Fundamentals of Human Resource Management 5th Edition by Raymond Noe, John Hollenbeck, Barry Gerhart, Patrick Wright

Exercise 11

HOW DOES COMPENSATION FAIRNESS AFFECT EMPLOYEES' MOTIVATION?
Research into ethical behavior shows that employees are more likely to conduct themselves with honesty and integrity when they believe their organization values and rewards ethical conduct. For example, employees seek fairness. If they doubt that they and their peers get fair rewards for their efforts, they are apt to find ways - even unethical ways-to even the score. Conversely, if managers reward ethical conduct, employees are more likely to behave ethically.
In the context of pay policy, this means employees are looking for fair policies, both for themselves and for their co-workers. Compensation decisions that employees perceive as fair contribute to an overall ethical climate. If employees' pay differs from what they could make at another organization, or if one employee's pay differs from the pay of a colleague in a similar position, employees won't perceive fairness unless they understand and accept the reasons for the differences.
Communicating fairness is especially important but tricky during bad economic times, when it may be impossible to pay everyone generously. Some companies have even tried "rewarding" employees with a raise that carries no pay increase. Presumably the honor of a higher title and the potential for future raises would outweigh the downside of taking on more responsibility for the same pay.
The emphasis on communicating fairness suggests a policy of disclosing pay decisions. However, a recent study at the University of California raises some concerns. A few years ago, California's government allowed the publication of state workers' salaries, and the Sacramento Bee published the information on its website. A few days after notifying UC workers about the information, the researchers contacted them again. In that survey, most of the university employees indicated that they had looked up salary information. Those who were paid below the median salaries were dissatisfied and more likely to be looking for new jobs. Those who earned above the median had no significant change in their satisfaction; apparently, they just assumed they were above-average employees.
If you worked for a small business that wanted to promote a valued employee but had no more money in the payroll budget, how would you address the issue of fairness in this situation? How would you expect the employee to respond?