr-glossary/variable-pay/

[6] MartinJenkins. (2022). Designing Effective Pay Systems for the Public Sector. Retrieved from https://www.publicservice.govt.nz/assets/Designing-effective-pay-systems-for-the-public-sector-FINAL.pdf

[7] ANZSOG. (2025). *Beyond Sticks and Carrots: Policy that Uses People's Intrinsic Motivations*. Retrieved from https://anzsog.edu.au/research-insights-and-resources/research/beyond-sticks-and-carrots-policy-that-uses-peoples-intrinsic-motivations/

[8] MartinJenkins. (2022). Designing Effective Pay Systems for the Public Sector. Retrieved from https://www.publicservice.govt.nz/assets/Designing-effective-pay-systems-for-the-public-sector-FINAL.pdf

[9] ResearchGate. (2012). *Effectiveness of pay for performance and fixed pay practices: An assessment of pay satisfaction, commitment, and turnover intention*. Retrieved from https://www.researchgate.net/publication/282749445_Effectiveness_of_pay_for_performance_and_fixed_pay_practices_An_assessment_of_pay_satisfaction_commitment_and_turnover_intention

[10] SAGE Journals. (2022). *Public Administration Review*. Retrieved from https://journals.sagepub.com/doi/abs/10.1177/00208523221105374

[11] MartinJenkins. (2022). Designing Effective Pay Systems for the Public Sector. Retrieved from https://www.publicservice.govt.nz/assets/Designing-effective-pay-systems-for-the-public-sector-FINAL.pdf

[12] MartinJenkins. (2022). Designing Effective Pay Systems for the Public Sector. Retrieved from https://www.publicservice.govt.nz/assets/Designing-effective-pay-systems-for-the-public-sector-FINAL.pdf

[13] Universities New Zealand. (2012). *University Staff Academic Salaries and Remuneration*. Retrieved from https://www.universitiesnz.ac.nz/files/University%20Staff%20Academic%20Salaries%20and%20Remuneration%20-%20Final.pdf

[14] World Bank. (2009–11). *Publication*. Retrieved from https://openknowledge.worldbank.org/entities/publication/2bb07f2c-bf84-5df4-bb8a-39746352a7c6

[15] New Zealand Government Procurement. (n.d.). *Guide to Paying a Living Wage in Contracts*. Retrieved from https://www.procurement.govt.nz/assets/procurement-property/documents/broader-outcomes/guide-to-paying-a-living-wage-in-contracts.pdf

[16] Living Wage New Zealand. (n.d.). *Living Wage 2025*. Retrieved from https://www.livingwage.org.nz/lw25

[17] Living Wage Employers in New Zealand. (n.d.). *Living Wage Employers in New Zealand*. Retrieved from https://www.livingwage.org.nz/accredited_employers

[18] Union New Zealand. (n.d.). *Union New Zealand*. Retrieved from https://union.org.nz/

[19] Te Kawa Mataaho. (2023). *Guidelines for Crown Entity Monitoring*. Retrieved from https://www.publicservice.govt.nz/resources/guidelines-for-crown-entity-monitoring/

[20] Wikipedia. (n.d.). *Employee benefits*. Retrieved from https://en.wikipedia.org/wiki/Employee_benefits

[21] EAP Services. (n.d.). *EAP Services*. Retrieved from https://www.eapservices.co.nz/

Benefits

There are a wide variety of benefits offered to employees such as Paid Time-Off (PTO), various types of insurance (such as life, medical, dental, and disability), participation in a retirement plan (such as pension or 401(k)), or access to a company car, among others. Some benefits are mandatory which are regulated by the government while others are voluntarily offered to fulfill the need of a specific employee population. Benefit plans are typically not provided in cash but form the basis of an employees' pay package along with base salary and bonus.

In the United States, "qualified" employee benefit plans must be offered to all employees, while "non-qualified" benefit plans may be offered to a select group such as executives or other highly-paid employees. When implementing a benefit plan, HR Departments must ensure compliance with federal and state regulations. Many states and countries dictate different minimum benefits such as minimum paid time-off, employer's pension contribution, sick pay, among others.

