Internal and External Equity Comparison` When reviewing a successful companies' portfolio to determine what makes them more successful from the next, you will find the company will have a strong compensation plan. A Compensation Plan is one of the more important aspects in the organizational environment. Before formulating the compensation plan based on internal and external equity, it is important to first understand what internal and external equity refers to. External equity is said to be prevailing in the organization when the employees are rewarded with fair compensation to those who perform similar jobs in other organizations. External equity persists when an organization's pay rates are equal to the rates prevailing in the organization's market. (Lederer & Weinberg, 1995) Internal equity is present when the employees are being provided with fair wages relative to the value of their jobs within the organization. Responsibility, rewards and compensation provided to an employee should be in equity with the other person working at similar position within the organization.
When formulating an effective compensation plan that is based on the internal equity, it is important to first consider the basic factors. The first step is to understand the types and varieties of jobs being performed by various employees within the organization and also the required level of skills, education and understanding to perform each and every single job of the organization. This will help in the easy formulation of internal pay decisions. Conducting an analysis and interpretation of the external job market will provide assistance in determining where the organization's pay policies are at in comparison to what the other organizations are offering in the same industry. Collecting all the related information from a very reliable source, so that further plans and policies will be effective (Frye, 2004). Conduct an analysis of the prevailing pay practice of the organization. This can be done by effectively using technology in completing the task in lesser amount of time. This step helps in the identification of both the good points and the bad points in the current compensation system of the organization. The points lacking importance can be then eliminated and the point showing importance can be included in the new plan that is to be developed. Proper review and analysis of all these factors helps in the formulation of an effective compensation plan for an organization (Frye, 2004).
The compensation plan focusing on external equity involves all the steps involved in the compensation plan focusing on internal equity but with a much wider perspective. Identifying the job requirements of the organization along with the job description of the entire workforce should be one of the first steps to accomplish. The next step is to properly analyze the payment policies that are being followed by other organizations in the same industry. The plans for creating equity in the organizations may include: Employee Stock Option Plan (ESOP), Employee Stock Purchase Plan (ESPP), Restricted Stock Plans etc. In maintaining external equity it is important to maintain equity in what the company is offering to the employees and what the other employees are getting in other organizations working at similar jobs (Singer & Francisco, 2009).
Compensation plans focusing on internal and external equities helps in supporting the objective of the organization's total compensation because the analysis and interpretation done for the formulation of plans highlights all the current as well as future requirements and needs of the organization. All the factors that have a relation with the organization's financial aspects are been thoroughly considered and analyzed, and so, we can say that the plans are able to effectively meet the objectives of the compensation of the organizations as a whole (Mathis & Jackson, 2008).
There are several advantages and disadvantages of both the internal and external equities for organizations. Internal equity helps in providing transparency within the company and the employees feel that that they are treated with equal respect which helps boost the employees' morale and performance. Internal equity also helps in the retention of the employees as well and that too for a longer period of time. The disadvantage of internal equity can be that the employees may take their work for granted, as they become sure that the payment will be given to them in accordance to the equity policy of the company, no matter how well or bad they perform (Mathis & Jackson, 2008).
The advantage of external equity involves the employees making them feel secure when they see that they are being paid similar to what the other employees on similar jobs are getting in other organizations. This ultimately leads to employees' loyalty to the organization. The disadvantage of external equity falls on the organizations because at times when the organization is not performing well and running into losses, it has to make payment in accordance to the compensation plan that considers external equity (Mathis & Jackson, 2008).
In conclusion we can see an important tie between the two equities wherein where they serve as the bridge for proper compensation of employees by the employers. On the downside it can also lead to poor job quality creating a hard working atmosphere while at the same time putting strain on the relationship of the employees, the employers and to the organization itself.
References
Frye, M.B. (2004). Equity-based compensation for employees: firm performance and determinants. Journal of Financial Research.
Lederer, J.L & Weinberg, C.R. (1995). Equity-based pay: the compensation paradigm for the re- engineered corporation. The Chief Executive. Retrieved April 26, 2014 from http://findarticles.com/p/articles
