Free Essay

Interal and External Equity Compensation

In: Other Topics

Submitted By ballterry619
Words 973
Pages 4
Internal and External Equity Comparison

HRM 324
April 28, 2014

Internal and External Equity Comparison` When reviewing a successful companies' portfolio to determine what makes them more successful from the next, you will find the company will have a strong compensation plan. A Compensation Plan is one of the more important aspects in the organizational environment. Before formulating the compensation plan based on internal and external equity, it is important to first understand what internal and external equity refers to. External equity is said to be prevailing in the organization when the employees are rewarded with fair compensation to those who perform similar jobs in other organizations. External equity persists when an organization's pay rates are equal to the rates prevailing in the organization's market. (Lederer & Weinberg, 1995) Internal equity is present when the employees are being provided with fair wages relative to the value of their jobs within the organization. Responsibility, rewards and compensation provided to an employee should be in equity with the other person working at similar position within the organization.

When formulating an effective compensation plan that is based on the internal equity, it is important to first consider the basic factors. The first step is to understand the types and varieties of jobs being performed by various employees within the organization and also the required level of skills, education and understanding to perform each and every single job of the organization. This will help in the easy formulation of internal pay decisions. Conducting an analysis and interpretation of the external job market will provide assistance in determining where the organization's pay policies are at in comparison to what the other organizations are offering in the same industry. Collecting all the related information from a very reliable source, so that further plans and policies will be effective (Frye, 2004). Conduct an analysis of the prevailing pay practice of the organization. This can be done by effectively using technology in completing the task in lesser amount of time. This step helps in the identification of both the good points and the bad points in the current compensation system of the organization. The points lacking importance can be then eliminated and the point showing importance can be included in the new plan that is to be developed. Proper review and analysis of all these factors helps in the formulation of an effective compensation plan for an organization (Frye, 2004).

The compensation plan focusing on external equity involves all the steps involved in the compensation plan focusing on internal equity but with a much wider perspective. Identifying the job requirements of the organization along with the job description of the entire workforce should be one of the first steps to accomplish. The next step is to properly analyze the payment policies that are being followed by other organizations in the same industry. The plans for creating equity in the organizations may include: Employee Stock Option Plan (ESOP), Employee Stock Purchase Plan (ESPP), Restricted Stock Plans etc. In maintaining external equity it is important to maintain equity in what the company is offering to the employees and what the other employees are getting in other organizations working at similar jobs (Singer & Francisco, 2009).

Compensation plans focusing on internal and external equities helps in supporting the objective of the organization's total compensation because the analysis and interpretation done for the formulation of plans highlights all the current as well as future requirements and needs of the organization. All the factors that have a relation with the organization's financial aspects are been thoroughly considered and analyzed, and so, we can say that the plans are able to effectively meet the objectives of the compensation of the organizations as a whole (Mathis & Jackson, 2008).

There are several advantages and disadvantages of both the internal and external equities for organizations. Internal equity helps in providing transparency within the company and the employees feel that that they are treated with equal respect which helps boost the employees' morale and performance. Internal equity also helps in the retention of the employees as well and that too for a longer period of time. The disadvantage of internal equity can be that the employees may take their work for granted, as they become sure that the payment will be given to them in accordance to the equity policy of the company, no matter how well or bad they perform (Mathis & Jackson, 2008).

The advantage of external equity involves the employees making them feel secure when they see that they are being paid similar to what the other employees on similar jobs are getting in other organizations. This ultimately leads to employees' loyalty to the organization. The disadvantage of external equity falls on the organizations because at times when the organization is not performing well and running into losses, it has to make payment in accordance to the compensation plan that considers external equity (Mathis & Jackson, 2008).

In conclusion we can see an important tie between the two equities wherein where they serve as the bridge for proper compensation of employees by the employers. On the downside it can also lead to poor job quality creating a hard working atmosphere while at the same time putting strain on the relationship of the employees, the employers and to the organization itself.

References

Frye, M.B. (2004). Equity-based compensation for employees: firm performance and determinants. Journal of Financial Research.

Lederer, J.L & Weinberg, C.R. (1995). Equity-based pay: the compensation paradigm for the re- engineered corporation. The Chief Executive. Retrieved April 26, 2014 from http://findarticles.com/p/articles

Mathis, R.L & Jackson, J.H. (2008). Human resource management (12th ed.). USA: Cengage Learning.

