Organizations with two-tier compensation structures place new employees on pay scales which are lower than the pay scales of employees hired before the tiers were implemented. Such pay structures are controversial because they violate the basic union tenet of equal pay for equal work, and thus
Research in tiered-employment settings has found that employees on various tier levels differ in their attitudes toward pay, commitment, and job satisfaction (Cappelli and Sherer, 1990; Lee and Martin, 1991; Martin and Heetderks, 1990; Martin and Peterson, 1987; McFarlin and Frone, 1990). That research speculated that a major reason such attitudes differ is that employees in various tier groups use different pay referents (standards by which one determines pay fairness) in evaluating their work situation. No study has tested this assumption, however, and little empirical work has been done to examine the combined effects of tiers and pay referents on attitudes.
Due to the inherent inequities of tiers, employee perceptions of pay fairness may be especially salient (Martin and Peterson, 1987). These perceptions may be explained partially by equity theory (Adams, 1965; Mowday, 1983). According to equity theory, individuals compare the ratios of their perceived rewards (outcomes) to their contributions (inputs) with the perceived ratios of other individuals (social referents), or with their own experiences and expectations (self referents, unique to the individual).(1) Social referents may be either external to the organization (external referents) or within it (internal referents) (Hills, 1980). Employee judgments of pay fairness are dependent on the social and self referents used, which in turn are linked to pay attitudes (Goodman, 1974; 1977; Ronen, 1986; Scholl et al., 1987). Further, research has suggested that employees may believe they are equitably paid in relation to certain referents and inequitably paid in relation to others (Scholl et al., 1987).