Compensation Policies and Employee Perceptions of Pay Equity in a Transitional Economy: The Case of Vietnamese StateOwned Enterprises45297

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The study contributes to the existing theoretical understanding of relationships between compensation policies and perceptions of pay equity, in particular in the context of Vietnamese SOEs It also provides suggestions to develop compensation policies and practices that improve employee perceptions of pay equity in SOEs during the economic reform process Keywords: Vietnam; economic reform; state-owned enterprise; compensation policy; compensation practices; perception of pay equity Introduction Vietnam’s economic reform, namely Doi moi, has been starting in the late 1980s, which aimed to adapt them to market-oriented practices and to increase their efficiency Transformation of state-owned enterprises (SOEs) has been a central point of this reform This change of the national and business governance systems has led to significant changes in mechanisms of compensation policy and practices The perceptions of pay equity among SOEs’ employees have also shifted from a view of respecting harmony and collectivism toward individualism and the notion of performance-based pay Owning to a lack of research on these issues, this paper has focused on investigating compensation fairness in the transformation process of SOEs in the transitional society of Vietnam It tackles the central research question: How compensation components relate to employee perceptions of pay equity in Vietnamese SOEs? To so, the paper employs a quantitative approach to investigate two types of SOEs in Vietnam’s biggest economic areas namely, Ho Chi Minh City and Hanoi in 2016 The primary data was a combining of 650 survey responses This paper firstly presents a conceptual framework for conducting a quantitative study to examine the research question It then explained the research method following the research findings and discussion Literature review There are different definitions of compensation, due to different points of view This study uses Milkovich et al (2011)’s definition to investigate relationships between compensation policies and employee’s perceptions of pay equity According to Milkovich et al (2011, p.10), ‘Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship’ In the HRM field, equity theory proposed by Adams (1963, 1965) is considered as a key theory to examine the fairness of a compensation system This is a theoretical foundation to investigate perceptions of pay equity The employee perceptions of pay equity can be examined through their feelings of satisfaction or dissatisfaction with their compensation, in comparison with their inputs or with those of others inside or outside their organisations According to Adams (1963, 1965), an employee brings many inputs to his/her job, including experience, education, intelligence, physical strength, commitment, status, and social connections; and then expects to receive a just return or outputs The outputs might be in the form of status, benefits, or basic pleasures, and reimbursed monetarily He also emphasises that the exchange between employees and employers is subjective so that the employees continuously check their inputs and outputs for jobs to perceive whether or not the ratio of the input and output is equitable If the ratio between the inputs and the outputs is equal, they perceive there to be pay equity, otherwise, feelings of pay inequity exist They also compare their ratio to others to perceive pay equity or not The research on impacts of compensation on the perceptions of pay equity is fragmented Studying the impacts of compensation in cash are the most popular They state the linkages between the level of payment to pay satisfaction, absenteeism rates, burnout, emotional exhaustion, and turnover rates, acts of stealing and theft (Telly et al 1971; McFarlin & Sweeney 1992; Heneman 1985; Summers & DeNisi 1990; Greenberg 1990; Carson et al 2010) Later, the decision-making process of pay has been found to have more impact on the perception of fairness than has the amount of pay (Zheng et al 2014; Della et al 2015) Besides pay as cash compensation, Romanoff et al (1986) state several nonmonetary benefits are influencing the perception of pay equity Studies show that workers often rank job security, working conditions, advancement opportunities, management appreciation, relations with co-workers, and flexibility of hours or job assignment, ahead of pay Studies were done by Davis and Ward (1995) and Martin and Bennett (1996) indicate that the perception of fairness in benefits provided by the firm was related to the fairness of the total amount of compensation Jawahar and Stone (2011) emphasise that the employees’ satisfaction with value and administration of benefits will tend to result in satisfaction with the overall compensation system The empirical studies also indicate other factors including personal background, firm’s management, government policies, and culture apart from compensation components as contributors for the perception of pay