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Best Practices: Balancing Internal and External Pay Equity

Whether in the context of real estate, common stock, equipment or wages, equity is a term that relates value between different choices, opportunities or investments. Studies into organizational behavior theorize that employees are continuously monitoring and evaluating their work and pay against those of their peers. Perceived unfairness can result in severe production problems.

In order for a business to operate effectively, the company needs to develop a compensation strategy that achieves the two goals of paying wages considered fair to employees, while providing a financial return on the investment for the employer.  Wage equity has two approaches. The first is externally driven by market forces. The second is an internal focus, driven by the employer’s valuation of the job.

Using market pricing to establish wages and salaries is called market based pay. WageWatch has found that market based pay is the best practice approach to designing compensation policy in competitive market segments such as the hospitality, healthcare, and not-for-profit. Every WageWatch salary survey is a market based strategy. Market based pay systems benefit from being inherently empirical, built from research, through surveys, reporting what similar jobs are paid in the organizations that one competes with in the labor market.

Committing to a market base pay compensation structure means that employees will be paid at a competitive wage when compared with rates offered to people in similar positions in peer organizations. The labor market, ruled by supply and demand, drives this approach. The WageWatch PeerMark ™ Survey and online report building tool is designed for custom selection of competitors from which to accurately benchmark job titles. Wage and percentile variances illustrate where you are positioned in the marketplace.

External equity is one side of the coin. There is also the employer’s perception of fairness called internal equity. Where external equity is a measure of market competitiveness forming its basis on job functions and duties, internal equity is a measure of internal worth with a basis in job autonomy and responsibility. If you have multiple incumbents in the same job title who are paid differently, the differences in pay are an expression of internal equity.

We analyze internal equity in a way similar to external market analysis in that we determine worth relative to benchmarked job titles, but different in that the benchmarks are internally established. Internal benchmarks are particularly useful in evaluating both unique and hybrid job titles for which external benchmarks do no exist. Variance analysis here looks inward at wage compression, organization structure, reporting relationships, and job families.

Managing external and internal equity is a dynamic process requiring human resources to stay vigilant on changes in market conditions and business demands. The market based pay approach to compensation gives the influence of the external market on wages precedence over internal equity. The WageWatch PeerMark ™ Salary Survey reports the most current data available which forms the basis of the external analysis. However, since both approaches have the aligned goals of attracting and retaining a talented workforce, the WageWatch Compensation Consulting Team is available to conduct internal equity audits to address employer concerns and add creditability to pay practices.

This entry was posted on Thursday, December 20th, 2012 at 8:21 AM and is filed under Benefits & Compensation. You can follow any responses to this entry through the RSS 2.0 feed. Comments are currently closed, but you can trackback from your own site.