In the United Kingdom, salary sacrifice arrangements are used to provide non-cash benefits. An agreement is put in place to reduce an employee's entitlement to cash pay in return for the non-cash benefit. The arrangement must not reduce the employee's cash earnings below the National Minimum Wage (NMW) threshold.^[2]

Equity-based compensation

Main article: Employee stock ownership

Equity-based compensation is an employer compensation plan using the employer's shares as employee compensation. The most common form is stock options, yet employers use additional vehicles such as restricted stock, restricted stock units (RSU), employee stock purchase plan (ESPP), performance shares (PSU) and stock appreciation rights (SAR). A stock option is defined as "a contract right granted to an individual to purchase a certain number of shares of stock at a certain price (and subject to certain conditions) over a defined period of time."^[3] Performance shares (PSU) awards of company stock given to managers and executives only if specified organization performance criteria are met, such as earnings per share target^[4]

Intangible benefits

An employee may receive intangible benefits, such as a desirable work schedule. That could be a schedule that is controlled by the employee and can be adjusted to accommodate occasional non-work activities, or one that is highly predictable, which makes it easier for the employee to arrange childcare or transportation to work.

Access to training programs, mentorship, opportunities to travel or to meet other people in the same field, and similar experiences are all intangible benefits that may appeal to some employees.

Extrinsic and intrinsic motivations and their implications

Extrinsic motivations

Extrinsic motivations ‘refer to doing something because it leads to a separable outcome’,^[5] meaning the reward comprises individual gains separate to the direct outcome of the work. This could include a monetary incentive (i.e. salary or performance pay) or promotion opportunity.^[6]

There are many kinds of extrinsic motivations and public managers should resist ‘the tendency to lump them all into a common category’.^[6] Ryan and Deci (2000) ^[5] agree, emphasising that extrinsic motivations are influenced by the degree to which the underlying incentive provides an employee with autonomy, and the extent to which they internalise the need or value of the regulation as their own. Ryan and Deci (2000) ^[5] identify four types of extrinsic motivations:

- ‘External regulation’ - the least autonomous, performed to satisfy an external demand or control. The separable outcome may not be aligned to an individual’s values or needs and may be associated with avoiding sanctions.

- ‘Introjected regulation’ - a response to a form of control or pressure, but which is also contingent on maintaining or enhancing an employee’s self-esteem or self-worth.

- ‘Identification’ - a more autonomous, self-determined form of motivation where personal value and importance is identified in the activity.

- ‘Integrated regulation’ - the most autonomous form of motivation whereby the imposed regulations are fully assimilated by the individual and is consistent with their own values and needs.

Intrinsic and prosocial motivations

Kroll and Porumbescu (2019) ^[7] call out intrinsic and prosocial motivations as ‘antibodies of extrinsic motivations’. They describe how contemporary public managers should comprehend a narrower definition of intrinsic motivations limited to an interest in and enjoyment of work, such that ‘for motivation to be intrinsic, the work needs to be considered an end in itself’. This is distinguished from prosocial motivations which involves ‘the desire to expend effort to benefit other people’, with the focus being the outcomes of ones work rather than the work itself or personal interests.

Practical implications for public managers

Under the right conditions intrinsic and prosocial motivations have the opportunity to improve the performance of public organisations. At the same time, extrinsic motivations can hamper any such improvements.

Dysvik et al (2019) ^[8] describe how working conditions offered to employees impact their intrinsic motivations, with autonomy, competence and relatedness to others needing to be experienced simultaneously to harness the potential benefits of intrinsic motivations. Similarly, Grant (2008) ^[9] describes how high levels of persistence, performance and productivity are demonstrated by employees when they experience intrinsic and prosocial motivations in tandem, suggesting the important synergies that exist within and between the characteristics of employee motivations. As such, Dysvik et al (2019) ^[8] insist that public managers should pay close attention to the work context they create, and the physiological needs of employees to improve organisational performance.

Jacobsen et al (2014) ^[10] advocates for a similar approach, suggesting the type of motivations experienced by employees are dynamic and highly responsive to different inputs. Public managers should be cognisant of this dynamism and sufficiently agile in their human resource management (HRM) practices to maintain their employee’s intrinsic or prosocial motivations.

Research has shown that such dynamism can materialise as a cognitive coping mechanism where few extrinsic rewards are expected from an employer.^[7] In such cases, employees may compensate by expressing higher levels of intrinsic and prosocial motivations to self-justify the importance of their work. Cognitive dissidence theory highlights darker consequences, suggesting employees subject to decreased expectations of extrinsic rewards will attempt to ‘maintain a positive self-image by rationalising situations and expected outcomes that are, ostensibly, of little objective value’.^[7] Van der Toorn and Jost (2014) ^[11] highlight how such attempts to justify the status may promote subconscious rationalisation of injustices even at the expense of wellbeing. As such, public managers need to ensure the effects of cognitive coping and dissidence do not undermine the wellbeing and effectiveness of highly public service motivated employees.