Singer, P.M & Francisco, L.L. (2009). Developing a Compensation Plan for Your Library (2nd ed.). USA: ALA Editions.…...

Similar Documents

Free Essay

Compensation

...important elements of any organization. It is what compensates, drives, motivates, and rewards employees for the work they do. Or it does the opposite of these things. What is a strategic compensation strategy? Simply stated, it is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives, philosophies, and culture of the organization (Bohlander &Snell, 2010. Compensation includes all forms of pay and rewards received by employees for the performance of their job. Employees desire compensation systems that they perceive as being fair and commensurate with their skills and expectations. An effective compensation and benefit system will contribute to organizational effectiveness. Holland Enterprises is one of the city’s largest employers. Your firm currently employs 3,500 employees. However, since 2007 the firm has lost 25% of its staff. From the research that has been presented, it is because your firm lacks an effective compensation and benefit system. In order for Holland to remain an effective organization, your compensation and benefit system needs a long overdue makeover. The current compensation system is being perceived as unfair and uncompetitive in the marketplace. An effective compensation and benefit system will contribute to the effectiveness of your organization. To survive and be successful in a global economy, an organization must be competitive (Henderson, 2006). ......

Words: 1847 - Pages: 8

Premium Essay

Internal and External Equity Comparison

...Internal and External Equity Comparison Edgar Martinez HRM/324 September 10, 2012 Annette Clark Davis Internal and External Equity Comparison In today’s competitive globalized economy, an organization’s approach to equity and its perception of equity can affect an organization’s ability to captivate, retain, and motivate its employees. Therefore, external as well as internal equity play an important role in an organization’s design of its compensation structure. In this essay, it shall examine the total compensation plans for the Home Depot Corporation and IBM Global Services, focusing on internal as well as external equity. Additionally, it shall also review the various advantages as well as disadvantages of internal and external equity for both organizations. Finally, it will provide an explanation to how each plan supports each organization total compensation objectives as well as the relationship of the organization’s financial situation to its plan (University of Phoenix, 2009). Internal and external equity An Organization that notably uses internal equity to form its pay structure is the Home Depot. The Home Depot’s internal equity exist because of its pays wages and hiring processes designed to fit each store budget, instead of hiring people with the skills to do the job at a market rate pay. The Home Depot’s decentralized stores use an elitist compensation system with different compensation plans by organization level and incentives offered only......

Words: 1037 - Pages: 5

Free Essay

Internal and External Equity Comparison

...and Total Compensation in Different Markets Lynette Gill HRM/324 December 10, 2012 Jocelyn Freimark Organizational Objectives and Total Compensation in Different Markets One of the fastest growing fields in Human Resources is compensation. The main motivator for employees is compensation; potential employees are searching for jobs that fit their area of specialty. A company’s human resources team is constantly looking for ways to compensate employees for job performance. When analyzing organizational objectives and total compensation packages in the various markets, it is important for small companies to know the differences in wages and salaries. Wages are paid to hourly employees based on the number of hours worked in a week while salaries are paid to exempt employees, executives, and those defined by the Fair Labor Standards Act of 1938. Deciding an employee’s level of monetary compensation depends on various factors. The wage should be high enough to attract qualified potential employees; the wage should in competitive with similar jobs performed in similar companies. Other considerations include: * The number of other employees capable of fulfilling the job responsibilities * The demand within the community and/or industry * Cost of living There are laws which have an impact on compensation that small companies should be aware of. The Fair Labor Standards Act (FLSA) has been amended over the years and now includes five major compensation laws......

Words: 560 - Pages: 3

Free Essay

Compensation

...Compensation In this assignment the upper management has asked Eric Garcia to suggest a new compensation plan specifically for the Puerto Rican team that include: A description of a compensation package for the new employment team, why the pay system will work, what reward package would motivate the employees to increase performance, compensation plan’s benefits to the individual and the company and how the Puerto Rican compensation plan differs from the parent company’s compensation plan. He must propose the plan and a rationale to the Human Resources Department for approval. Compensation package for new employment team The level of pay in a company is one or the most important aspect of the employee; they will pay close attention in this category in terms of fairness. If the employees think the pay level for the job is not acceptable the lack of commitment and mistrust will be reflected in their performance. According to University of Phoenix Week Five Compensation (2012), there are four key challenges of pay planning and administrative system: (1) Understand the pay levels of economics and legal factors. (2) To develop a systematic pay structure. (3) Combine compensation and general business strategy. (4) Address key policy issues. Granting bonuses to new heirs it can offer a competitive compensation package, especially for those with special required skills by the company. Overtime will be provided by request and it can be rotated among the employees so it can be......