equity (Berkowitz et al 1987; Buick et al 2015; Heneman et al 1997; Isaac 2001; Sturman 2006; Tekleab et al 2005; Wu et al 2013; Blackman et al 2019) Some studies state that government policies on minimum wage can influence the employees’ compensation, thus might impact their perception of pay (Rice et al 1990; Milkovich et al 2011) Employees’ cultural background has been found to influence their view in judging compensation fairness (Hundley & Kim 1997) Literature review on the relationship between compensation and employees' perceptions of pay equity presents significant interests of many scholars However, it is still a lack of comprehensive studies on this topic in the context of transitional economies To fill the gap in the literature, this study thus explores the impacts of compensation components to the perception of pay equity in Vietnam Hypothesis development Effect of minimum wage Minimum wage contributes to social fairness by forcing employers to pay workers at least equal to a socially acceptable minimum (Bradshaw et al 2008; Milkovich et al 2011) This protects workers from exploitation, especially ones in the low-income group (Lee 1999; DiNardo et al 1996) Minimum wage increases pay equity at the lower end of the wage distribution (David et al 2016) The relevant studies on the relationship between minimum wage and pay equity suggest the following hypothesis: Hypothesis 1: Minimum wage positively influences the perception of pay equity in Vietnamese SOEs Effect of salary Regarding pay equity and pay satisfaction of salary, Rice et al (1990) showed that the actual amount of salary that an individual receives well explains about 25 percent of the variance in pay satisfaction Martocchio (2006) and Milkovich and Newman (2005) also found when employees are satisfied with the amount of their salary, they tend to be happy with the total payment received Similarly, regarding the salary procedure, several authors have argued the positive relations between salary procedure and pay satisfaction Employees who are happy with the payment procedure will feel happy with their total payment (Miceli & Lane 1990; Shrivastava 2018) The pay satisfaction literature, concluding that the relationship between perception of pay equity and pay satisfaction is always positive (Dyer & Theriault 1976; Heneman 1985) Based on these studies, the relationship between salary and perception of pay equity is hypothesized as follows Hypothesis 2: Salary positively influences the perception of pay equity in Vietnamese SOEs Effects of benefits Hypothesis was developed from a series of studies on the positive influence of benefit on pay satisfaction The effect of benefit on pay satisfaction is used as a dimension measuring pay satisfaction (Heneman 1985; Miceli & Lane 1990) The flexible benefit plans enhanced employees’ pay satisfaction (Barber et al 1992) Employees rated their current level of benefit coverage as higher tended to be more satisfied with their pay package (Williams 1995) Employee perceptions of benefit justice positively impact their pay satisfaction (Davis & Ward 1995) This is a logical hypothesis of a positive relationship between benefit and perception of pay equity in Vietnamese SOEs, as follows: Hypothesis 3: Benefit positively influences the perception of pay equity in Vietnamese SOEs Effects of relational return Armstrong and Murlis (2007) argued that relational returns such as learning opportunities and promotion opportunities all act as powerful motivators and increase the employee perception of pay equity and satisfaction with the pay system Practically, relational returns have positive impacts on the perception of pay equity among employees (Scott et al 2011) Based on these findings of previous studies, this research hypothesizes the relationship between relational returns and perception of pay equity in Vietnamese SOEs as follows: Hypothesis 4: Relational return positively influences the perception of pay equity in Vietnamese SOEs Ranking effects of compensation components Milkovich et al (2011) propose that individuals perceive salary to be the main source of their financial security In other words, monetary compensation or salary plays a vital role in ensuring employees' well-being Salary is also a key compensation component reflecting the value of skills, experiences or other inputs that employees bring to completing their jobs (Adams 1965) Therefore, it is expected that salary will have the strongest impact on the perception of pay equity among compensation components, as expressed in the following hypothesis: Hypothesis 5: Among compensation components, salary has the strongest impact on the perception of pay equity in Vietnamese SOEs By developing the above research hypotheses, this research can propose relationships between compensation components and perceptions of pay equity in a conceptual model in Figure Unit of analysis and Demographic factors This research focuses on the perceptions of employees about their compensation and pay equity; thus, the unit of analysis is at the individual level The impacts of internal and external contexts of the firm that might