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Advantages of an Internal Equity Plan

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The Advantages of Internal Equity in a Compensation Plan

An effective employee compensation system must balance two factors -- worker motivation and labor costs. In designing your company's pay plan, you must consider both external equity and internal equity. External equity refers to comparisons with other competitive pay structures. Internal equity means ensuring fairness in pay for employees working similar jobs. There are some advantages to considering internal equity.
Perception of fairness
Organizational culture is an important strategic factor to business success. If you want to develop and maintain a culture of fairness, you need to strongly factor in internal equity. If employees look at others in similar jobs and see equal pay, they will likely feel like the organization and its leaders are fair. When employees respect you as fair as a leader, the chances that they listen to your direction and guidance toward their work is greater.

Reduced Exposure to Discrimination
While the market-based approach may attract the most talented workers, an emphasis on internal equity offers better protection against discrimination lawsuits. Title VII and the Age Discrimination Act are a couple major employment laws that protection workers from discrimination. If you pay different wages to workers in the same role, you run the risk that one is a member of a protected class and sues for wage discrimination. The Lilly Ledbetter Fair Pay Act of 2009 expanded exposure to lawsuits by allowing workers to sue for past wage discrepancies. By ensuring internal equity, you mitigate your risks.
Consistent Standards
When you pay employees on a consistent scale, you also have the opportunity to maintain consistent performance standards. When conducting a job analysis and developing a description, you establish the abilities, duties and responsibilities required for a position…...

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