Evaluate the business problem described and discuss recommendations: usiness problem A CEO made the decision that he wanted to ‘fix the pay issue once and for all’ within his business. It was an international brand known for luxury and service, but many employees felt undervalued and unappreciated, and were dissatisfied with their current compensation. The solution was simple. The solution The CEO announced that the company was going to provide a 15 per cent raise for all 2,000 employees. This equated to an investment of more than $35 million in annual payroll. The announcement was made six months prior to the next yearly employee survey. To the leadership team’s dismay, the subsequent survey showed a decline in employees feeling recognized and rewarded of more than 7 per cent, which was statistically significant for a population that size. How could a significant increase in compensation leave employees feeling less rewarded? The failure came in how it was communicated and presented to the organization. Many employees left comments on the employee survey along the lines of ‘I’m a top performer on my team, and I received the same raise as everyone else’. The truth was that, in most cases, top performers were already paid more, so 15 per cent on their base salary was actually a larger amount than their co-workers received. However, this fact was clearly lost on many employees. More importantly, the negative impact the raise had on perceptions highlights something important about employee psychology. Equity theory states that employees anticipate and desire to receive a return on their work equal to that of what they invest in terms of knowledge, skills, ability, loyalty and effort. This wasn’t taken into consideration when rolling out the raise. The organization made no connection between performance, results or value and the pay increase itself. At best, it felt like a random but nice increase in pay. At worst, it reinforced an already held belief that the organization didn’t notice, recognize or reward high