How is a compensation plan most equitable to an employee? If an organizations goal is to attract and retain the most qualified employees, managers and HR professionals need to understand what is valuable to an employee. For a long time base pay was the most important thing to employees. Now and depending on the age and other factors of the workforce, benefits are becoming more important than just base pay. Benefits such as flex time, retirement, and enhanced career development are often enormously popular with certain segments of the work force, like younger workers with children(). Internal and external equity are two factors that are considered when forming a compensation plan.
Internal equity is how an employee perceives the worth of their job in relation to other jobs in the same company(). Value is often determined by skill, responsibility, work conditions, and effort. Person-focused pay plans reward employees who gain job related skills and knowledge. Such plans as pay-for-knowledge and skill-based pay demonstrate internal equity by promoting job enrichment and increasing an employee’s responsibilities when new job skills are learned. This can increase job performance and the need for a lower workforce. Some disadvantages of internal equity is that compensation may not be competitive outside the company. This can lead to a recruiting and retention problem if compensation is below what other companies pay and a lack of external equity.
External equity is when an employee perceives compensation is fair relative to people doing the same job at other organizations. An organization that is focused on external equity pays its employees equal to the average pay of organizations in the same market. Job surveys are often used to determine competitive pay and weather it is more, equal, or less than other organizations. A job
