Hrm 324 - Internal and External Equity Comparison

Internal and External Equity Comparison

Jennifer Thompson

HRM/324

December 15, 2015

Dr. Harrison

Internal and External Equity Comparison

Internal and external equity are the relationships of compensation for an organization. They deal with job levels and the pay associated at the levels within and outside the organization, respectively. Careful analysis and consideration is required to create an effective structure that best aligns with objectives while maintaining perceived fairness.  

Internal Equity

The relationships between jobs and their pay within the same organization is the internal equity. An organization’s pay structure should support the organization strategy, support the work flow, and motivate behavior toward organization objectives (Milkovich, Newman & Gerhart, 2014). Organizational goals may include market share objectives, productivity goals, and/or profit targets. Therefore, structures will vary. Levels are created by lumping together equal effort work, skills and responsibilities. The levels have differentials which is most often linked to the difference in pay. Work that requires more effort, knowledge, skills, or undesirable work environments are valued higher and paid more.

Employees have a perception of whether or not the pay structure is fair. Jobs in different areas and different job titles still may require the same work so should earn the same pay. Additionally, career development must be perceived for employees to feel they are treated fairly. Proper placement of attainable levels will increase how employees recognize fairness even when pay differentials are small (Milkovich et al., 2014). The benefit to having the perception of fairness is that employees respect the leaders and are more likely to heed direction (Kokemuller, 2015).

Internal equity is important for team projects as employees work best with others at the same level and pay grade or close to it). The equality hinders resentment of others who make more. Furthermore, the consistent pay fosters consistent performance standards. An organization will be able to get dependable and desired results in exchange for the compensation provided to employees (Kokemuller, 2015).

For an organization focused on internal equity, a pay structure that groups similar jobs and those exhibiting the same amount of effort into a pay grade is needed. The human resource department creates job descriptions and places them along the scale of pay. The levels all pay the same but include jobs from a variety of workgroups. The difference in pay between the levels may be significant or small, but should be attainable for career progression. Internal equity is valuable to reaching organizational goals. Budgeting for an internal equity focused organization is calculated and forecasted easily.