Words: 899 - Pages: 4

Free Essay

Compensation Equity in China

...CRITICAL ESSAY: COMPENSATION EQUITY IN CHINA Hou Guangjian ABSTRACT In China presently, employees receive different compensation according to all kinds of ad hoc definitions of external equity, internal equity and individual equity. Consequently, employee attitudes toward work and social status are affected. If the government would provide people with access to better education, legal measures that guarantee fair competition, and training opportunities to people who have need, the Chinese people would have greater reason to believe that improved compensation equity will be realized in the future. INTRODUCTION Two years after the death of late chairman Mao Zedong, Deng Xiaoping launched century. During the past twenty-five years, the country has witnessed tremendous gains in economy and social wealth in general. Although, on the average, people are leading a much better life, the gap between rich and the poor is becoming larger. As a large developing country in a transition period from a planned economy to a market economy, China at present has to adopt a de facto policy of “letting a few people get rich first” to stimulate enthusiasm and initiative for the rest of the population. Thus, the usual egalitarianism -- what Chinese term the “Large Bowl” -- has been smashed. People working at similar jobs receive different compensation. Various ad hoc definitions of external equity, internal equity and individual equity influence compensation and, consequently, employee attitudes......

Words: 3190 - Pages: 13

Premium Essay

Riordan External and Internal Equity

...Riordan Internal and External Equity Equity internal alignment is also called the existing relationship between the payment and the different labor positions, skills, and competence within the organization (Milckovich & Newman. 2008). Internal equity describes the comparison of wages paid to the employee performing at the same level or degree within the Riordan organization. Moreover, the External Equity compares wages in the market competition, Riordan Manufacturing play where to employ and retain similar types of employees. It is based in Riordan's compensation system and pay structures. Riordan manufacturing work towards an equitable payment to the internal and external, which makes it attractive to retain and keep good employees. The implementation of structural job, payments system, analysis, and business structures, which help to identify and define the labor content describing the duties and internal assignations to endorse equal compensation (Martocchio, 2009). Additionally, external equality elements to identify market competition include, marketing surveys, researching new and current competitors marketplaces will help to maintain the company update in pay, and trends. Implementing internal and external equity Riordan will continue to be a successful organization. A wage management process and rationale The purpose behind Riordan program wages, is to get consistency in payment practices, supplemented by laws and regulations, especially with the......

Words: 312 - Pages: 2

Premium Essay

Compensation

...and employees) affect the views of compensation? (11 marks) Differing perspectives certainly do affect the view of compensation. Our textbook discusses in pages 2-5 (Milkovich et al) that society in general may "view pay as measure of justice" (pg. 2). The example used in our textbook refers to the pay gap between men and women in society. It is stated that the pay gap is narrowing but it still persists compared to various other OECD countries. Economists have concluded that various factors may have contributed to this gap. For example: human capital, demographic characteristics, and job characteristics. What this may mean is that "women are more likely to study health and education, whereas men are more likely to study engineering and other technology fields" (Mikovich et al, pg. 3) Women are also more willing than men to adjust their work location and hours in order to take care of young children and elderly parents, and to do most, if not all, of the "unpaid" housework. From the manager's point of view, compensation directly influences their success in two ways. According to Milkovich et al on page 4, it is a "major expense." Managers need to think of and be aware of both global and local competitive pressures when making compensation decisions. Moreover, managers need to either minimize or optimize pay in a way to influence employee behaviour and to improve organization performance. This is the second way that compensation influences their success. As......

