Compensation Equity

Arriving at fair compensation is not always easy. Aside from the fact that each position has a unique value to an organization and not all jobs are created equal, employers also face the challenge of recognizing and rewarding exemplary performance in a given role. Add to that the fact that people seldom agree on what’s fair and compensation design becomes that much more complicated.

Freedom or Fairness by Nina Paley, Wikimedia Commons, Creative Commons

Employees consider two things when assessing whether their own compensation is fair.

  1. How their compensation compares to their co-workers.
  2. How their compensation compares to those employed in similar roles in other companies.

Achieving a state where employees are content with both of these comparisons is an important part of creating an effective and competitive compensation structure.

Internal Equity

There are a variety of definitions for internal equity. Here are two examples, the first from a legal perspective and the other from an HR perspective.

“Internal equity is a situation that results when people feel that performance fairly determines the pay for each individual with a certain job or that relative difficulty results in appropriate differences in pay rates between jobs.”[1]

“Internal equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization.”[2]

These and other definitions of internal equity have one fact in common: in order to achieve internal equity, it’s not enough that compensation be fair according to the employer, compensation must be seen as fair by employees. Employees will have their own ideas about how their jobs should be valued relative to other roles in the company—and they may not agree with the company’s perspective.

One way to achieve a sense of internal equity is by following a consistent set of principles when designing and applying compensation structures and by avoiding ad hoc negotiations. If you’re concerned about internal equity in your organization or you hear rumblings of discontent on the topic, you may choose to conduct an internal equity study to help determine whether concerns are justified.

External Equity

Employers strive for external equity by providing compensation for each position that is consistent with what is being offered by other companies for similar work. Typically, employers want to pay well enough to find, keep and motivate as many qualified employees as they need. They do this by staying on top of market conditions and accessing comparative data through colleagues, government sources and industry salary surveys.

Employees, on the other hand, often bring subjective nuances to their perception of external equity. For example, an employee may compare her job to a similar role in a very different industry that is impacted by different market forces, or place greater weight on the specific benefits provided by another employer in determining whether they are being treated fairly.

Compensation Equity: Perception and Reality

At the end of the day, equity is in the eye of the beholder. If employees feel respected and heard, they are more likely to perceive their treatment as fair. To foster a sense of both internal and external equity, the best an employer can do is follow sound compensation design practices and strive to build an environment of mutual trust.

 

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