Fairness in Skill-Based Pay

Abstract

The Fairness in Skill-Based Pay scale, developed by Cynthia Lee, Kenneth S. Law, and Philip Bobko (1999), is an empirically validated psychometric instrument designed to measure employee perceptions of justice and equity within skill-based pay (SBP) compensation systems. Skill-based pay diverges fundamentally from traditional job-based pay models by compensating workers for the range, depth, and types of work-related capabilities they master and apply, rather than the specific job title or hierarchy they occupy. Because SBP plans rely heavily on formalized assessment procedures to award wage increments, the perceived fairness of skill evaluation and certification serves as a critical psychological determinant of program viability, worker motivation, and organizational effectiveness.

The scale consists of four targeted items assessed on a 7-point Likert-type scale ranging from 1 (strongly disagree) to 7 (strongly agree). Structurally, the instrument operates as a parsimonious, unidimensional measure capturing core operational facets of procedural, interpersonal, and distributive justice specific to skill-based pay schemes. These facets include the perceived competence and objectivity of supervisory certification decisions, the accuracy and content validity of task-based performance examinations, the transparency of the skill-advancement pathway, and the global fairness of the compensation distribution. In initial and subsequent validation studies across longitudinal industrial settings, the instrument demonstrated strong internal consistency reliability (Cronbach's $\alpha = .80$). Confirmatory factor analyses demonstrated robust discriminant validity, distinguishing perceived fairness from neighboring constructs such as skill training adequacy, plan comprehension, advancement opportunities, pay satisfaction, and perceived compensation benefits. The scale provides researchers and compensation specialists with a targeted, diagnostically sensitive tool for evaluating compensation climate, predicting employee turnover intentions, and optimizing reward architecture.

Keywords

Fairness in Skill-Based Pay, Skill-Based Pay, Organizational Justice, Procedural Justice, Distributive Justice, Compensation Satisfaction, Certification Testing, Employee Motivation, Psychometrics, Industrial-Organizational Psychology

Authors

The scale was developed and psychometrically validated by a collaborative research team in organizational behavior and human resource management:

• Cynthia Lee, Ph.D. — Professor of Management and Organizational Development at the D'Amore-McKim School of Business, Northeastern University. Dr. Lee has published extensively on employment relationships, psychological contracts, organizational justice, and compensation systems in leading management periodicals.
• Kenneth S. Law, Ph.D. — Professor Emeritus and former Department Chair of Management at the Chinese University of Hong Kong (CUHK). Dr. Law is internationally recognized for his methodological and conceptual work on structural equation modeling, multidimensional constructs, emotional intelligence, and human resource management systems.
• Philip Bobko, Ph.D. — Professor of Management and Psychology at Gettysburg College and previously affiliated with Rutgers University. Dr. Bobko is a preeminent quantitative psychometrician whose research focuses on testing theory, cognitive ability, utility analysis, and structural equation modeling in industrial-organizational psychology.

Purpose

The primary purpose of the Fairness in Skill-Based Pay scale is to quantify employee perceptions of systemic, procedural, and administrative equity within organizations that implement skill-based compensation architectures. Traditional compensation systems—such as point-factor methods or job-evaluation systems based on the Hay Guide Chart-Profile Method—tie base pay directly to job descriptions, hierarchical rank, and market pricing for static roles. In contrast, skill-based pay (SBP) systems compensate individuals for acquiring and demonstrating demonstrable proficiencies, cross-functional capabilities, and technical depth. Consequently, SBP introduces unique organizational dynamics: employees must proactively undergo continuous learning, endure formalized skill testing, and submit to supervisory evaluations to attain higher pay grades.