directly or indirectly influence employee perceptions are also examined to provide a comprehensive explanation of the relationships between compensation and individual perceptions of pay equity in Vietnamese SOEs The focal point of this research is not on the impacts of employees’ demographics on perceptions of pay equity; however, due to the potential impacts of these demographics on the regression results, these factors will be controlled for when examining the relationships between compensation and perceptions of pay equity in Vietnamese SOEs H5 Minimum wage H1 H2 Salary Perception of pay equity H3 Benefits H4 Demographic factors Relational returns Figure 1: A conceptual model of relationships between compensation components and the perception of pay equity (Source: Adapted from Milkovich et al 2011; Government of Vietnam 2012; Adams 1965) Methodology The questionnaire is designed to measure variables in the research, including perceptions of pay equity; and the four main compensation components, namely, minimum wage, salary, benefits, and relational returns; and the eleven sub-components of the four main components Each component of both groups was measured by three items To measure the compensation components, the researcher referenced the Pay Satisfaction Questionnaire (PSQ) suggested by Heneman and Schwab (1985), Survey of Compensation Policies and Practices by WorldatWork (2003), and Employee Satisfaction Survey Sample by ECO Canada (2015) These questionnaires were referenced as a starting point for a systematic approach to measuring multiple dimensions of compensation components The key points in the PSQ survey are to measure levels, actual amount, and procedure of compensation components The surveys suggested by WorldatWork (2003) and ECO Canada (2015) guided items measuring the relational returns in the present survey It also has questions about the general information of the respondent This comprises questions about gender, age, educational level, position, working length, income level, SOE type, and industry The questionnaire includes 48 multiple-choice items Each multiple-choice item was constructed with a five-point Likert scale, comprising Very satisfied, Satisfied, Neutral, Dissatisfied, and Very dissatisfied The questionnaire was translated into Vietnamese via a forward and backward translation process, due to all the respondents being Vietnamese The questionnaire was tested in a pilot survey, and revised in response to the feedback from the pilot test The target sample of the survey was employees in SOEs which were chosen randomly from the list of 498 SOEs on the government website of enterprise information In total, 800 questionnaires were sent to the participants, and the researcher received 655 responses After data cleaned, there were usable cases are 650 Results Measure reliability and validity The study used an internal consistency test by applying Cronbach’s alpha coefficient to ensure the reliability of the measurement, exploratory factor analysis (EFA) to investigate the construct validity of the measure and the Harman single-factor test to check common method variance (CMV) after the main data collection had finished Cronbach’s alpha of the measurements, ranging from 0.741 to 0.911 According to Hair et al (2010) and Kline (2015), these are all above the acceptable lower limit, and in the very good and excellent ranges of internal consistency These results confirm that the measurements were accurate and consistent For EFA outcomes, a cut-off point for factor loading at 0.50 was employed, to guarantee that each item for each factor was significant The items measuring each theoretical variable are loaded onto component, thus the measurements of these theoretical variables have construct validity (See Table and Table 2) Table 1: Independent variables- reliability and EFA results Factor Indicator α Factor loading Minimum wage How minimum wage is determined The current general minimum wage The current regional minimum wage How your salary is determined The level of your salary The amount of salary you received How your welfare is determined The general benefits of the welfare package Total welfare you have received 0.813 878 915 783 859 881 782 899 814 890 Salary Benefit 0.791 0.837 Relational return The fairness of policy on career advancement in this company The general career development in this company Your chances in career development in this company 0.855 897 942 799 Table 2: dependent variable- reliability and EFA results Factor Indicator α Factor loading Perception of pay equity The differences among levels in your company’s pay structure The differences in pay of comparable jobs in the company The differences in pay between yours and comparable jobs in SOE system 0.791 833 869 816 For Harman’s one-factor test to figure out CMV, all items were entered into EFA using unrotated principal components factor analysis According to Podsakoff et al (2003), if the new common latent factor explains more than 50% of the variance, then CMV may be present The findings summarized in Table show that the new common latent factor only explains 32.794% (