Pay Equity: Internal and External Considerations
When setting pay rates, compensation managers must take into consideration the employees' perception of fair, equitable compensation.
Pay Equity: Internal and External Considerations
KENT ROMANOFF
Associate Hay Group, Inc.
KEN BOEHM
Labor Economist Pacific Telesis
EDWARD BENSON
Vice-President, Hay Group, Inc.
EqUity (or fairness), a central theme in compensation theory and practice, arises in many different contexts. Here, for example, are some major areas: • The legal and economic issue of equal pay for similar work (comparable worth). • Pay differences caused by external competition or market pressures. • The fairness of individual wage rates for people who are doing the same job. • Individual employee views of their value relative to their pay. A company's approach to equity is as important as the actual pay programs it im plements. Companies typically emphasize external equity in the design of their com pensation structures. This focus on external equity enables a ,company to develop compensation structures and programs that are competitive with other companies in appropriate labor markets. Perceptions of equity can also influence a company's abil ity to attract, retain, and motivate its employees. Employee perceptions of equity and inequity are equally important and should be carefully considered when a company sets compensation objectives. Employees who perceive equitable pay treatment may be more motivated to perform better or to sup port a company's goals. Individual employees, however, perceive equity in many different ways. Therefore, it is difficult to specify one definition of equity that is ap plicable to all s i t u a t i o n s . ' In sum, compensation equity poses a conceptual and practical challenge: how to reconcile the company's ability to pay (financial resources), desire to pay (image), and
17
COMPENSATION AND BENEFITS REVIEW
need to pay (labor market) with the employees' perception of equity (fairness). Equity
Pay Equity: Internal and External Considerations
KENT ROMANOFF
Associate Hay Group, Inc.
KEN BOEHM
Labor Economist Pacific Telesis
EDWARD BENSON
Vice-President, Hay Group, Inc.
EqUity (or fairness), a central theme in compensation theory and practice, arises in many different contexts. Here, for example, are some major areas: • The legal and economic issue of equal pay for similar work (comparable worth). • Pay differences caused by external competition or market pressures. • The fairness of individual wage rates for people who are doing the same job. • Individual employee views of their value relative to their pay. A company's approach to equity is as important as the actual pay programs it im plements. Companies typically emphasize external equity in the design of their com pensation structures. This focus on external equity enables a ,company to develop compensation structures and programs that are competitive with other companies in appropriate labor markets. Perceptions of equity can also influence a company's abil ity to attract, retain, and motivate its employees. Employee perceptions of equity and inequity are equally important and should be carefully considered when a company sets compensation objectives. Employees who perceive equitable pay treatment may be more motivated to perform better or to sup port a company's goals. Individual employees, however, perceive equity in many different ways. Therefore, it is difficult to specify one definition of equity that is ap plicable to all s i t u a t i o n s . ' In sum, compensation equity poses a conceptual and practical challenge: how to reconcile the company's ability to pay (financial resources), desire to pay (image), and
17
COMPENSATION AND BENEFITS REVIEW
need to pay (labor market) with the employees' perception of equity (fairness). Equity