Internal and External Equity Discussion

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Table of Contents

Pros and Cons of Internal and External Equity
Federal Law
Human Resource Actions
References

Pros and Cons of Internal and External Equity

Internal equity refers to compensating employees with similar roles or skill sets in a firm with equal pay through wages or other perks associated with the job. Internal equity focuses on pay equality within and across the organization. Advantages of internal equity include perceptions of fairness, reduced exposure to discrimination, consistency in standards, and team structure. Internal equity allows equal pay to all employees, creating a perception of equality and fairness among the employees. A fair internal compensation strategy enables organizations to retain top talent (Boogaard, 2021). Internal equity reduces the probability of litigation against wage discrimination as all workers in the same job category are paid equal wages.

Employees’ capacity to claim unfair treatment during termination is constrained when pay is consistent across the department. Internal equality is essential for creating a cohesive team inside an organization as employees collaborate when their salaries are comparable to their peers. The most notable drawback to internal equity entails the difference in perception between employees and employers. Employee and employer perspectives might not match where an employee believes they ought to be paid equally compared to another staff as they perform the same duties. This difference in perception creates internal conflict and affects workers’ morale.

External equity refers to the fairness of remuneration compared to the outside market. External equity measures the difference between what a company is willing to pay for talented personnel and what other companies vying for the same talent are prepared to pay. An organization can improve its capacity to recruit and retain top talent by maintaining a competitive compensation structure by matching the pay rates of its rivals (Teine, 2020). This approach allows organizations to better manage labor costs by comparing salaries for qualified workers to the market, company size, revenue, and industry. The disadvantages of external equities are the cost borne by an organization to remain competitive in the market (Teine, 2020). External equity requires employers to adjust the compensation structure during tight labor markets.

Federal Law

It is required by law to treat every employee fairly and equitably. The Federal Equal Pay Act (EPA) of 1963 prohibits gender-based discrimination between men and women employed by the same business in positions requiring an equivalent level of ability, effort, or responsibility (American Bar Association, n.d.). For compliance, organizations must structure their internal pay to correspond to the EPA rules; thus, employees in a department are offered compensation within a predetermined pay range. The Lilly Ledbetter Fair Pay Act of 2009 aims to provide workers with greater discrimination protection, as employees can file a lawsuit within 180 days of the last paycheck in which the discrimination occurred (American Bar Association, n.d.). Organizations risk litigation issues when dissatisfied employees learn that they are not being paid the same as someone in a similar role. This affects the internal equity pay structure as organizations must ensure equality in monetary compensation, bonuses, and fringe benefits.

Human Resource Actions

Human resource (HR) managers should use job evaluation techniques to establish an internal equity structure and avoid potential illegal discrimination. Cosentino (2022), competency-based pay is the most suitable method as it compensates workers based on their skills and experience rather than a job title. The balance between expertise, potential, and market value helps HR managers avoid bias, underestimation, and overestimation when considering compensation (Cosentino, 2022). HR managers need a clear compensation plan that compares pay scales to benchmark against market competitors. A defined pay approach can eliminate arbitrary salary decisions and guarantee that workers are valued and fairly compensated.

The likelihood of an equal pay discrimination lawsuit can be reduced by using external market data to guide a company’s pay scales and concentrating on internal equality throughout an organization. Implementing internal pay equity is crucial in adhering to federal statutes regarding employment and compensation. Compensation is a vital factor in attracting and retaining talent; thus, organizations should assess remuneration packages to eliminate significant discrepancies.