Internal And External Equity Comparison

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 Intel's objective of adjusting the relationship between the pay of executive officers and the CEO's pay. The advantages of internal equity can be seen in Intel. When employees are aware of what their fellow employees are paid at their particular "level" within the company, a check and balance system based on internal equity can help to keep internal dissatisfaction in check, especially between high ranking executives'. However, this does have some disadvantages, as it can risk losing employees to competition, and may thus be harmful in the future. (Armstrong, 2007). Another disadvantage is that it may discourage employee motivation, who knows that they will be paid according to the internal equity policy, rather than merit or individual performance (Mathis & Jackson, 2008). While here are potential risks, overall the plan has been beneficial to Intel, which remains lucrative in the competitive