This research points to a dilemma for public managers as it suggests some adverse outcomes for offering high and low expectations of extrinsic rewards. As such, a careful balance needs to be struck in their HRM strategies.

The ‘motivational crowding effect’ is perhaps the most dominant factor influencing the capacity of public organisations to harness the effectiveness and efficiency gains of appropriate balanced employee motivations. HRM research describes how intrinsic and prosocial motivations can be ‘crowded out or decreased if intrinsic rewards or motivations are present.^[7][12] This is because extrinsic motivations have the effect of reinforcing an external focus for the employee that is centred neither on the enjoyment of the work or altruistic outcomes. This is challenging for public managers as it presents an economic anomaly counter to ‘the most fundamental economic law’ ^[12] which suggests that rising monetary incentives increases efficiency and effectiveness. Frey (1994) ^[13] describes how motivational crowding theory demonstrates serious limits to all forms of external motivations, emphasising that ‘no external intervention at all is the best policy’. This is upheld Frey’s (1994) ^[13] description of potential ‘spillover effects’ from extrinsic motivations to multiple areas of responsibility for public service employees such that the potential costs of extrinsic motivations can be much higher than first anticipated. Moynihan’s (2010),^[14] analysis supports this, suggesting the application of market models to public organisations focused on decreasing the costs may create a ‘workplace of cynics with a less effective public sector’ ^[14] that also contributes to declining public trust in public organisations.

Forms of pay

Employee compensation comes in different forms, and organizations design pay programs in a wide variety of ways. Rewards/returns are often described through broad measures that capture the value employees receive in both financial and non-financial forms. It can be transactional or psychological returns.^[15] These forms allow organisations to manage costs, attract talent, ensure fairness, and provide employees with a clear understanding of the total value of their employment. These are some forms of returns people receive from work:^[15]

Total cash compensation

Total cash compensation refers to the combination of base salary and variable pay, such as merit increases, incentives, and bonuses. It represents the immediate financial return employees receive in cash, excluding benefits or indirect forms of pay.^[16] Total cash compensation is often used to compare salaries across different jobs, industries, and companies because it only includes direct cash payments. This is a common way for employers to assess their competitiveness in hiring and retaining top employees. Total cash compensation is the amount of money employees can expect to make in addition to their base pay. In the private sector, bonuses and other incentives can make up a big part of an employee's income. In the public sector, on the other hand, base pay and total cash compensation may be very similar. This shows that government jobs are stable and predictable.

Pay mix

The pay mix shows the proportion of guaranteed pay relative to variable pay within total cash compensation. A mix that is heavily weighted toward fixed salary provides stability, while a higher proportion of variable pay highlights the importance of performance and results.^[17] This balance shows how a company thinks about its reward system. In public service roles, where fairness and predictability are important, fixed salaries are usually more common. On the other hand, jobs like sales, finance, or executive management generally have more flexible rewards that are meant to make employees behave in a way that helps the company reach its goals.

Total compensation

Total compensation goes further than cash payments by including other benefits. It encompasses both the immediate cash compensation and the broader picture of employer-provided benefits, including pensions, healthcare, housing allowances, and paid leave.^[18] This number indicates the amount of money the employer must spend and the value that employees receive. Total compensation is important in the public sector because pensions and allowances make up a significant portion of long-term costs. Governments frequently use this measure to analyse salary bills and assess budgetary sustainability.

Non-financial rewards

Non-financial rewards centre on people's needs for achievement, acknowledgement, personal development, and favorable working conditions to varying degrees. They include non-monetary recognition of accomplishments, such as creating satisfying jobs that allow individuals to enhance their skills and careers and providing a workplace that ensures a high quality of working life and a suitable work-life balance.^[19] Relational returns might be extrinsic, like praise or recognition, or intrinsic, like feeling challenged and interested in the job, and that it is worth doing. Public service organizations often focus on relational returns, such as meaningful work or community engagement, as part of their value proposition to employees. Organizations can generate loyalty and satisfaction in ways that money alone may not be able to do by delivering these kinds of returns.

Total rewards

Total rewards are the mix of financial and non-financial benefits that employees can get. Guaranteed pay, variable pay, employee benefits, and non-financial rewards, which are rewards that come from the work itself, are all connected and seen as one big thing.^[19] The concept of total returns refers to a method of managing rewards that emphasizes the need to consider all aspects, not just a select few, such as compensation and benefits. A total returns approach recognizes that securing financial rewards (pay and benefits) is crucial. Still, it also acknowledges that providing employees with rewarding work experiences (the job itself and how they are managed) and opportunities to develop their skills and careers is equally important. It helps build an employee value proposition that gives great people a clear and compelling reason to work for an organization.

