Employers who want to thrive in a competitive market need to establish an effective compensation program, which values employees through rewards and equity. Equity is a fundamental factor in the employee compensation system because it enables employers to measure the value of employees based on their responsibilities, as well as consider their pay based on other organizations. Equity is one of several ways that organizations utilize to allocate rewards and punishments to their employees. Workplace equity ensures that all workers within the organization receive appropriate pay, and are treated fairly. Thus, internal and external equities are fundamental in the establishment of the organizational compensation structure, since they enhance employee reward system across organizations.
Comparing Internal and External Equity
Internal equity involves rewarding employees with regard to the value of their jobs. Internal equity allows employees to perceive their benefits with regard to their responsibilities within the organization. Compensation systems offer a competitive advantage to a particular firm over its competitors, thus, enhancing its capacity for survival. Before an organization can decide on the value of each job, it has to determine the compensable factors, such as experience, education, physical demand, supervisory responsibilities, and health hazards.
In contrast with the internal equity is the external pay, which focuses on rewarding employees the same way as other employees, with similar responsibilities, in other organizations. The goal of establishing an external equity is to match the organization’s compensation program with the same programs within the same labor market. While internal equity depicts a complex form of relationships where workers’ behaviors do not determine their pay, external equity may evaluate employee’s behavior before determining their rewards. Internal equity does not necessarily depend on the external equity; hence, compensations suggested by the labor market may not be applicable in an internal job ranking.
Although there is no right or wrong method concerning the formulation of compensation structure, organizations should the long-term tactics of addressing pay equity. Ascertaining internal and external equities enable organizations to develop a pay curve that illustrates the link between base pay and the value of the job (Hartel & Fujimoto, 2015). Internal and external equities should strive to satisfy organizational goals, in addition to creating the culture that each organization aspires to attain. Both equities are vital in determining pay-level satisfaction.
External equity ensures that employees are not treated unfairly based on how other employees in the competing firms are being treated in the same capacity. According to Hartel and Fujimoto (2015), competitors usually establish market rates that determine how much employees working at a similar job should be paid. Virtually, all employers have to weigh up the external labor market when instituting a comprehensive compensation program. This aspect is crucial because compensation programs of other organizations in the same industry have a significant effect on the quality of labor, with regard to recruitment and retaining workers.
Employers utilize market compensation surveys to assist them attain external equity. The process of carrying out pay surveys incorporates factors that include geographical location, type of industry, organization size, product competition, and experience level. Each of the mentioned factors or a combination of the factors, establish the labor market for specific jobs. For instance, a financial manager in a city bank is likely to receive a higher pay than a financial manager in a small town due to geographical location, experience level, and organization size.
Employees are likely to feel undervalued if they realize that their fellow employees receive more pay for the same work. External equity is linked to a lower level absenteeism while relationship between employees and their employers becomes strong when the past employee’ performance is utilized as the base for increased pay. External equity influences employers to offer extrinsic rewards, which incorporate financial payment based on work performed, in addition to indirect financial rewards that include employee assistance program, childcare, and sick leave.
External Equity in Health Care
Firms in the same industry will always compete to conquer the best talent to assist their organizations to expand. For instance, if a health care employer fails to offer compensation that employees perceive as equitable in comparison with other employees in other health care facilities, the employer is likely to encounter a high turnover. A strategic compensation plan is vital in health care to enhance competition in the labor market and to retain quality health care professionals. To avoid shortages of health care professionals in the hospitals, employers should reward professionals for their loyalty. This would encourage new employees to dedicate their effort in making their workplaces better.
Despite being extremely cyclical, the healthcare labor market perceives recruitment as an essential strategy in dealing with high turnover. Compensation programs in the health care are normally guided by the Fair Labor Standards Act (FLSA), which penalizes employers for violating employees’ rights (Flynn, Mathis, Jackson & Valentine, 2016). The act enables health care professionals to receive extra pay for any extra time they dedicate to their responsibilities. The act also indicates the minimum wage that an employee is supposed to receive on hourly basis.
Although most health care organizations offer doctors and nurses compensation incentives, their compensation programs do not differentiate between incentive pay and base pay. Employers in the health care facilities are also likely to face numerous challenges while trying to recruit qualified nursing staff. Lack of competition would result in retention of less knowledgeable employees, which could affect the productivity of the facility.
Health care facilities should establish compensation programs that focus on boosting performance, rather than limiting progress. Apart from base pay, health care employers should incorporate incentives, such as paid holiday and paid vacations, which would encourage professionals to remain in the sector. Providing clear updates on compensation incentives enables health care professionals to be integrated into the compensation program, which contributes to high productivity. It makes sense for the employers in the health sector to consider external equity instead of internal equity while drafting compensation programs to enhance career progress and minimize job shifting. In addition, employers should encourage feedback to ensure that health care professionals are satisfied with their pay.
Internal and external equities are vital in the designing of the compensation plan, as they enhance employee reward system within organization, as well as across the labor market. Pay equity depicts employee’s value within the organization and it enables organizations to treat employees fairly based on their roles. While internal equity is vital in enhancing employees pay with the organization, external equity ensures that employees undertaking similar responsibilities receive equal pay across the labor market. Most experts prefer employers to consider external pay equity as the basis of rewarding employees equitably. Health sector should consider both external and internal equities to eliminate cases of high turnover.
Flynn, W. J., Mathis, R. L., Jackson, J. H., & Valentine, S. R. (2016). Healthcare human resource management. Boston, MA: Cengage Learning.
Hartel, C. E., & Fujimoto, Y. (2015). Human Resource Management. Australia: Pearson.