However it is measured, "the fairness of the paycheck remains extraordinarily important for worker morale and performance," says consultant Sirota. And these days, a consideration of fairness should take into account the lavishness of executive-pay packages. Forced to pass on higher health-care premiums to employees, for example, Xcel also announced recently that executive perks such as no-deductible medical coverage, reimbursed financial-planning services, and company-paid home security systems were being eliminated.

"Employees understand that executives are going to be paid more," says Xcel's Connelly. "But they also respond well when they see a company being consistent in its actions." Applying standards that distinguish between top performers and everyone else — and reward them accordingly — may not be easy. But as Sibson Consulting's Hellerman notes, "If you're going to give merit raises and add to your fixed costs, you might as well do it well."

Roy Harris is a senior editor at CFO.

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