Pay equity is a key component in any compensation system. External pay equity exists when employees perceive that they are currently being rewarded fairly when compared to similar job in other organizations. Internal pay equity exists when an employee perceives that they are being rewarded fairly when compared to the value of their job within the organization (Long, 2010).
For employees, pay equity is achieved when the compensation received is equal to the value of the work performed. If employees perceive that pay inequities or unfairness exist, low morale and loss of organization effectiveness can result. The perceptions that not all jobs are equitably compensated in an organization can have devastating effects on the organization such that a climate of distrust and hostility arise, voluntary turnover and absenteeism increases, employees will be less willing to help others, employee performance and commitment to the organization is affected and can even create counter-productive behaviours.
It is important for organizations to ensure that internal pay equity exists between similar positions and is especially crucial where teamwork is critical for success. The optimal way to ensure pay equity exists is to assign a pay range to each role with corresponding criteria, which helps determine when an employees should be placed into each specific range. For example: company ABC Inc. may employ numerous marketing professionals which work with similar client groups. ABC Inc. should continually review the salary of each employee and compare it with other in the same role to determine that internal equity exists. Not all employees will be paid the same salary, it just means that employees are paid fairly in relation to other employees in the same position. Differences in wages are based on education, experience, years of service and responsibility level. An employee who has more education but only 2 years of experience will have a lower salary than that of an employee with longer seniority, 5 years of experience and more responsibilities.
Organizations also need to ensure that they stay market comparable with their current wages so they can provide their employees with external pay equity. They need to stay comparable not just to keep their current employees from leaving for other organizations but to also attract new employees. When employees look at total pay equity, they not just look at base pay, but benefits and other total rewards. If an employee feels underappreciated in their current position and has brought forward their concerns about not being compensated fairly but has not been explained why they are compensated at the level they are, the employee may look at comparable market jobs and what is available.
When employees view all jobs as equitably compensated, it motivates employees to continue working towards their performance goals (whether personal or professional), continue their education, help other employees and will show more commitment to the organization.