Internal and External Equity Compensation

878 words 4 pages
Internal and External Equity Comparison

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
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(Heneman, 2002). Additionally, by creating equity in relation to the market, companies have a higher retention rate, which can lead to employee loyalty (Mathis & Jackson, 2008). The disadvantages to this system is that it can lead to inflated wages that do not take into account the economic environment as a whole, and can also lead to internal dissatisfaction if there are wage discrepancies between individuals working at the same level in the organization. While this may be sustainable short term, should an organization’s performance fall in the market, whether due to internal factors or market condition, the organization still has to abide by its compensation package (Mathis & Jackson, 2008).
In conclusion, both types of compensation plans help to support an organization’s objectives, because in analyzing the compensation plans and tailoring them to either the organization and/or market, companies are trying to ensure that they attract and retain good employees. A company will be well served to choose the type of compensation plan best fit to their place in the market.

Armstrong, M. (2007). A handbook of employee reward management and practice. Kogan Page Publishers
Heneman, R.L. (2002). Strategic reward management: design, implementation, and evaluation.
Lederer, J.L. & Wienberg, C.R. (1995). Equity-based pay: the compensation paradigm for the re-engineered corporation. The Chief


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