Compensation and benefits are essential factors to consider in a workplace. They contribute to employee satisfaction, motivation, productivity, and high-performance rates. Thus, internal and external equity are measures that every business must take for business growth and compliance.
The combined provisions of the constitutions and employment laws of many jurisdictions worldwide make it mandatory for employers to treat their employees equally and fairly. Equal and fair employee treatment usually entails giving equal pay to employees for similar work or responsibilities regardless of their gender, race/ethnicity, age, status, religion, etc. Additional and stricter provisions may apply depending on the specific jurisdiction.
What is Internal Equity?
Internal equity refers to a situation in an organization whereby all employees who have similar roles, hold similar positions, or possess similar skill sets are compensated similarly. The compensation may be in the form of salary as well as other financial and non-financial benefits that are attached to the job, such as bonuses, vacation time, expense accounts, health insurance, retirement benefits, professional development benefits, flexible work timing, employee stipends, paid time off, gym memberships, catered meals, stocks, stock options, etc.
What is External Equity?
External equity, on the other hand, entails a business or an organization surveying and exploring the broader market to discover what others are paying for similar jobs in the business’ particular industry of operation. Some factors to be considered while surveying market rates include the specific industry, the location, the skillset, etc.
Importance of Internal and External Equity in the Workplace
- It attracts talented employees: The presence of internal and external equity in an organization results in an attractive compensation package that can be advantageous to the organization during recruitment and hiring. A good payment package increases the chances of an organization being selected when such an organization extends job offers to skilled individuals.
- High Employee/Staff Retention: In addition to attracting talented employees, internal and external equity aids in the retention of skilled staff. One major factor influencing employees’ decision to leave an organization is having an alternative option with fairer pay. Therefore, an organization that prioritizes Internal and External Equity is less likely to lose its skilled staff. Staff retention, in turn, reduces the costs associated with going through constant hiring, such as having to train replacement staff, management of integration of new employees in the workplace, the possibility of new employees not meeting the performance standard during their probation period, etc.
- It eliminates discrimination in the workplace: Where discrimination exists in an organization; it creates an unhealthy work environment which in turn negatively impacts all aspects of the business, such as a low number of skilled staff, poor team spirit, poor employee performance, higher probability of lawsuits, etc. A fundamental principle of Internal and External Equity is an absence of discrimination in the determination of compensation; therefore, as organizations incorporate Internal and External Equity, it contributes to the eradication of all forms of discrimination in the workplace.
- It ensures compliance with regulatory requirements: The employment laws in many jurisdictions as well as other relevant laws, incorporate provisions to guide the compensation of employees. In addition, freedom from all forms of discrimination is a globally recognized human right. The presence of an excellent Internal and External equity structure, therefore, contributes to the organization’s compliance with the law.
- It enables a business to maintain a competitive advantage: The foundation of every workplace is its people. People are the origin of innovative ideas, good customer service, and other organizational factors. High-caliber employees are a primary factor contributing to maintaining competitive advantage.
- It contributes to business growth: The presence of internal and External Equity contributes to the growth of an organization by increasing the possibility of growth components such as low workforce turnover, reduced costs, innovation, thought leadership, etc.
- It contributes to the development of a good work culture and healthy work environment: In addition to work-life balance and growth opportunities, an excellent Internal and External equity structure not only contributes to good work culture but is also an indication of a healthy work environment.
How to Maintain Internal and External Equity in the Workplace
- Ensure that all employees in the organization are paid in accordance with industry standards: Ensuring that the various compensation packages of employees across all levels are consistent with industry standards aids in uniformity. This further makes it easier for an organization to maintain Internal and External Equity across all levels.
- Ensure that compensation is commensurate to workload, skill, and performance: In addition to keeping up with industry standards, an excellent way to maintain Internal and External Equity in an organization is to make corresponding adjustments to compensation as an employee’s workload grows or their skillset and performance improve.
- There should be transparency about compensation information: Where an organization is open with information about compensation for all levels, the organization is better able to track Internal equity. In addition, employees often compare their salaries to others who they believe are in similar positions. If there is a perception that some employees are paid at a lower rate than the norm within the organization, it breeds tension in the workplace. Transparency, therefore, reduces the instances of such perceptions. Further, lapses and discrepancies are easily identified and rectified.
- There should be transparency, clarity, and consistency in the methods used to determine compensation, promotion, and additional benefits.
- Regular audits of compensation structure: This will entail processes such as the periodic survey of market rates, reviews of updated regulatory requirements, internal performance reviews, etc.
- Implement other relevant processes within your organization to sustain Internal and External Equity: Some other methods include internal analysis, particularly in a large organization, to ensure that some employees are not being underpaid compared to either their colleagues or the external market; Incorporation of a Human Resource department targeted at taking care of employee matters; Accurate job analysis and descriptions, this aids in determining compensation packages per level; etc.