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Internal and External Equity

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A solid and well put together compensation package is a valuable tool for an organization. A well-designed compensation package will go a long way in attracting and retaining knowledgeable and well-suited employees to the organization. In presenting a well-designed compensation to potential employees, will attract them to the position and help in retaining them to the organization. Less turnover enables an organization to reduce training costs, increase productivity, and create better working environments for the employees. The two main factors to be considered when creating a compensation plan are the internal and external equity the organization faces. While the organization is considering either of these plans research and position overview should be reviewed to ensure, the compensation package is in line with the organizations goals for the future. In the following; the advantages and disadvantages of internal and external equity and how the two affect and support the total compensations objectives of the organization. Internal Equity

Internal equity exists within an organization when it commits to pay wages commiserate with the value of each position within the company. Thus creating a sense of fairness with the employees fair pay for their work. The organization should keep in mind that every person views their worth differently, and establishing wages for each position needs to be fair and equal. Organizations have developed methods to test an organizations fair distribution of pay. Intel and Du Pont are organizations that implemented their compensation with internal equity (“Compensationstandards.com”, 2012). Advantages to internal equity established programs are the fairness to each employee from the CEO on down to other levels within the organization.

According to “Compensationstandards.com” (2012), the other advantages are the program is economical, takes away market bias, leads to a stronger company and improved employee relations, A disadvantage is the transparency of the position and the pay that each employee receives for that job. Some view the transparency as a relief to know that they are being paid the same as the next person. Others view the transparency as invasive, and people do not like others knowing personal information such as wages about them. External Equity

External equity compensation plans are driven by the external labor markets where the organization is doing business. There are many factors that can influence external equity compensation plans. Geographical location, competition within the local market, and the availability of a qualified workforce to name a few. A company that uses an external equity program is American Institutes for Research (AIR’S) (“American Institutes For Research”, 2014). At American Institutes for Research, their benefits brochure boasts the market competitive salaries they offer to their employees along with an extensive benefits program. Advantages of the external equity program are the employees know that they are being paid a wage that is competitive with other organizations in their market area. A disadvantage is the organization may have multiple locations and the markets vary from each location. Setting up a compensation package in one location in comparison to another is a tricky process.

An organization’s human resources department must understand how each compensation program works. Understanding the components of both programs they can better drive which program is a better fit for their organization. An organization may decide to research both sides of the programs and come up with one that is unique to their organization. Every organization sets out to hire and retain qualified employees to help them reach their strategic goals for the organization. Without competitive wages and benefits the organization will not be successful in attracting qualified employees to their company. Basing salaries on what the next company is offering is would be a disadvantage to the organization.

How will they compete with the other organizations in the areas? To create a competitive plan for your organization there needs to be an incentive to come to work for each employee. Competitive salaries, insurance, retirement plans, corporate discounts, and educational packages are some components that can entice employees to seek employment with your organization. An adequate compensation plan helps an organization save money and grow through higher retention and loyalty to the company. After establishing a compensation plan, an organization should periodically review the plan to ensure that the plan is in line with the organization’s financial and strategic plans.

American Institutes for Research. (2014). Retrieved from http://www.air.org/sites/default/files/10000_117_04_30-129-10_Compensation_Booklet.pdf CompensationStandards.com. (2012). Retrieved from http://www.compensationstandards.com/nonmember/files/IntPay.htm

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