Under an SBP structure, compensation increments do not depend merely on seniority or broad performance appraisals; they hinge upon the successful passage of discrete, high-stakes competency certification tests. When employees perceive these assessment gates as subjective, biased, or disconnected from genuine job execution, the motivational mechanics of the compensation plan collapse. Conversely, when employees perceive the certification framework as transparent, reliable, and standardized, their self-efficacy and organizational commitment increase. Lee, Law, and Bobko (1999) designed this scale to address a critical empirical gap: the lack of an objective, targeted instrument to gauge whether employees believe their SBP plan operates with procedural integrity and administrative legitimacy.

In applied organizational development, human resource professionals and compensation consultants utilize the scale as a diagnostic barometer during the post-implementation and maintenance phases of an SBP transition. Low composite scores pinpoint acute operational failures, such as inconsistent grading by front-line supervisors, flawed technical testing rubrics, or an overarching sentiment that pay progression is unattainable or arbitrary. In academic research, the instrument provides an indispensable operationalization of pay-specific justice, allowing investigators to model how procedural fairness mediates the relationship between pay plan design characteristics (such as training provision, rotation opportunities, and plan understanding) and distal workforce outcomes (such as voluntary turnover, pay level satisfaction, collective productivity, and organizational citizenship behaviors).

Psychological Construct

The construct assessed by the scale is Perceived Fairness in Skill-Based Pay, a multidimensional theoretical phenomenon operationalized into a unified, parsimonious evaluative index. Within industrial and organizational psychology, compensation fairness comprises cognitive evaluations of both the processes governing pay allocation and the equity of the resulting pay outcomes. The scale captures three interrelated justice dimensions contextualized specifically to competency-based compensation:

1. Supervisory Certification Objectivity (Procedural and Interactional Justice)

In skill-based compensation regimes, direct supervisors act as frontline gatekeepers who verify whether a technician or knowledge worker has attained the requisite operational mastery. Item 1 (“Supervisors do a good job of certifying employees for skill-based pay raises”) taps into employees' belief in the competence, impartiality, and accuracy of supervisors throughout this evaluative milestone. If supervisors are perceived as indulging in favoritism, halo errors, or idiosyncratic grading standards, the pay system loses its procedural integrity. This facet reflects interpersonal justice and informational transparency, reflecting Leventhal's (1980) foundational justice criteria of bias suppression and accuracy.

2. Measurement and Content Validity of Competency Testing (System Integrity)

Unlike standard merit-pay arrangements that rely on subjective annual reviews, SBP requires rigorous testing instruments—written assessments, live work simulations, or practical equipment demonstrations. Item 2 (“The skill-based pay certifications are a fair test of employee ability to perform a task”) evaluates the perceived content and construct validity of the certification process itself. It assesses whether workers believe the test faithfully mirrors real-world task demands rather than irrelevant minutiae or artificially punitive barriers. This dimension encapsulates the justice principle of standard representativeness and operational relevance.

3. Instrumentality and Mastery Predictability (Expectancy-Justice Convergence)

Item 3 (“If an employee really knows how to perform the tasks that make up a skill level, the employee will be able to pass the certification tests for that skill level”) operationalizes the psychological alignment between true competence and systemic reward attainment. This construct bridges cognitive justice theory with Vroom's expectancy theory, specifically measuring the employee's subjective belief that genuine task capability directly translates into passing the certification barrier (Expectancy and Instrumentality). When workers perceive that exogenous factors (e.g., equipment failures, arbitrary grading rubrics, or supervisory caprice) decouple skill mastery from test success, perceived fairness plummets.

4. Global System Distributive Equity (Macro-Fairness Perception)

Item 4 (“The skill-based pay plan is fair to most employees”) captures a macro-level, generalized distributive evaluation. While the prior items interrogate procedural mechanics, this item synthesizes the collective outcome distribution across the workforce. It measures whether the overall remuneration scheme yields equitable, non-discriminatory, and proportionate financial distributions across the collective employee base, reflecting generalized Adams' equity principles.

Theoretical Framework

The Fairness in Skill-Based Pay scale is theoretically grounded in the convergence of two major paradigms within organizational psychology: Organizational Justice Theory and Expectancy Theory of Motivation.

