Internal and External Equity Compensation
Internal and External Equity Comparison
HRM/324
02/11/2013
Internal and External Equity Comparison
Compensation packages are one of the most valuable pieces of the puzzle when an organization creates a program designed to attract and retain suitable employees. A well designed compensation package can ensure that employees are not only attracted to beginning work at an organization, but are also willing to stay within a corporation over time. A higher retention rate for employees can increase productivity and reduce costs for an organization over time. Two of the factors that affect a company’s compensation plan are internal and external equity. In this paper, internal and external equity is explored, including the advantages and disadvantages of both, and an explanation of how these types of plans support an organizations total compensation objective and how they relate to the organization’s financial situation.
Internal equity refers to the equality that exists between employees who work in similar positions within the organization. It also takes into account that an employee is compensated based on the values of their jobs within the organization. (Lederer & Weinberg, 1995). In developing a compensation package based on internal equity requires a corporation to develop and evaluate the compensable factors that will go into setting and individual employee’s pay. (Romanoff, et. Al 2012). After determining compensable factors (such as skills required, educational requirements, etc.), companies should look at the external job market to look at how the company’s compensation package relates to similar organizations in the market. (Frye, 2004). Intel and DuPont are two companies that utilize internal equity. At Intel, compensation for the CEO is determined by comparing the top five executive’s cash compensation relative to the 100 highest paid employees at the company, checking for internal consistency. (Vivient, 2005). This lines up well with
HRM/324
02/11/2013
Internal and External Equity Comparison
Compensation packages are one of the most valuable pieces of the puzzle when an organization creates a program designed to attract and retain suitable employees. A well designed compensation package can ensure that employees are not only attracted to beginning work at an organization, but are also willing to stay within a corporation over time. A higher retention rate for employees can increase productivity and reduce costs for an organization over time. Two of the factors that affect a company’s compensation plan are internal and external equity. In this paper, internal and external equity is explored, including the advantages and disadvantages of both, and an explanation of how these types of plans support an organizations total compensation objective and how they relate to the organization’s financial situation.
Internal equity refers to the equality that exists between employees who work in similar positions within the organization. It also takes into account that an employee is compensated based on the values of their jobs within the organization. (Lederer & Weinberg, 1995). In developing a compensation package based on internal equity requires a corporation to develop and evaluate the compensable factors that will go into setting and individual employee’s pay. (Romanoff, et. Al 2012). After determining compensable factors (such as skills required, educational requirements, etc.), companies should look at the external job market to look at how the company’s compensation package relates to similar organizations in the market. (Frye, 2004). Intel and DuPont are two companies that utilize internal equity. At Intel, compensation for the CEO is determined by comparing the top five executive’s cash compensation relative to the 100 highest paid employees at the company, checking for internal consistency. (Vivient, 2005). This lines up well with
References: Armstrong, M. (2007). A handbook of employee reward management and practice. Kogan Page Publishers Heneman, R.L. (2002). Strategic reward management: design, implementation, and evaluation. Lederer, J.L. & Wienberg, C.R. (1995). Equity-based pay: the compensation paradigm for the re-engineered corporation. The Chief Executive. Retrieved February 9, 2013, from http://findarticles.com/p/articles/mi_m4070/is_nl102/ai_17015394/ Mathis, R.L. & Jackson, J.H. (2008). Human resource management (12th ed.). USA: Cengage learning. Romanoff, K. et al (2012). Pay Equity: Internal and external considerations. Retrieved February 9, 2013, from http://theperfectpayplan.typepad.com/Pay_Equity_Article.pdf Vivient Consulting, (2005) What other executives earn affects CEO comp at Pier 1, Rent-A-Center BASE and BONUS newsletter. Retrieved February 9, 2012, from http://www.vivient.com/graphics/Base_and_bonus_June_2005.pdf