Introduction
Over time, organizations have come to appreciate the value of compensation as a vital factor as far as their ability to recruit and retain competent staff as well as reduce staff turnover is concerned. With that in mind, the importance of external as well as internal equity considerations cannot be overstated. In this text, I identify the total compensation plan for an organization focused on external equity as well as a total compensation plan for an organization focused on external equity. I also identify the various advantages as well as disadvantages of internal and external equity for the organizations and conclude by explaining how each plan supports the organizations total compensation objective as well as the relationship of the organization’s financial situation to its plan.
Internal and external equity
An Organization that notably uses internal equity to inform its pay structure is Intel. Internal equity is basically concerned with the organizational hierarchy’s job position. This process seeks to balance the hierarchy’s senior and junior level compensation with the job profiles compensation. Here, the parameters that inform fairness include but are not limited to status level, management level, job classification, job ranking etc. In the case of Intel, the total compensation plan as far as internal equity is concerned is informed by the relationship (numerical) between the Chief Executive Officer’s pay and that of the Company’s various executive officers.The Coca Cola, a company concerned with the manufacture of a wide range of both non-carbonated as well as carbonated drinks and other products however uses external equity to inform its pay structure. In this case, there is an analysis of the market pricing and a compensation plan is formulated based on a detailed industry and competitor standards assessment. It is argued that setting the employees compensation packages based on the market’s prevailing compensation rates enhances fairness. PepsiCo has over time been able to retain competent talent as a result of its basis of pay structure on external equity (Heneman 2002).
Internal equity: advantages and disadvantages
In the case of Intel, the effective management of internal equity is highly effective as far as the elimination of morale as well as motivational issues are concerned. This is based on the premise that an employee is much more likely to be aware of what his or her colleagues are paid as opposed to what other people in another organizations are paid. Hence when managed well, employees can be better motivated by their perception of fairness as far as pay scales within the organization are concerned. Further, Intel has consistently used internal equity to keep internal disaffection in check as far as the CEO’s compensation and that of senior organizational management is concerned. Further, it acts as a check against excess compensation and also effectively check against market biases.However, by relying entirely on internal equity, Intel risks losing some of its most competent staff to competition. Also, according to Armstrong (2007), internal equity may prove to be beneficial in the short term but be costly in the long run.
External equity: advantages and disadvantages
External equity has been highly effective in the case of Coca cola as far as attracting as well as retaining competent or the best minds in the marketplace is concerned. Similarly, staff turnover rates have been reduced as employees are aware that the company’s compensation structures are benchmarked on the labor markets best standards. With this, employees identify more with the company and are hence more motivated to support the various organizational goals.However, by developing a pay structure based on internal equity, a companies like the Coca-Cola company risk being adversely affected by industry or market biases where pay structures are largely artificial and do not reflect the economic prevailing conditions or otherwise. Also, resentment may set in at the management level in situations where the CEO’s pay is set as per the industry standards without any bearing on what other managers earn. Consequently, developing a pay structure based on internal equity may hurt the company’s bottom-line, i.e. in terms of return on equity (ROE).
Effect of the compensation plans on each organizations compensation objectives
When it comes to Intel, an internal equity plan has been in line with the Organizations objective of enhancing the relationship (numerical) between the Chief Executive Officer’s pay and that of the Company’s various executive officers. The compensation objective is also in line with Intel’s organizational structure as well as culture which largely influence the formulation of internal pay equity ratio. Taking into consideration the Organization’s financial situation, this plan has been beneficial to the organization oven the volatility of revenues informed by severe competition in the technology sector.When it comes to Coca Cola Company, an internal equity plan has been in line with the Organizations objective of basing its compensation on three main measures including industry standards, geographic location as well as size of the organization. When it comes to the organizations financial situation, its ability to consistently generate high returns has seen it maintain the compensation plan which acts as a competitive advantage when it comes to retaining the best talent.
Conclusion
In conclusion, it is important to note that to in addition to external equity and internal equity, companies have been known to compensate individuals on other measures including personal equity as well as individual equity, wit that in mind, a company must base its compensation plan on its unique compensation objectives as well as financial situation amongst other parameters.
References
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. IAP
