Equity as it applies to compensation plans used by employers refers to the exchange of service for compensation that employees make with their employers. total compensation systems take into consideration all things of value given by an employer to an employee in exchange for his or her service in a specified role (Romanoff, Boehm & Benson).
Total compensation systems include not only salary or wages, but also insurance, retirement plans, tuition assistance, child care, corporate discounts arranged with other companies, and even coffee in the break room. The design of total compensation systems must take many items and services into consideration when identifying what will attract and retain employees of the quality the organization in question hopes to attract (Romanoff, Boehm & Benson).
Often these goals can conflict with one another and organizations must focus on what is more important to their employee engagement strategy. This paper will discuss two companies whose opposing views with regard to total compensation illustrate the differences between a focus on external equity Comparison">internal equity and one on external equity.
Worker's Compensation is a service that provides reimbursement for lost wages to employees who have sustained injuries from work or work-related tasks. It is also one of the services that is most often the victim of fraud. Each of the three types of fraud, claimant, employer, and provider, is defined by the same characteristics, outlined by the Ohio Board of Workers Compensation: Receiving ...
Internal equity as it relates to total compensation can best be thought of as the degree of fairness that exists in the level of compensation between different levels of an organization. While fairness itself is subjective, there are several tests that an organization’s human resource managers can perform to shed light on the degree to which their organization fairly distributes pay between employees at different levels within an organization. DuPont is one organization that decided to implement a total compensation program that sought to measure and enforce fairness or equity among various levels of the organization in order to ensure that executive salaries did not increase arbitrarily or beyond what non-executive increases did (Compensationstandards.com, 2013).
One such test implemented by DuPont was to establish a numerical relationship between executive officers of their company and their CEO. This measurement was in place to ensure that the CEO did not earn more than 50% than executive officers one step below. The relationship can be extended from that point to lower managers, continuing on to whatever end seems appropriate. By establishing an internal check on the salaries of the highest paid employees within an organization, DuPont ensured that it was guarding against sharply rising executive salaries that did not further contribute to salary increases for other company employees. This perception of fairness on internal policies is important to retain competent employees who might otherwise seek work elsewhere to serve their own rational self-interest.
While internal equity can improve an organization’s ability to retain a talented workforce, the primary goal of a total compensation plan designed around external equity is to make an organization externally competitive with other similar organizations. External equity is not focused on eliminating a disparity between employees at the same organization, but rather takes into consideration market forces within a specified geographic or other market to set the level of compensation for the position in question. Eastern Kentucky University (EKU) is an organization that underwent a deliberate attempt to initiate a compensation plan focused on external equity. The specified goal of the program was to “attract top talent” and the plan extends to all positions within the University (Eastern Kentucky University, 2005).
Selection Our team chose Apple Computer, Inc. as the organization to profile and pursue for our strategic plan. Apple provides a challenging opportunity. The company has consistently been engaged by strong competitive forces, yet may continue to possess a unique competitive advantage. However, this advantage is contingent on product positioning and can only be beneficial if Apple exploits this ...
The basis of EKU’s plan was ensuring a job description for each position that included sufficient criteria to illustrate the purpose, scope, skills, experience, education and other factors required for success in the position. This information made easy for EKU’s leadership to judge the relative importance of the position and decide where in the market it wanted to position the role in order to attract the desired level of talent. EKU used market data tools to ensure that pay rates were aligned with 90% of the benchmarks of local areas’ compared cost of living. This analytical approach allowed the hiring managers to be confident that persons in consideration for positions with EKU or being offered a fair rate of pay and would not dismiss the University’s offer because it was too low when compared against similar employers in the same geographic areas.
Understanding the benefits of each approach to total compensation system design, it is incumbent upon the leadership of the organization along with human resource managers to decide where their organization should fall on the spectrum between these competing interests. It is clear that without competitive rates organizations are disadvantaged when trying to attract new talent. It is also clear that offering salary that is tied solely to market conditions and does not take into consideration the perceived fairness of those pay rates by existing employees is a recipe for a disgruntled workforce. A balance must be struck between these competing goals to prevent turnover, poor morale, or both.
Compensationstandards.com. (9, September 2013).
Internal pay equity methodologies. Retrieved from http://www.compensationstandards.com/nonmember/files/IntPay.htm
Eastern Kentucky University. (6, June 2005).
Eastern kentucky compensation plan. Retrieved from http://www.hr.eku.edu/sites/hr.eku.edu/files/files/Compensation/compensation_plan_draft_6_6_05.pdf
Martocchio, Joseph J. (2009).
Strategic Compensation: A Human Resource Management Approach (5th ed.).
Thanks for forwarding Mr. Stonefield phone message to us. We understand Mr. Stonefield likes get our recommendation for pay and benefits strategies. He also likes to have pay and benefits comparable to other limousine services in Austin, TX market. Additionally, he has mention that he plans to have 25 employees in first year. He is also projecting annual revenue for first year in red (-$50,000) ...
Upper Saddle River, NJ: Pearson Education. Romanoff, K., Boehm, K., & Benson, E. (n.d.).
Pay equity: Internal and external considerations . Retrieved from http://theperfectpayplan.typepad.com/pay_equity_article.pdf