Management 314
Exam 3: Essay Question
Due: 11 December 2014

Essay 1:
Equity theory is based on the notion that individuals compare their inputs and outcomes with those of relevant others. If inequity is apparent based on the ratios, tension is created amongst individuals and one individual will be motivated to reduce the inequity by working less hard. One of the most important types of equity for compensation is internal equity, which refers to comparisons among jobs inside an organization. Internal equity is determined by comparing the pay rates of each job, bearing in mind the relative net worth of each job to the organization. 
The compensation committee for an IT company, who is a pay leader, is in the process of creating a pay structure for the company using a point job evaluation system. The job that is currently in question is an entry-level computer engineer. The compensable factors are weighted out of 1000 points and those that have been selected for this job are education (200 pts), experience (200 pts), complexity (250 pts), and responsibility (350 pts). Education is divided into five degrees: Doctorate (200), Masters (150), Bachelors (100), Associates/ Some College (50), High School or less (0). Experience is divided into five degrees: 10+ years of experience (200), 6-9 years of experience (150), 3-5 years of experience (100), 1-2 years of experience (50), little to no experience (0). Complexity is divided into four degrees: very complex (250), complex (150), somewhat complex (50), not very complex (0). Finally, responsibility is divided into four degrees: supervisor (350), senior engineer (250), engineer (150), junior engineer (50).
The computer engineer job would receive 100 pts for education, as a bachelor’s degree is needed, 0 pts for experience, since it is an entry-level job, 250 for complexity because the position is that of an engineer, which requires a lot of math, design, and analytical thinking, and 150 for responsibility, since the position is for that of an engineer. In total, this job would receive 500 out of 1000 pts. This could be compared to the job of a senior engineer, who would receive 850 out of 1000 pts for added experience and responsibility.

External equity refers to the comparison of jobs outside of the organization. External equity also examines how competitive an employer’s pay is in the external market, which could be leading, lagging, or matching the competition. This IT company is a pay leader. In order to find out about other pay levels, we survey relevant exterior markets, which tells us what other employers are paying for similar key (benchmark) jobs and skills. Below is the market pay policy line, which shows the relationship between the relative worth of jobs and their wage rates. Salaries for key jobs are plotted based on the point system, and then we are able to estimate the salary for non-key jobs (specific to the organization) at any point on the line based on the point system and the regression line. The pay policy line may be the same as the market pay policy line, but since this company is a pay leader, the pay policy line will be above it (as shown. For example, the market rate for the computer engineer job is $60k according to our pay policy line for 500 pts, whereas the rate for the IT company is represented by the dot, which is higher than the market rate at about $68k. Once the job evaluation is completed, the pay structure process is completed by establishing pay grades, which are created by grouping a variety of jobs that are similar in terms of worth (points). For example, if a job is above the maximum limit for a pay grade, it is considered to be a red circle job, and if it is below, it is considered to be a green circle rate. When a pay grade is developed, all the jobs within the grade have the same pay range. .￿