Internal and External Equity

Internal and External Equity

        Employees always seek a workplace where they are treated fairly.  When designing compensation systems, an employer must find a balance between employee motivation and the organizations labor cost (Martocchio, 2014).  Employee motivation is part of the internal equity, and the organizations labor cost is the external equity.  Internal equity is the fairness in employee wages for similar jobs and responsibilities within an organization.  When employers pay a wage rate that is equal to the internal value of each job, internal equity exists (Wagewatch, 2016). 

        When developing a total compensation package based on internal equity, a thorough job analysis and job evaluation comparison of the job is first needed to determine the value of the skill, education, and experience required to perform the job.  The internal worth along with the discretionary benefits are all part of the total compensation package. The compensation package should progress the company's strategic objectives and human recourses along with the  organizational management should provide an aligned reward strategy.  Creating a total package of rewards, including wages and salaries, incentives, and benefits will generate the employee behavior the company wishes to support in order to achieve its competitive strategy.  

        ContEx is a company that uses internal equity to fit the stores budget.  ContEx uses internal equity by evaluating all of its pay levels with the executive pay levels.   ContEx allows its employees the opportunity to pick and choose the benefits that suit their individual or family needs. By allowing their employees to choose their benefits, ContEx is expecting to lower their turnover rate.  Some advantages of internal equity is the perception of fairness by the employees.  Studies theorize that workers continuously evaluate and monitor their pay against their peers (Kokemuller, 2016).  Internal equity reduces the exposure to discrimination by being transparent about wages and wage levels.  By paying a fair wage, you remove the employees ability to allege unfair treatment.  Internal equity ensures consistent standards and a team structure.  A major disadvantage of internal equity is, if the employer's perception the fairness is not the same perception as the employee's, there will be morale and production problems (Kokemuller, 2016).

        Where internal equity is a measure of fairness, external equity is a measure of market competitiveness through job functions and duties (Wagewatch, 2016).  External equity exists when wages are equal or close to pay in the external market.  The total compensation between ContEx, FedEx and UPS are similar, but vary slightly depending on job duties.  One of the main advantages of external equity is, it allows the organization to be competitive.  The cost of staying competitive is the disadvantage.  ContEx offers many benefits; health, dental, vision, paid time off, and others which the employee can choose from as a part of the total compensation package.  Companies participate in external equity use empirical data, external research, and other companies information shared from internal surveys to evaluate their total compensation packages.  
        When it comes to internal equity and external equity, there is no clear standout in which one is better.  There is no doubt that companies that can operate and continue to be competitive with other companies.  Employers must find a balance between internal equity and external equity.  Balancing employee motivation and the cost of labor within a company is like a fine balancing act.  Companies that compensate to motivate their employee to perform their best, while keeping the cost manageable will achieve the companies goals and objectives (Martocchio, 2014).  Companies that place the employee first, before making money will build the trust and teamwork needed to succeed. The total compensation package should be a tool for recruiting and retaining the best talent.  Employees compare their equity to others in the same organizations, while companies compare their equity to other organizations.