1. Organizational Justice Theory

Organizational justice explores how employees judge the fairness of organizational events and how these judgments shape job attitudes and behaviors. The theoretical lineage of the Lee et al. (1999) instrument builds upon three sequential developments in justice scholarship:

• Distributive Justice (Adams, 1965): Stemming from social exchange theory, distributive justice posits that individuals evaluate the fairness of their outcomes (compensation, recognition) by calculating the ratio of their inputs (effort, education, skill execution) relative to perceived referent others. In an SBP context, workers invest cognitive effort and time to master technical modules; distributive fairness is realized when compensation raises consistently and proportionately accompany proven skill enhancements.
• Procedural Justice (Thibaut & Walker, 1975; Leventhal, 1980): Expanding justice beyond resource allocation, procedural justice emphasizes the fairness of the protocols used to determine those distributions. Gerald Leventhal established six definitive rules for procedural fairness: consistency across people and time, bias suppression, accuracy of information, correctability of errors, representativeness of all parties, and ethicality. The Lee et al. scale directly operationalizes Leventhal's accuracy, consistency, and bias suppression rules within the parameters of skill certification.
• Interactional Justice (Bies & Moag, 1986): Focuses on the dignity, respect, and informational transparency provided by decision-makers during procedural execution. Item 1 reflects interactional fairness by assessing how effectively and equitably supervisors conduct the certification exchange.

2. Vroom’s Expectancy Theory

In addition to justice models, the architecture of SBP is governed by Victor Vroom's (1964) Expectancy Theory, which posits that motivation is a multiplicative function of three cognitive components: Expectancy (belief that effort leads to performance), Instrumentality (belief that performance leads to rewards), and Valence (value placed on the reward). Within an SBP environment, certification exams serve as the structural bridge between effort and performance verification. If employees conclude that passing tests is arbitrary, the instrumentality link collapses ($I to 0$), neutralizing the motivational power of the compensation incentive. Lee et al. (1999) conceptualized fairness perceptions as the cognitive mechanism through which plan characteristics sustain this instrumentality pathway.

Validity

The psychometric validity of the Fairness in Skill-Based Pay scale was thoroughly established through a rigorous two-year longitudinal field investigation conducted by Lee, Law, and Bobko (1999) within a high-technology aerospace manufacturing plant undergoing an enterprise-wide compensation overhaul. The validation protocols encompassed construct, convergent, and discriminant validity analyses.

1. Construct and Discriminant Validity

To confirm that perceived fairness in SBP represents a standalone psychological construct rather than an artifact of general organizational climate or broad pay satisfaction, the authors executed a series of Confirmatory Factor Analyses (CFA) using structural equation modeling. The focal fairness measure was modeled alongside five theoretically proximal but conceptually distinct constructs:

• Training and Job Rotation: The availability of formal learning opportunities.
• Understanding of the Plan: Cognitive mastery of the SBP operating rules.
• Advancement Opportunity: Perceptions regarding whether upward mobility within the skill matrix was attainable.
• Perceived Benefits of SBP: Strategic utility of the program for company productivity and personal development.
• Pay Satisfaction: General satisfaction with base pay level and structure, assessed via the Pay Satisfaction Questionnaire (PSQ; Heneman & Schwab, 1985).

The hypothesized multi-factor model demonstrated superior fit compared to constrained models where fairness items were collapsed with general pay satisfaction or plan understanding. The latent fairness factor exhibited low-to-moderate cross-loadings and clean discriminant separation, confirming that employees distinguish the justice of administrative certification procedures from their general affective satisfaction with take-home pay.

