A Look at Requisite Organization Theory and Felt-Fair Pay

by David Creelman | Posted | Total Rewards

A Look at Requisite Organization Theory and Felt-Fair Pay

As reward professionals, we have a lot of tried-and-true practices, but not a lot of theory. One exception is the field of requisite organization (RO) theory, which has some interesting things to say about employee rewards.

First, a bit of a disclaimer: Some feel RO theory, unlike most fields of management thought, is a proven scientific theory. Others feel it’s just another set of ideas about management.

Whether the theory is True with a capital “T” need not concern us here because RO theory is useful and provides a structured way to think about management.

What is RO theory?

The most powerful idea in RO theory is that jobs don’t get more complex in a continuous way; there are distinct transitions from one level of complexity to the next. We see this phenomenon in nature all the time. For example, ice doesn’t just get gradually warmer ‒ at some point it turns into water and, at higher temperature, it turns into steam. Children go through distinct developmental stages too. For instance, one day they won’t get the concept of object permanence and the next day they will.

With respect to jobs, RO theory says there are distinct differences between jobs requiring a short time horizon (“What do I need to do today?”) and those requiring a longer time horizon (“Where does this department need to be three years from now?”).

In a well-structured organization, each layer of hierarchy sits exactly one RO level above the one below it ‒ that’s how managers add value to their subordinates’ work without being overly distant.

Determining what pay feels fair

After clearly defining the different levels of the organization, RO scientists could investigate what pay differentials felt fair to most people. Interestingly they got consistent answers. The research has shown that in many different countries people have a consistent intuitive sense of what is fair.

Here’s a table showing what is considered fair compensation in a large organization (smaller organizations would have fewer than six levels of hierarchy). What matters are the relative differences; the illustrative pay is just to give a sense of what the actual salaries might look like.

Chart

Now, I realize this is a lot to take in if you’re not familiar with RO theory. In a moment I’ll point to where you can learn how levels are defined and measured, and where to find research on felt-fair pay.

However, the takeaway here is that people do believe there’s an inherently fair distribution of pay up and down the hierarchy, and that the differences are not small. According to the RO research, the closer you get to this sort of distribution, the more employees will feel the pay system is fair.

From a total rewards perspective, felt-fairness cannot be the sole driver of your pay policy; but it is nice to see a guideline from academic research on what differences are normally seen as reasonable.

Delving deeper into RO theory

Marvin Dunnette, Professor of Industrial Psychology at the University of Minnesota, and Roy Richardson of Honeywell did a four-year study on felt-fair pay. In this research they compared time-span with 29 other variables that were believed to influence people’s perceptions of pay fairness. Timespan explained 75% of the variations.  You’ll find the results in Richardson´s book, Fair Pay and Work, available from Cason Hall & Co., Publishers.

If you want to dig deeper into RO theory, grab a copy of Elliott Jaques’ classic book, Requisite Organization.

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