Organizational place

In most companies, compensation & benefits (C&B) design and administration falls under the umbrella of human-resources.

HR organizations in large companies are typically divided into three sub-divisions: HR business partners (HRBPs), HR centers of excellence, and HR shared services. C&B is an HR center of excellence, like staffing and organizational development (OD).

Main influencers

Employee compensation and benefits main influencers can be divided into two: internal (company) and external influencers.

The most important internal influencers are the business objectives, labor unions, internal equity (the idea of compensating employees in similar jobs and similar performance in a similar way), organizational culture and organizational structure.

The most important external influencers are the state of the economy, inflation, unemployment rate, the relevant labor market, labor law, tax law, and the relevant industry habits and trends.

Bonus plans benefits

Incentive compensation bonuses are reward-based programs that allow workers to earn pay above and beyond their base salary.^[20] Bonuses are a form of variable pay, meaning they are contingent payments that vary according to individual, group, or organizational performance,rather than being part of fixed salary.^[21][22] The main objective of bonus plan are:

1. Align Behavior with Strategy – Bonus plans communicate strategic priorities, ensuring employees focus their efforts on tasks that directly support the organization's mission and objectives.^[23]

2. Motivate employee performance: this idea is based on the concepts of goal-setting and reinforcement. According to research, employees' performance tends to improve when they are aware that their bonus is contingent on reaching predetermined goals.^[24] Specifically, Wood, Atkins, and Bright (1999) discovered that, in contrast to no-bonus conditions, bonus schemes based on externally defined standards raised goal difficulty and performance.^[25]

The theoretical underpinnings stem from the work of B. F. Skinner on operant conditioning, which holds that consequences affect behavior and that rewards or punishments either enhance or decrease the likelihood that a behavior will repeat (Skinner, 1938/1953). According to operant conditioning, providing rewards based on desired results motivates people to take activities intended to get those results.

3. Motivate and Increase Productivity – Research shows bonus plans are designed to incentivize higher effort and productivity, particularly when objectives are clear and attainable.^[26]

4. Encourage Skill Development and Improvement - Setting challenging bonus objectives encourages employees to continuously improve and develop relevant skills that benefit the company.^[27]

5. Support Sustainability and Innovation - New trends incorporate sustainability and social responsibility as bonus objectives, motivating employees and executives to address broader business impacts.^[28]

6. Employee retention – Bonus plans may indirectly help employee retention in a number ofways, according to study, even though this is not their main goal. First, high performers are typically rewarded at a greater rate by performance-contingent bonuses, which deters those individuals from accepting competitive offers.^[29] Secondly, yearly incentives may cause workers to postpone leaving until after receiving them, allowing employers more time to resolve problems that could otherwise cause turnover.^[30] Lastly, work satisfaction and less plans to leave are positively correlated with higher total income, including bonuses.^[31]

Limitations & Potential Problems

While bonus plans have benefits, research shows there are several risks and limitations:

1. Misaligned incentives / unintended behaviour

If bonuses are tied only to certain metrics, employees may focus narrowly on those and neglect other important tasks. In extreme cases, this can lead to gaming, unethical practices, or sacrificing long-term value for short-term bonus achievement.^[32]

2. Undermining intrinsic motivation

According to Self-Determination Theory, when extrinsic rewards (like bonuses) are used in tasks that employees already find meaningful, or in ways that feel controlling rather than supportive, they can reduce intrinsic motivation.^[33]

3. Difficulty setting fair and challenging targets

Empirical studies (e.g. of CEO sustainability performance targets) find that many targets are set lower than prior performance, making them relatively easy to achieve. This reduces the motivational power of bonuses.^[27]

4. Context dependence

Bonus effectiveness depends heavily on task type, employee perception, organizational culture, monitoring, and the nature of the reward. What motivates one employee/team may demotivate another. The timing, size, clarity, and fairness perceived in the bonus plan are all crucial.^[34]

Since the middle of the 20th century, studies in management and psychology have questioned whether "if–then" benefits, like bonuses, are really good at keeping people working hard. Self-determination theory-based studies show that extrinsic rewards can sometimes weaken intrinsic drive. This is especially true when tasks need creative thinking or problem-solving instead of just doing them over and over again.^[35] Critics also note that poorly designed bonus plans may encourage unintended or even dysfunctional behavior. For example, employees and managers may focus narrowly on rewarded metrics, neglect important but unrewarded tasks, or engage in short-term decision-making that harms long-term performance.^[36] In extreme cases, bonuses tied solely to financial outcomes can incentivize unethical conduct or excessive cost-cutting that reduces organizational value.^[22]

