Internal and External Equity Comparison and Fundamental Aspects

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Table of Contents

Introduction
Internal Equity at American Institutes for Research
External Equity at Novartis Pharmaceuticals Corporation
Conclusion
References

Introduction

The aspect of equity in organizational total compensation plans primarily entails fairness and competitiveness of salaries and rewards that employers pay employees (Martocchio, 2009). Internal equity and external equity are the main forms of employee-centered compensation systems. The two reward systems are implemented by organizations depending on the nature of their activities, their required employee skill sets, and their overall human resources management strategies.

Internal equity involves the comparisons of employee rewards allocations in an organization. External equity, on the other hand, refers to the ways an organization’s compensation packages compare to those of other organizations. The choice of a particular compensation system is usually informed by the need to optimize employee retention and work performance while remaining attractive to prospective employees at the same time (Martocchio, 2009). This essay analyses the fundamental aspects of internal and external equity, with reference to two organizations that have in place either of the compensation systems.

Internal Equity at American Institutes for Research

American Institutes for Research (AIR) is one good example of an organization that implements a total compensation structure that is focused on internal equity. AIR’s work environment demonstrates team empowerment and encourages assertiveness in the bid to observe motivational strategies that promote efficiency and continuity within the internal environment of the organization. These employee compensation characteristics are evident in AIR’s total compensation package whereby it is designed to attract and retain the best talent through competitive salary rewards, comprehensive employee benefits, and a supportive work environment.

As such, it observes internal equity by rewarding its entire talented workforce proportionately (American Institutes for Research). The organization has in place performance-based bonus programs, well-defined systems for propagating employee promotions, and clear criteria for determining salary increments and benefits that come with promotions (American Institutes for Research). This enables the organization to avoid discriminative salary discrepancies and other pitfalls in its internal environment.

One advantage of internal equity is that it encourages individual employees to exercise creativity and innovations because of the satisfaction they get from their compensation rewards, but also from their ambition to rise through the ranks. It also promotes teamwork among employees in similar and different pay scales because of the absence of discontent that usually arises from salary discrepancies among employees in similar job scales. Organizational employees also motivated when their designated job responsibilities and actual workloads are taken into account in their respective total compensation packages (Martocchio, 2009).

However, internal equity compensation plans may fail to take into account the individual skills, talents, and work performance capabilities of employees especially when uniform scales compensation is offered to workers in similar job groups.

External Equity at Novartis Pharmaceuticals Corporation

Novartis Pharmaceuticals Corporation is one good example of an organization that has in place a total compensation structure that is focused on external equity. The company’s external equity aims at ensuring that its total compensation plan matches or even exceeds the prevalent pay rate scales in the market. To this end, the Novartis Annual Incentive Plan offers employees lucrative reward packages along with a string of benefits that are in tandem with the prevailing industry trends (Novartis Pharmaceuticals Corporation, 2012).

The company’s external equity-focused benefits programs include: “overall health and overall well-being benefits, work and life benefits, financial protection benefits, financial and retirement planning benefits that include 401k plans” (Novartis Pharmaceuticals Corporation, 2012).

The total compensation plan for Novartis Pharmaceuticals Corporation compares well with the other industry players such as Sanofi Aventis, Pfizer, Inc., and Bristol-Myers Squibb Company. For example, in addition to offering an extensive employee benefits portfolio, Sanofi Aventis provides its employees with 401k retirement plans that are accompanied by matching contributions of the company (Sanofi, 2012).

Bristol-Myers Squibb similarly ensures that its total compensation packages match the offers of other industry players (Bristol-Myers Squibb Company, 2012). This means that the employees of Novartis Pharmaceuticals Corporation are not likely to exit the company in favor of its competitors on grounds of compensation because all the companies provide relatively similar lucrative total compensation plans.

External equity poses the advantage of stemming employee turnover rates because it ensures that the organization matches or even exceeds offers in the industry-wide compensation systems. It also enables the organization to attract employees with the best qualifications and desired skill sets that enhance output performance and product competitiveness (Martocchio, 2009). However, the external equity compensation system has the disadvantage of added costs for the organization, especially when the organization’s income potential does not match the income potentials of other organizations in the industry offering comparatively lucrative compensation packages to their employees. Moreover, external equity is a force of the external organizational environment. External forces are considered to pose significant challenges to organizational management because of their uncontrollable nature.

Conclusion

Organizational needs are generally determined by the diversity management strategies that involve planned and systematic commitment of the organization to recruiting and retaining employees with diversified skills from diversified backgrounds (Kirton, Mary, & Greene, 2009). Indeed, employees with diversified professional backgrounds are beneficial to the organization because they can freely multitask and eliminate the need for expanded support staff. Diversified qualifications broaden management approach options for managers by way of mainstreaming operations through individual skills and affiliations (Kirton, Mary, & Greene, 2009).

References

American Institutes for Research. (n.d.). Rewarding our people – AIR’s commitment to you. Web.

Bristol-Myers Squibb Company. (2012). Entire benefits listing. Web.

Kirton, G., Mary, Q., & Greene, A. (2009). The costs and opportunities of doing diversity work in mainstream organizations. Human Resources Management Journal, 19(2): 159-175.

Martocchio, J. J. (2009). Strategic compensation: A human resource management approach, (5^th ed.). Prentice Hall, Pearson Education Inc.

Novartis Pharmaceuticals Corporation. (2012). Compensation and benefits. Web.

Sanofi. (2012). Compensation and benefits. Web.

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Internal and External Equity Comparison and Fundamental Aspects

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