Internal and External Equity Comparisons
Internal and External Equity Comparisons
Organizations that has the drive to flourish in a market that is very competitive must have a compensation plan that is well designed and inspires its employees, has benefit programs, guarantees equity, and handles compensation costs. These plans should mirror the culture of its employees. Organizations have numerous of options when designing a compensation plan comes into play, and must consider how the options they have chosen will be suitable for their strategy for engaging and keeping their employees. This paper will identify a total compensation plan for an organization, identify the internal and external equity advantages and disadvantages, and provide and explanation on how each plan supports the total compensation objective and the relationship to its financial situation. Total Compensation Plan Focused in Internal and External Equity Some organizations decisions are based off of the market. They begin by looking at salary surveys to observe what the other competitors are paying their employees (known as external equity).
Soon as they have access to the market data that is needed, the organization have their option to either establish their salaries and wages equal, below or above the market depending on the financial situation of that organization. For instance, an organization may decide to raise the pay for certain employees pertaining to certain positions in order interest and then keep very valuable employees. Let’s say General Motors (GM) has just opened up a new plant in a city where Ford is well known. They are short on senior creative program designer positions who’s salary ranges from 99,000-125,000 a year. What GM would do is access the salary surveys that are on the market to see how much Ford is actually paying them. From there GM would make the decision to either set the wage for that positon the same, lower, or higher than what Ford is offering. If that position is needed and they want the best employee then the wages would be set higher, maybe starting off at 105,000 a year with the opportunity to advance to making 130,000 max.
This would not only gain the attention of the best program designer but also may retrieve the best from Ford. Conversely GM should also deliberate on internal equity, which is whether their compensation plan imitates how much they value certain positions in relation to other positions throughout the organization. In order to guarantee both internal and external equity, GM would have to institute an operative compensation management program that conducts job analysis (to systematically evaluate and describe each job within the organization), job evaluations (regulating what jobs have a better value to GM), and job pricing (form rate ranges, the minimum, midpoint, and maximum dollar values for each job). Bottom line is that some organizations compensation plans are meant to meet compliance requirements. While GM would be to attract skilled employees, motivate them, and retain them so that the goals of the organization could be achieved.
Advantages and Disadvantages of Internal and External Equity Internal equity deals with the perceived worth of a job relative to other jobs in the organization (“Cite Hr”, 2014). Generally, they consider skill, effort, responsibility and working conditions in this comparison in order to determine the value of their jobs relative to other jobs (“Cite Hr”, 2014). This structure is made to show employees that they are being treated fairly based on their place or job within the organization. External equity deals with the issues of market rates for jobs (“Cite Hr”, 2014). This is where an organization looks within the market to see what’s the going pay rate for certain jobs, then they would determine how they are going to pay within their organization so they could seek and retain qualified employees. This system will require a base pay program the pays competitively. There are a few advantages and disadvantages of internal and external equity. The advantages of external equity is that it allows organizations to keep up with the competition within the marketplace (on salary and wages), it allows organizations to raise an employee pay (if they ask for one basically negotiating), the last benefit is that it forces organizations to always be on top of the market.
The advantages of internal equity are that it gives the employees the perception of fairness, it decreases the opportunity for discrimination to arise, and it provides consistent standards because when one is paying an employee fairly an organization limits their ability to claim unfair treatment therefor have a lack of motivation and bad performance. The disadvantages of external is that it could lead to overestimated wages, and employee dissatisfaction. This disadvantages of internal equity is that an organization could risk the loss of employees to higher paying competition, and could lose the employees motivation once they realize they are being paid in the internal equity system. Explanation on how each Plan Supports the Organization’s Compensation Objective GM’s much improved financial structure and our $23.2 billion in EBIT-adjusted since the beginning of 2010 are allowing us to reinvest in the business at a consistently high level, despite the fact that most European economies are in distress and U.S. sales remained below pre-recession levels in 2012.US automaker General Motors gave one of its highest profit-sharing payouts ever (“Gm”, 2014). Forty-five thousand employees received $189 million in a profit-sharing bonus, which equaled about $4,200 per person (“Gm”, 2014)..
The external plan works great for this because it allows for employees to make even more money when the production of the company rises. The internal plan also works great because it shows that everyone is being paid fairly but at the same time have that option of buying into stock to make more money. In conclusion having a compensation plan can be beneficial for both an employee and organization. Once an organization choose which direction they are wanting to take whether it’s an internal or external approach is on them. An internal approach is more of a peaceful one for the employees, it shows that they are being paid fairly. While the external approach reaches of for the best employees by having the opportunity to pay them more. Either way an organization will have to pick the type of plan that fits them within the market.
Cite HR. (2014). Retrieved from http://www.citehr.com/601-compensation-plans-overview-base-pay.html
GM. (2014). Retrieved from http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Stockholder_Information/PDFs/2012_GM_Annual_Report.pdf