Internal Equity vs. External Equity: Compensation Comparison

Updated on June 16, 2020
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What Is Equity Pay?

The internal and external analysis allows an organization to evaluate the compensation plan based on the fairness of employee compensation. The impact of the internal and external forces is important when dealing with pay structure. Equity pay is ensuring that all parties involved are receiving the same benefits based on the internal and external factors.

Internal checklist.
Internal checklist. | Source

Internal Influences

Internal influences involve employees doing the same job but with different job responsibilities, or even employees working in different departments but for the same company. The structured pay scale could reflect the highest pay grade at the top and the lowest pay grade at the bottom based on job responsibility. The pay scale allows the employee to view the benefits he or she will receive in relation to the responsibility given.

Fair pay and work conditions are an important factor to employees and influence morale. According to Martocchio (2008), “Job evaluation is key for casting internally consistent compensation systems as strategic tools. Compensation professionals use job evaluation to establish pay differentials among employees within the company.”

The evaluation outlines differences and similarities in job responsibilities, which can be described in the experience level, performance, and knowledge. Internal equity ensures that fairness is maintained throughout the organization based on similar responsibilities.

External Influences

Understanding the external influences is just as important as the internal factors. An evaluation of external factors allows the organization to remain competitive in the market. Organizations are competing to attain the best employees to help their company grow. In turn, pay is taken into consideration to compete with other similar organizations. The external wage comparisons can be the same union, geographical area, job similarity, certifications, or the size of the company.

Human Resource Managers are responsible for assessing the outside competition properly in regard to the above mentioned to maintain a competitive advantage with similar companies. An employee looking to join the organization can easily find the mean or medium pay based on the geographical area and job description. An evaluation of the marketing prices can also be used to retain the employees already on staff.

Competitive business will seek out employees from other companies, so it is important to ensure that the organization does not allow the competition to steal their employees. This is referred to as poaching or raiding.

A comic about poaching employees.
A comic about poaching employees. | Source

Advantages and Disadvantages

Internal and external factors are important tools used to define and implement a solid base pay, cash compensation, or benefits.

Internal Equity

Advantages: Internal equity allows the organization to warrant an equal pay among the employees based on the pay scale or performance.

Disadvantages: The disadvantage of internal equity is the perception of the employees. An employee can perceive that he or she is doing the same job as another employee and should receive the same pay. Perception of employees may differ from the perception of the employers. The employee may feel that his or her individual performance is the same or above in comparison to the employees who are performing. It creates tension and lowers morale within the workplace.

External Equity

Advantages: External equity advantages allow the organization to remain competitive for sought out profession or geographical area.

Disadvantages: The disadvantages of external equities are the cost to remain in a competitive market.

Which Is More Important: Internal or External Equity?

It is still undecided whether internal or external equity is more important, and there is no right or wrong answer (Kent Romanoffken, 1986, p. 8, Balancing external and internal equity). Finding a balance is important. A fair and honest compensation policy that is communicated to the employees and defines the value and worth of an employee is best. The external and internal compensation plan should meet the organizational goals in order to create the culture it seeks.

How Equity Applies to Federal Workers

Compensation is an important tool that is used by the government to attract employees who have the skill, knowledge, and experience that can meet the strategic goals of the organization. Total compensation includes salary and benefits. The government uses a pay scale focusing on levels of position, skills, and qualifications.

According to U.S. Department of Health & Human Services (n.d.), “A number of different pay systems are used for Federal employment; however, the General Schedule (GS), the Federal Wage System (FWS), the Senior Executive Service (SES), or the Administratively Determined (AD) covers most employees within HHS” (Salary Information).

The internal quality is achieved by providing pay structure that is consistent and uniform within the organization. Other benefits such as retirement, health benefits, leave, and life insurance are offered to all the employees. It allows an organization to offer the employees pay and benefits that meet internal equality and compete with private organizations.

The Importance of Balance and Clarity

Internal and external equity is important for companies to remain competitive with other organizations, attract the right employees, and retain current employees. There is no right or wrong focus; the best option is to maintain balance when focusing on internal and external motives. A structured and clear benefits plan could limit confusion over the worth and value of employees.

References

KENT ROMANOFFKEN, B. B. (1986). Pay eguity: Internal and external considerations. Compensation and Benefits Review (1986-1998), 18(3), 17. Retrieved from http://search.proquest.com/docview/196742747?accountid=458

Martocchio, J.J. (2008). Strategic Compensation: A Human Resource Management Approach (5th ed.).

U.S. Department of Health & Human Services. (n.d.). Pay and Benefits. Retrieved from http://www.hhs.gov/careers/pay/

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

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