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Internal Equity Vs. External Compensation Equity

What is the importance of internal equity vs external compensation equity to an employer and an employee? What are the advantages and disadvantages of both to a company? As a manager, how can you ensure internal and external equity in the workplace?

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Internal equity is the pay of an employee relative to the pay that the other employees of the same organization are receiving. It is the assurance that the employer pays salaries which is commensurate to each job's internal value. External compensation equity is the pay of an employee relative to the pay of employees of other organizations. Companies usually base their employees' compensation with the salaries that other companies give to their employees. Management views equity more in the external compensation perspective because they consider any or all of the following reasons: the hope of having a good reputation that can be a tool to recruit the best and most qualified employees, maintain their employees' morale in relation with other companies, belief that they are obligated to pay current wages, pressure in the competitive market, company size, or union status. Employees view equity in terms of internal as they often compare their salary with others within the organization. Hence, if there is a difference, there is always a problem as a result of dissatisfaction on the employee's part. If he/she is underpaid, he complains or asks for a raise. If he/she is overpaid, he/she can work for more hours in order to minimize the guilt of receiving more pay compared with the others. Employers are now shifting to consider the internal equity as the basis for the compensation and benefits scheme of their employees as they have started to recognize the limitations of focusing on external equity only as the basis for setting the compensation objectives. They are now starting to realize that it is more important to consider internal equity in setting wage levels. Studies have shown that employees are more concerned of the ...

Solution Summary

The solution discusses the importance of internal equity vs. external compensation equity to an employer and employee, the advantages and disadvantages of both to a company and how to ensure internal and external equity in the workplace. References included.

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