Essay on Internal and External Equity Compensation

Internal and External Equity Comparison HRM/324 02/11/2013 Internal and External Equity Comparison Compensation packages are one of the most valuable pieces of the puzzle when an organization creates a program designed to attract and retain suitable employees. A well designed compensation package can ensure that employees are not only attracted to beginning work at an organization, but are also willing to stay within a corporation over time. A higher retention rate for employees can increase productivity and reduce costs for an organization over time. Two of the factors that affect a company’s compensation plan are internal and external equity. In this paper, internal and external equity is explored, including the advantages†¦show more content†¦The advantages of internal equity can be seen in Intel. When employees are aware of what their fellow employees are paid at their particular â€Å"level† within the company, a check and balance system based on internal equity can help to keep internal dissatisfaction in check, especially between high ranking exe cutives’. However, this does have some disadvantages, as it can risk losing employees to competition, and may thus be harmful in the future. (Armstrong, 2007). Another disadvantage is that it may discourage employee motivation, who knows that they will be paid according to the internal equity policy, rather than merit or individual performance (Mathis amp; Jackson, 2008). While here are potential risks, overall the plan has been beneficial to Intel, which remains lucrative in the competitive technology industry. External equity is found in organizations in which an employee in an organization’s pay is equal to prevailing rates in that organizations industry or sector. (Lederer amp; Weinberg, 1995). Both PepsiCo and Coca Cola utilize external equity compensation analysis. The process of developing a pay scale based on external equity requires a detailed and updated study on market wages and compensation. In addition to wages, other aspects to compensation, such as employee stock options must also be considered. (Singer amp; Francisco, 2009). This has given both companies the advantage of being able to retain highly qualified employees over time, as a payShow MoreRelatedExternal And Of An Effective Compensation Program1408 Words   |  6 PagesExternal and Internal Equities in an Effective Compensation Program Wanda I. Ramos Trident University MGT 511: Title of Course Professor’s Name November 2, 2014 Abstract Pay structures, regardless of the size of the organization, must have two things going for them, which are external and internal equities. 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