People Operation: Outcome Fairness vs. Process Fairness for Employees

Ask your employees what fair treatment is, and the chances are that you will get different answers from each one.

But what do employees mean when they talk about or require fairness? There is no pat answer. In 1964, there was an obscenity court case in the United States, and in one session of the case, there was an argument about the definition of pornography. Justice Potter Stewart made a famous statement, "We all know what porn is when we see it." This statement was shortened to the infamous adage: "I know it when I see it."

So, although not everyone might have the exact definition of fair treatment for employees, those employees know very well if they have been treated fairly or not.

Jack Welch, one of the most prominent CEOs in the corporate world in the USA, had to retire from General Electric (GE) after leading it for about 20 years. But he could not leave the leadership of the humongous entity lingering in limbo after what he built and achieved. He followed what the economists Eddie Lazear and Sherwin Rosen indicated in their 1981 paper "Rank-Order Tournaments as Optimum Labor Contract" that in some circumstances, tournaments among staff are an excellent tool to decide who gets promoted. Jack Welch followed this concept to determine his successor. He named three executives, Jeff Immelt, Jim McNerney, and Bob Nardelli, as the contenders for the future CEO. He gave each of them a big division to lead and one year to deliver preset key performance indicators. Jeff Immelt won. Despite his loss, Jim McNerney said, "It was a fair game." 

Why did he call it a "fair game" despite his loss?

Fairness is not only about the outcome; it is the process. There is outcome fairness, and there is process fairness. No leader or organization can guarantee outcome fairness because it is unattainable. Every employee has their view of the exact reward they should get. But every organization could, and should strive to, achieve process fairness. 

You might give your employee ten salary multiples as a bonus for her achievements, which she might not have necessarily expected or even dreamt of. Suppose she finds out her colleague got a 20-salary bonus when he was a relatively mediocre performer. In that case, she will feel she was not treated fairly even though her bonus exceeded her expectations. Her gripe is about the process, not the amount they both got. She is questioning the integrity of the process.

On the other hand, assume that the company faced financial troubles. Despite her outstanding achievement, she was given only a 2-salary bonus, much to her disappointment. Still, when she finds out that those who did not perform as she did were given a reward proportional to their run-of-mill performance, she will be content despite the lower amount. She trusts the system and process. In his 2006 article "Why it's so hard to be fair?" in Harvard Business Review, Dr. Joel Brockner argued that even in layoff times, when employees perceive the process of terminating contracts due to financial difficulties to be a fair process, the chances are meager that they will sue their employers for wrongful dismissal.

Why is fairness essential?

There is a vast amount of literature on the correlation between fairness in the workplace and productivity, revenue generation, and impact on customer relations. Unfair practices in workplaces lead employees to feel disrespected and taken advantage of. These two feelings could lead to fraud, negligence, disengagement, disenfranchisement, and attrition of promising talents. The feeling of being disrespected breeds in employees the rationalization of committing fraud and intentional error.

High-quality skill sets cannot survive in workplaces intoxicated with a culture of substandard professionalism and conduct, and they are always on the lookout for better places and opportunities. The firm will always face difficulties in meaningfully implementing risk management, governance, compliance, and internal control practices among disenfranchised employees. Having the best-written policies and procedures is something, and implementing those documents in practice in a profound manner that could upgrade the conduct of the whole organization is something else.  

What causes the perception of the unfair process?

1.     Lack of transparency. In the Jack Welch successor case, everything was transparent; the contenders were informed of the tournament, the duration, and the KPIs, and the tournament was announced to the company and the world. Decision-makers must rid themselves of the black-box culture to instill a meaningful transparency culture. At Google, the most well-known company for people operations analytics, they hold weekly gatherings at which the founders and top executives attend. Employees at these gatherings can raise questions about any topic, from compensation to strategy to employment conditions, and the executives listen to every question—no red tape.

2.    The culture of favoritism. It is part of human nature to like and dislike others. However, a prudent management team does not allow that bias to govern how employees are treated and rewarded, irrespective of their organization's hierarchy. Employees pay attention to everything the executive management says and does. The culture of black box and favoritism is a recipe for disgruntled employees and talent migration. Matthew Mitchell et al. (2019) at George Mason University found a positive correlation between favoritism and employees' behaviors and perceptions.

3.    Decision-makers are not embedding themselves into instilling a fairness culture by being role models. It is counterproductive if those who herald the values of fairness make exceptions to the enterprise policies or procedures. At Toyota, the cradle of lean thinking and leadership, the personification of values and principles and leading by example are fundamental to its philosophy. Leaders at Toyota are the live embodiment of the philosophy of the firm. They believe in it, religiously apply it, and teach it. Japan's economy was significantly damaged during World War II, and the country suffered from hyperinflation. Toyota went through significant financial difficulties. Toyota had a principle that no employee should be laid off on the grounds of financial challenges. But the CEO had no choice but to ask some employees to take "voluntary retirement." Disgruntled employees took to the street, expressing their anger that their firm reneged on its principles. The CEO left the company on "early retirement" and never returned, even when the situation quelled. The angry employees understood the CEO's message – he led by example.