Internal and External Equity Comparison

Internal and External Equity Comparison

Two factors that affects an organizations total compensation plan are both internal and external equities. A well designed compensation package attracts and retains talented employees to the organization. The objective of this paper is to explore internal and external equity, outline the advantages and disadvantages of both, and provide an explanation of how they support an organizations total compensation objective as well as how they relate to the organization’s financials.

Internal Equity

Internal equity is the fairness in pay that exists between employees who work in similar positions within the organization. It is important to note that the perception of fairness is that of the employees and if an organization wants to develop and maintain a culture of fairness, then internal equity must be strongly factored in. The compensation factors that are used to determine an employee’s salary should be developed and evaluated by the organization. The relative knowledge, skills, experience and sustained performance levels of all associates who are performing the same job duties should be taken into account. After identifying these compensation factors, the organization should assess market competitiveness to ensure alignment with the current external market rate.

Intel

Intel follows what most refer to as the “internal pay equity check” model. At Intel, internal equity is checked at various levels within the organization to ensure internal consistency between the CEO and senior managers. The CEOs compensation is determined by comparing the top five Executives cash compensation to the 100 highest comparative paid employees within the organization. According to Internal Pay Equity Methodologies (2001-2016), “To motivate staff and avoid excesses, chief executives' pay should remain within a small multiple of the pay of their 25 most senior managers. Making 20 times more is lunacy.” (GE CEO Jeff Immelt Speaks Out for Internal Pay Equity)

Advantages and Disadvantages of Internal Equity

Intel’s approach to internal equity has both its advantages and disadvantages. For example, an advantage to their approach is employees aware of what others within their level are paid within the organization. A disadvantage to this approach is employees may lack motivation as they would prefer to be paid based on their individual contribution. Like all organizations, there are potential risks to the organizations internal equity; however, for Intel, it seems the compensation plan has been positive.

External Equity

External equity is the perception of the employee as it pertains to their pay compared to others in similar positions outside the organization, but within the same industry.