The internal and external analysis allows an organization to evaluate the compensation plan based on the fairness of employee compensation. The impact of the internal and external forces is important when dealing with pay structure. Equity pay is ensuring that all parties involved are receiving the same benefits based on the internal and external factors.
Internal influences involve employees doing the same job, a difference in job responsibilities, or even a specific department but for the same company. The structured pay scale could reflect the highest pay grade at the top and the lowest pay grade at the bottom based on job responsibility. The pay scale allows the employee to view the benefits he or she will receive in relation to the responsibility given. Fair pay and work conditions are an important factor to employees and influence the morale and employee response. According to Martocchio (2008), “Job evaluation is key for casting internally consistent compensation systems as strategic tools. Compensation professionals use job evaluation to establish pay differentials among employees within the company”. The evaluation outlines differences and similarities in job responsibilities, this can be described in the experience level, performance, and knowledge. Internal equity ensures that fairness is throughout the organization based on similar responsibilities.
Understanding the external influences is just as important as the internal factors. An evaluation of external factors allows the organization to remain competitive in the market. Organizations are competing to attain the best employees to help their company grow. In turn pay is taken into consideration to compete with other similar organizations. The external wage comparisons can be the same union, geographical area, job similarity, certifications, or the size of the company. Human Resource Managers is responsible to assess the outside competition properly in regard to the above mentioned to maintain a competitive advantage with similar companies. An employee looking to join the organization can easily find the mean or medium pay based on the geographical area and job description. An evaluation of the marketing prices can also be used to retain the employees already on staff. Competitive business will seek out employees from other company, so it is important to ensure that the organization does not allow the competition to steal their employees. This is referred to as poaching or raiding.
Advantages and Disadvantages
The advantages of internal and external factors are an important tool used to define and implement a solid base pay, cash compensation, or benefits. Internal equity allows the organization to warrant an equal pay among the employees based on the pay scale or performance. The disadvantage of internal equity is the perception of the employees. An employee can perceive that he or she is doing the same job as another employee and should receive the same pay. Perception of employees may differ from the perception of the employers. The employee may feel that his or her individual performance is the same or above in comparison to the employees who are performing. It creates tension and lowers morale within the workplace. External equity advantages allow the organization to remain competitive for sought out profession or geographical area.
The disadvantages of external equities are the cost to remain in a competitive market. There seems to be no set preference in which factors is more important whether it is internal or external equity. It is still undecided on which is the most important between internal and external equity and there is no right or wrong answer (Kent Romanoffken, 1986, p. 8, Balancing external and internal equity). Finding a balance and ensuring that the internal and external equities in the organization is important. A fair and honest compensation policy that is communicated to the employees which define the value and worth of an employee is best. The external and internal compensation plan should meet the organizational goals will create the culture it seeks.