Internal and External Equity Comparison

Internal and External Equity Comparison

Silvia Henriquez

HRM/324

August 17, 2015

Rebekah Benson

Internal and External Equity Comparison

        For employers and employees alike a major focal point of the organization is the compensation plan that the organization offers. According to SHRM (2012), total compensation “give employees information on the complete pay package awarded to them on an annual basis, including both direct and indirect compensation.”  The items included in the total compensation package range from salary to insurance coverage, paid leave, retirement benefits and bonuses. Any perks that a company offers to their employees will also be part of the total compensation plan. The total compensation plan inherently is what draws talent to an organization.

Determining Pay

        Before an organization can decide on their compensation they must perform evaluations and analysis on the positions they will be having. Job analysis can aid in the search for comparable pay for the tasks of the job. The pay structure will encompass both inside consideration and outside influence. According to Martocchio (2009), “a strategic analysis entails an examination of a company’s external market context and internal factors.”  Once the analysis is completed they will be able to have a point of reference for a pay structure that will evolve into the compensation plan.

Equity

        Within the total compensation package an organization develops and implements there are various facets that must be determined. For example, the pay scale that determines the value of each position within the organization is vital. This is where equity comes into play. When deciding the basis of the value of each position and how to compensate monetarily there are two influencing factors: internal equity and external equity.

Internal Equity

        Internal equity is defined as “ensuring fairness in pay for employees working similar jobs” (Kokemuller, n.a.).  This means that when selecting a total compensation plan all employees must receive equal to or very similar monetary compensation aside from the indirect perks such as insurance. Internal equity focuses on the value that each employee has to the organization. To ensure that the pay is equal and comparable to their duties, experience and effort organization can use the job-based pay where they pay employees based on the type of job they do. With job-based pay promotion or increases are done on the basis that they have completed a specific task or goals met. This translates over into employees reaching company goals of growth. Due to the fact that this compensation plan is pay for job duties it will impact the financial budget right on the marker since it is not overpaying. Keeping to the budget means controlling the expenses that the organization may have, “compensation is often a company’s largest controllable expense” (Milkovich, & Newman, 2008).