2. Convergent and Nomological Validity

Nomological network analysis revealed significant, theoretically predicted correlations between perceived fairness of SBP and core compensation variables across time intervals:

• Amount of Pay at Risk: Positively correlated with fairness, indicating that employees with larger financial stakes in the system demanded and perceived rigorous certification standards ($p < .05$).
• Pay Satisfaction: Positively and strongly correlated with perceived fairness ($r \approx .45$ to $.55$, $p < .001$), supporting the premise that procedural equity in wage determination directly enhances overall pay satisfaction.
• Plan Understanding and Advancement: Moderate to high positive correlations ($r > .40$, $p < .01$) emerged between fairness and employees' understanding of how to advance through skill tiers, verifying that transparency fosters perceived equity.
• Perceived Benefits of SBP: Employees who scored high on SBP fairness consistently recognized greater personal development and organizational competitiveness ($p < .001$).

Reliability

The scale demonstrates excellent internal consistency across diverse empirical assessments. In the original longitudinal investigation by Lee, Law, and Bobko (1999), the four-item scale yielded a Cronbach's alpha coefficient of $\alpha = .80$ at baseline assessment and maintained comparable reliability ($\alpha ge .81$) in subsequent follow-up measurement waves separated by a 12-month interval.

In accordance with classical test theory and the psychometric guidelines established by Nunnally and Bernstein (1994), an alpha value of .80 meets and exceeds the standard .70 benchmark required for exploratory research and satisfies the rigorous .80 threshold demanded for established research scales in organizational behavior. Corrected item-total correlations across the four statements were uniformly high, consistently exceeding $.50$, which indicates that each item shares substantial common variance with the overarching latent fairness factor. Furthermore, split-half and composite reliability estimates (derived from structural equation modeling) aligned closely with the alpha coefficients, demonstrating that the four items reliably assess the construct without excessive measurement error.

Factor Analysis

During initial scale development and psychometric refinement, Lee, Law, and Bobko (1999) evaluated the dimensional architecture of the instrument through both Exploratory Factor Analysis (EFA) and Confirmatory Factor Analysis (CFA) utilizing maximum likelihood estimation.

Factor Loadings and Variance Extraction

Initial principal axis factoring of the four items revealed a robust, unifactorial structure. A single primary factor accounted for the majority of the total item variance, with an initial eigenvalue well above the Kaiser-Guttman criterion threshold of 1.0 (eigenvalue $> 2.45$), while the second factor exhibited an eigenvalue significantly below 0.60. Visual inspection of the scree plot confirmed a sharp inflection point after the first factor, corroborating a unidimensional representation of skill-based pay fairness.

Standardized factor loadings from the confirmatory factor model demonstrated that all four indicators loaded heavily and significantly on the latent fairness dimension:

• Item 1 (Supervisory certification effectiveness): Standardized loading $\lambda \approx .71$ ($p < .001$)
• Item 2 (Test fairness and ability measurement): Standardized loading $\lambda \approx .82$ ($p < .001$)
• Item 3 (Knowledge-test alignment / Instrumentality): Standardized loading $\lambda \approx .74$ ($p < .001$)
• Item 4 (Global plan equity across workforce): Standardized loading $\lambda \approx .68$ ($p < .001$)

Structural Equation Model Fit Indices

When evaluated within the comprehensive measurement model containing other compensation variables (skill training, advancement pathways, pay satisfaction), the measurement model demonstrated acceptable to superior goodness-of-fit indices across standard metrics:

• Comparative Fit Index (CFI): $> .93$
• Tucker-Lewis Index (TLI / NNFI): $> .91$
• Root Mean Square Error of Approximation (RMSEA): $< .06$ (90% Confidence Interval: $.042 – .078$)
• Standardized Root Mean Square Residual (SRMR): $< .05$

These fit indices substantiated that the four items cleanly converge to represent a single, parsimonious latent factor of SBP fairness without the necessity of correlated error terms or secondary higher-order cross-loadings.

Instrument / Measurement Tool

The Fairness in Skill-Based Pay scale is an employee self-report psychometric questionnaire designed for administrative ease and rapid completion in operational environments.

