Compensation System Ethics

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Ethics refers to a collection of laws in an organization that governs how it can perform its functions. Compensation of workers plays a key role in the mindset of workers towards the accomplishment of the objectives set. A company must ensure that it has a fair and just scheme of pay in place to ensure that the fairness of workers is maintained. The pay scheme applies to the combined monetary and non-monetary incentives granted to the employee for the services offered by the employee on behalf of the company (Moriarty, 2014). Ethics encourages the upper executives to set up the most appropriate framework for compensating employees. The following discussion looks at the ethical issues arising from the compensation systems.
Analyzing the ethics of the compensation presented to determine equitable compensation practices

In the case above, it is clearly indicated that the management of AT&T acted unethically towards its former accountant, Ralph Colotti. The compensation system used by this company goes against the rule of ensuring fairness among employees. This is because there is a large difference between the annual pension of Dorman (CEO) and Ralph (an accountant). Large differences in the amount paid to employees create disunity in an organization. The compensation system should ensure that regarding pay, fairness should prevail among employees (Moriarty, 2014).

The compensation system presented in our case does not uphold transparency in its operations, and it attracts questionable practices without looking at future risks. The issue of holding Colotti’s pension show lack of transparency as there is no given reason as to why the formula of AT&T was changed. A good compensation system should be transparent.

Also, this system does not embrace the establishment of a rewarding system that rewards the employees based on the requirements of the job and performance per individual. The management of AT&T shows that it is highly rewarding the CEO simply because other CEOs in various companies are treated in the same manner. The management should concentrate on developing a performance-based rewarding system to ensure that the organization can maintain competitiveness in the industry. This also boosts the morale of workers (Moriarty, 2014).

Compliance with legislation is another ethical issue affecting the compensation system. Based on the case presented above, AT&T fails to comply with laws as it is unlawful to hold down someone’s pension due to an internal change of pension formula. This is unjust action by the company as it violates his human rights and it might eventually reduce the organizational effectiveness. An effective compensation system must comply with legislation (Gomez &Santos, 2014).

Favouritism among top executives is also evident in our case. The CEO is being given higher bonuses where we can rarely locate a bonus for the accountant. An effective system calls for equality of all employees.

Ethical questions that can arise from having large pay differentials between employee salaries and salaries of top executives

Most of the organizations nowadays are paying the CEOs very high salaries and bonuses claiming that they want to assist them in hiring and maintaining highly talented and skilled personnel. However, there is an issue of large pay differentials that arises since the lower level workers are lowly paid and this creates instability in the firm. The ethical questions that can arise include; “what criteria have been used to come up with these compensation packages?” “Which are the factors used by management to decide on the payment amounts?” “Are the employees satisfied with the amount paid to the top executives?” and “are the employees contented with the processes and procedures used by management to decide on payment levels?” (Gomez &Santos, 2014).

The management should assess the financial state of an organization to be able to determine whether it will be able to continue operating when paying the CEOs high compensation packages.

Compensation advice offered to make the compensation policy more equitable

An equitable compensation policy brings unity and motivation to employees thus enhancing the productivity of any organization in the long term. The compensation committee and the top management can embrace some ways to achieve this objective. Both internal and external pay equity must be employed to ensure that there is fairness in the compensation policy. Internal pay equity refers to a situation whereby the employees’ perception indicates that they believe that they are rewarded fairly depending on the value of the jobs found in an organization. On the other hand, external pay equity is defined as a belief that workers of a certain organization have in that they are being paid fairly compared to other employees carrying out similar jobs in different organizations. Also, workplace equity must be observed with the aim of making the employees feel that they are all treated fairly. Again, this fosters production among employees (Khan & Rasheed, 2015).

Furthermore, upholding transparency in a compensation system ensures that people feel to be fairly paid. Transparency might involve issuing of personal compensation documents which will show the total compensation offered to each in semi-annually or annually basis.

Creation of a fairly appeal process by organizations enables workers to have a chance of discussing their problems with the top management. This discussion makes the employees understand that they are considered as crucial assets of an organization (Khan & Rasheed, 2015).

The organization can train top managers and compensation committee members on ways in which an equitable policy can be achieved.


Finally, the researcher recommends that ethics of the compensation system must be strictly followed by an organization so that fairness among employees emerges. Organizations that uphold ethics enjoys a lot of benefits such as increased productivity, low employee turnover, teamwork, efficiency among others. Failure to observe ethics can cause fatal consequences such low productivity and even close down of organizations in future. Ethics largely determines success or failure of an organization.


Gomez-Mejia, L. R., Berrone, P., & Franco-Santos, M. (2014). Compensation and organizational performance: Theory, research, and practice. Routledge.

Khan, A. S., & Rasheed, F. (2015). Human resource management practices and project success, a moderating role of Islamic Work Ethics in Pakistani project-based organizations. International Journal of Project Management, 33(2), 435-445.

Moriarty, J. (2014). Compensation ethics and organizational commitment. Business Ethics Quarterly, 24(01), 31-53.

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