Words: 2412 - Pages: 10

Premium Essay

Internal and External Equity Compensation

...Internal and External Equity Compensation When a company is designing their total compensation plan there are many different factors that need to be taken into consideration. Are they going to go with a compensation plan that focuses on internal equity, external equity or maybe a little bit of both? What kind of benefits are they going to offer? Is the company going to pay for the benefits in full or will the employees be responsible for paying a portion of them? Then there are also the legal aspects that need to be followed to avoid legal ramifications such as the Lilly Ledbetter Fair Pay Act of 2009. Internal Equity Compensation “Internal equity deals with the perceived worth of a job relative to other jobs in the organization” ("Compensation Plans - An Overview - Base Pay", n.d.). “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, n.d.). When a company chooses to base their compensation plan on internal equity what they do is they look at jobs that perform similar duties, and those jobs will be paid the same wage. For instance, if there are three Executive Assistants in a company then, all three Executive assistants pay will be around the same. Also with internal equity a company wants to retain the talent they currently have, so they are more than likely going to invest more in their employees by offering......

Words: 910 - Pages: 4

Premium Essay

Interal and External Factors

... Internal and External Factors I think the internal and external on the four function of management is planning, organizing, leading, and controlling. These functions of management are need in business to be successful in a continuously advancing world. There are some internal factors include ethics, diversity, and innovation. I think the ethics affects the leadership and controlling functions of management as diversity and innovation are the leading and organizational the functions of management. The external that affect the four function management is technology and globalization. I think that globalization and technology is the major factors that affect the business world today. Both are a most have in large organization by excel above their competition. They are also need to organizational in planning to keep up with the demand of readily available products. In today world the market can change overnight cause management to make decision that will put their company in a poison that they will adapt to the technology change in the business world. In the business world globalization are the important for the success of the growth and survival of the business marketing. I believe major factor to a business success is the moral and the ethical integrity of the management team. The ethical is determines of the quality of their employees in a business that is able to retain and maintaining the loyalty in the business. When manager display ethical integrity in the business......

Words: 379 - Pages: 2

Free Essay

Compensation

...Part 1 (Short Response) 1- How do differing perspective (society, managers and employee) affect the views of compensation? • Societal perspective: compensation is viewed as a measure of justice as well as a cause of increased taxes and price increases. • Managers: view compensation as a major expense and a means to influence employee behaviour. • Employees: view compensation as a return in an exchange with their employer, an entitlement, or a reward. 2- Explain the difference between base pay and performance pay. • Base pay: Base pay-wage or salary is the monetary compensation an employee receives for the work performed. For example, the base wage for machine operators may be $18 an hour but some individual operators might receive more because of their experience. • Incentives (or variable pay): Incentives tie pay increases directly to performance. It differs from merit increases. Incentives do not increase the base wage, and must be earned each pay period. The potential size of the incentive payment generally will be known beforehand. 3- What are the three tests used to determine whether a pay strategy is a source of competitive advantage? Are these tests difficult to pass? Can compensation be a source of competitive advantage? • Equity Theory: Fairness Equity theory focuses on how employees compare their work, qualifications, and pay to those of others. • Tournament Theory: Motivation and Performance Tournament theory suggests that the greater...

Words: 926 - Pages: 4

Premium Essay

Internal and External Equity

...Five Functional Areas Of Human Resource Management Five Functional Areas of Human Resource Management (HRM) HRM has five functional areas that include: Staffing, Human Resource Development (HRD), Compensation and Benefits, Safety and Health, and Employee and Labor Relations. Staffing Achieving organizational objectives requires having the proper number of employees with the appropriate skills.  Staffing accomplishes this objective through four tasks. The first task is job analysis, which examines specific job functions in determining the skills,  duties and knowledge required for each position. The second task is ensuring that the required numbers of employees, with the appropriate skills, are available when needed organizations engage in Human Resource Planning (HRP).  The third task is recruitment, which is the process of attracting enough skilled people to apply for jobs in the organization. Fourth, the last step in the staffing process, is selection. This involves choosing the best suited individuals to fill the open positions in the firm. Human Resource Development (HRD) Six functions, including training, development, career planning, career development, organization development and performance appraisal, make up Human Resource Development (HRD). * Training: is a process designed to provide employees with the knowledge and skills needed for their present job. Focusing on long-term learning needs is development. The ongoing process of career planning sets career goals......