Ideas for Making Bonus Plan Design Better

Effective bonus plans should lower risks and increase effectiveness by:

1. Make use of performance metrics that are balanced, quantifiable, and transparent. A wider range of measurements aids in coordinating bonuses with long-term performance; depending solely on short-term financial objectives may lead to distortions.^[37]

2. Involve managers and staff in goal-setting; their involvement boosts motivation, dedication, and feelings of justice.^[38]

3. Make sure the thresholds and reward size are appropriate; for example, bonuses should be large enough to inspire, and goals should be difficult but reachable.^[39]

4. Encourage relatedness, competence, and autonomy. Self-Determination Theory-aligned designs support long-term engagement and intrinsic drive.^[40]

5. Make sure to include checks for unforeseen outcomes because badly thought out incentives can promote unethical behavior, gaming, or the neglect of unrewarded activities.^[40]

Equity theory

Equity Theory is a concept in human resources management that explains how individuals assess fairness in the distribution of resources. In the workplace, equity theory means that perceived fairness of the distribution of compensation and benefits between one employee and another.

Equity theory can be linked to job demand resource theory where resources include autonomy, support and recognition.^[41] Perceived fairness in how an employee is rewarded for their input is also a type of resource. In equity theory, perceived inequity is a cause of employee demotivation, disengagement, poor performance, and stress.^[42] In job demand resource theory, a lack of adequate resources is a cause of burnout and poor health outcomes. Perceived inequity as a job demand can cause an employee to decrease job demands by not proactively seeking new opportunities which may have otherwise benefited them.^[43]

Equity theory was developed by psychologist John Stacey Adams in the 1960s.^[44] The theory states that employees evaluate the ratio of their inputs (such as effort, skill, and time) to outputs (such as salary, benefits, and recognition) and compare this ratio to that of their peers. The ratio of input to output can be measured in two directions:

• Horizontally, among peers within an organization or across comparable organizations.
• Vertically, between managers and workers within the same organization.^[45]

Horizontal distribution is perceived as fair and proportional when the ratio of one employee’s work inputs to their compensation is on par with others in similar roles. Equity theory therefore suggests that workers’ pay should be equivalent to their inputs. This differs from equality theory, which advocates for equal pay regardless of input—valuing all workers’ contributions as equal and distributing outputs uniformly.^[46]

Horizontal equity in practice

Horizontal equity is often pursued through:

• Gender pay gap reduction initiatives
• Anti-discrimination laws
• Workplace policies that support diverse employee needs, such as flexible working arrangements and inclusive healthcare benefits.

Organizations may also conduct pay equity audits, publish transparent salary bands, and align performance metrics with compensation to reinforce horizontal fairness.

Vertical equity

Vertical equity concerns the fairness of compensation between hierarchical levels, particularly between executives and average employees. A large difference between senior leaders’ pay and the average workers’ pay is called high vertical pay dispersion. High vertical pay dispersion has drawn public and academic scrutiny because of the growing rate of dispersion.

For example, in 2023, the average CEO-to-worker pay ratio at 100 S&P 500 corporations with low median worker pay was 632:1, the highest recorded to date.^[47] This disparity raises questions about organizational justice, employee morale, and long-term sustainability.

There is less research on high vertical pay dispersion and its effects in the public service compared to the private sector. In the public sector, vertical pay dispersion tends to be lower. In New Zealand’s public service, the average base salary of incumbent chief executives was 5.1 times that of non-management staff in 2023.^[48] While less extreme than private sector ratios, such figures still prompt debate about fairness and transparency in publicly funded institutions.

In New Zealand, equity in public organisations is matter of public interest and scrutiny because equity aligns with the public service principle of merit-based appointments (and by extension, compensation and benefits should also be based on merit) (section 12(1)(c) Public Service Act 2020).

Psychological and behavioral impacts

The perceived horizontal and vertical equity of pay in the workplace influences motivation, job satisfaction, and workplace behavior.

When employees perceive inequity, they may experience emotional distress and adjust their behavior towards work. Common responses include:

• Reduced effort or productivity
• Increased absenteeism
• Seeking employment elsewhere
• Lower organizational trust and engagement and,
• Reframing or adapting their attitudes toward work.^[49]

Conversely, perceived equity fosters motivation, loyalty, and job satisfaction.

See also

• Reward management