• Test Type: Standardized self-report rating scale / organizational climate assessment
• Format: Paper-and-pencil or digital enterprise survey
• Number of Items: 4 items
• Target Population: Hourly, salaried, technical, or manufacturing personnel enrolled in an active skill-based pay, knowledge-based pay, or competency-based compensation program
• Administration Time: Approximately 2 to 3 minutes
• Response Format: 7-point Likert-type scale scored as:
  • 1 = Strongly disagree
  • 2 = Disagree
  • 3 = Slightly disagree
  • 4 = Neither agree nor disagree
  • 5 = Slightly agree
  • 6 = Agree
  • 7 = Strongly agree
• Scoring Protocol: All 4 items are positively worded; therefore, no reverse scoring is required. A composite score is calculated by computing the unweighted arithmetic mean across all four items:

$$\text{Fairness Score} = \frac{\sum_{i=1}^{4} \text{Item}_i}{4}$$

• Interpretation Benchmarks:
  • 1.00 – 3.49: Low Perceived Fairness (indicates systemic employee distrust in testing integrity, supervisory bias, or structural plan failure).
  • 3.50 – 4.50: Neutral / Ambivalent (indicates operational uncertainty, inconsistent certification experiences, or inadequate employee onboarding into plan rules).
  • 4.51 – 7.00: High Perceived Fairness (signifies strong procedural legitimacy, valid testing gates, perceived supervisory objectivity, and positive compensation climate).

Permissions & Fee and Test Year

The Fairness in Skill-Based Pay scale was originally published in 1999 (often indexed to the 1998–1999 research stream) in the peer-reviewed article:

Lee, C., Law, K. S., & Bobko, P. (1999). The importance of justice perceptions on pay effectiveness: A two-year study of a skill-based pay plan. Journal of Management, 25(6), 851–873.

The copyright for the original article and its appendix contents is held by the Southern Management Association and published by Elsevier Science (now managed under license by SAGE Publications). The scale items were published directly in the academic appendix (p. 871) for educational, scientific, and non-commercial research use. Academics, students, and independent research scientists may reproduce and administer the scale for non-profit empirical investigations without formal fee, provided proper bibliographic citation is accorded to Lee, Law, and Bobko (1999). Commercial organizations, management consultancies, or commercial testing platforms seeking to package the scale into proprietary human resource assessment software or fee-for-service compensation audits must obtain formal copyright clearance and licensing permissions through the Copyright Clearance Center (CCC) or directly via SAGE Publications.

References

• Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in Experimental Social Psychology (Vol. 2, pp. 267–299). Academic Press. https://doi.org/10.1016/S0065-2601(08)60108-2
• Bies, R. J., & Moag, J. S. (1986). Interactional justice: Communication criteria of fairness. In R. J. Lewicki, B. H. Sheppard, & M. H. Bazerman (Eds.), Research on Negotiation in Organizations (Vol. 1, pp. 43–55). JAI Press.
• Heneman, H. G., III, & Schwab, D. P. (1985). Pay satisfaction: Its multidimensional nature and measurement. International Journal of Psychology, 20(2), 129–141. https://doi.org/10.1080/00207598508247727
• Lee, C., Law, K. S., & Bobko, P. (1999). The importance of justice perceptions on pay effectiveness: A two-year study of a skill-based pay plan. Journal of Management, 25(6), 851–873. https://doi.org/10.1177/014920639902500603
• Leventhal, G. S. (1980). What should be done with equity theory? New approaches to the study of fairness in social relationships. In K. J. Gergen, M. S. Greenberg, & R. H. Willis (Eds.), Social Exchange: Advances in Theory and Research (pp. 27–55). Plenum Press. https://doi.org/10.1007/978-1-4613-3087-5_2
• Nunnally, J. C., & Bernstein, I. H. (1994). Psychometric Theory (3rd ed.). McGraw-Hill.
• Thibaut, J. W., & Walker, L. (1975). Procedural Justice: A Psychological Analysis. L. Erlbaum Associates.
• Vroom, V. H. (1964). Work and Motivation. John Wiley & Sons.

Items of the Scale