Words: 11273 - Pages: 46

Premium Essay

External and Internal Factors Impacting Compensation

...| Internals and externals factors impact on compensation | Bus assignment # 1 | idiane1000 11/8/2009 | Contents Introduction 2 Internal factors affecting the best buy co Inc new compensation strategy 2 Best buy financial capital affect on compensation 2 Internal structure affect on compensation: 3 Employees’ acceptance of the new compensation 3 External factors affecting BEST BUY CO INC. compensation strategy 6 Economy factor on compensations: 6 Legal compliance on the compensation strategy: 6 Competitors impact on compensations strategy 6 Best buy summary 8 Conclusion 9 Figures: Median salary by job..…………………………………………………………………5 Median bonus by job…………………………………………………………………...6 Average weekly vacation by years experience…………………………………………6 Introduction With so many changes within the industry best buy the number one electronic retailer decided to implements new compensation strategy within their organization to gain competitive advantage against their competitors. An organization employing over 170,000 employees within the US will have hard time developing a compensation strategy for every employee. Therefore the organization decided to focus on its retail store managers. Data reveals that best buy Inc is employing little of two thousands retail store manager. The organizations is developing new compensation strategy so that they will be expose......

Words: 1988 - Pages: 8

Premium Essay

Internal and External Equity Comparison

...Internal and External Equity Comparison Total compensation means to reward employees for their labor. Compensation packages in today’s market can range from low to high depending on the company’s goal. Compensation packages have the ability to attract a certain type of candidate to apply for a specific position within an organization by the way they are designed. With the economy constantly changing and somewhat unstable, it is important for a company to offer a compensation package geared towards not only the employee but as well as the economic changes. Two types of equities plan an organization can use are, internal and external equity. Total Compensation Internal Equity 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 (hrcouncil.ca). Internal equity is a good way to ensure that employees receive fair wages and cannot file lawsuits against the employer. Although two employees functioning at the same level in the organization, it is possible for them to draw different pay. J.P. Morgan, an American Capitalist, is said to have a rule regarding investing into a company. Mr. Morgan stated that he would not invest in a company that pays the CEO over 50% more than the next level executives (Compensations Standards 2015). The corrective approach is addressing the "internal pay equity check" as did the companies like DuPont and Intel when they...

Words: 931 - Pages: 4

Premium Essay

Compensation

...DISCUSSION ASSIGNMENT 1 5 MARKS WORTH 5% OF THE OVERALL GRADE FOR THE COURSE INTERNAL EQUITY (ALIGNMENT) AND EXTERNAL EQUITY (COMPETITIVENESS) After reviewing the Wilson Brothers Case Scenario, as Director of Human Resources for the organization, what conclusions can you draw with respect to the status of the company’s compensation strategies that are currently in place? What would you do to begin to address this situation? (3 Marks) Provide Constructive Feedback to at least two other student’s postings. (2 Marks) HINT:-reference both internal equity (alignment) and external equity (competitiveness) in your response. NOTE:-this Discussion Assignment will be marked on content, analysis, direct references to the readings, the overall professionalism of the presentation and constructive feedback to other students’ work. The organization’s strategies seem to be outdated, reflecting a different period in time.  It does not seem that government policies, laws, and regulations are being followed and/or up to date.  There are no consistent policies on employee relation issues and some employees’ fear of getting on the owners bad side would cause them to be terminated.  There are also no policies on employment equity and pay equity.  This could cause legal issues if they are not following the proper legislation set out by the government.  There is also no pay structure and therefore, no differentials.  Hiring salaries are negotiated which leads to no salary range for jobs......

Words: 1436 - Pages: 6

Premium Essay

Interal

...Introduction Since LEGOs inception in 1932, the company has not only experienced extreme pressure from competitors, but it has overcome numerous challenging obstacles from the external environment to become the world’s largest toy manufacturer (Financial Times, 2016). Upon analysis of LEGOs strengths through Institutional Theory (IT) and Resource-Based View (RBV), this essay aims to combine these two theories to explain LEGOs internationalisation process. Firstly, the two frameworks will be used to analyse the period (1932-1990s) where LEGO established a culture centred on product quality and innovation. As a result, the company achieved legitimacy within the institutional environment which spurred their international expansion. Within this analysis, the strategic decision to enter specific markets, and the methods they used to so will be outlined. Secondly, LEGOs recovery from their financial crisis in 2003, is an excellent example of how new capabilities can be made, and existing ones rebuilt to deploy resources using organisational processes to produce a desired effect. Institutional theory Institutional theory describes companies that operate in foreign markets conform to the institutional environments in order to gain legitimacy from the perspective of other institutional bodies. These institutions are the rules, norms and beliefs that define socially acceptable behaviour and therefore influence economic activity (Scott, 1995). The degree to which a......

Words: 4588 - Pages: 19