Internal and external equity relate to an organization’s compensation and rewards, and both are essential for an employer to attract and retain top talent. Striking a balance between the two will help create a compensation framework that motivates employees, retains top performers, and supports organizational success. 

• External equity refers to the fairness of a company’s pay and rewards relative to the external market. It involves comparing your organization’s compensation practices and levels to competitors and industry standards so that you can attract high-quality talent that will accept your offer and join your company.
• Internal equity refers to the fairness and equality of pay and rewards within an organization. It is the principle that employees with similar positions, experience, skills, and contributions should receive comparable compensation and recognition. Internal equity aims to eliminate pay disparities and perceived inequalities among employees.  

Related: Pay Transparency on Job Postings 

The “how” of internal equity 

To address internal equity, employers must ensure that employees perceive their compensation and rewards as fair and aligned with their contributions. This is an essential step toward fostering an inclusive work environment. However, 41 percent of HR professionals feel their company struggles to address pay equity—up 10 percent from last year. Here are some steps you can take: 

• Regularly audit your compensation structures by systematically evaluating jobs within your organization to determine their relative value based on factors such as skill requirements, responsibilities, and impact on company goals. This process helps establish a fair and consistent framework for comparing positions and setting compensation levels.
• Develop a pay structure that reflects the hierarchy of jobs and your company’s compensation philosophy. This structure should establish explicit salary ranges or bands for different job levels, considering factors like skills, experience, education, and performance.
• Conduct regular salary benchmarking exercises to compare your organization’s pay levels with industry standards and competitors. This helps ensure that compensation remains competitive and aligned with the external market.
• Promote transparency in pay practices by clearly communicating the criteria for determining compensation and rewards. Establishing clear and consistent guidelines can help employees understand how their pay is determined and reduce perceived inequities. 

Related blog from Aleron Group Partner Broadleaf Results: How to Introduce Pay Transparency to Help Close the Gender Pay Gap 

• Continuously monitor internal equity by reviewing compensation structures, evaluating pay scales, and addressing the impact of changes on employee satisfaction and motivation. Conducting pay equity analyses to identify disparities based on gender, race, or other protected characteristics is crucial.
• Implement a robust performance management system that evaluates employees’ contributions objectively and links performance to rewards. Ensure that the criteria for performance evaluation are transparent, fair, and consistently applied across the organization.
• Involve employees in the process of designing and implementing compensation systems. Actively seek employee feedback and engagement on compensation and internal equity matters. Encourage them to share their thoughts, concerns, and suggestions to foster a sense of inclusion and empower employees to contribute to improving compensation practices.
• Provide training and education to managers and employees on compensation practices, internal equity, and the factors contributing to fair pay to help increase awareness and understanding, fostering a culture of equity within the organization.
• Establish employee recognition programs that acknowledge and reward exceptional performance, contributions, and achievements. Recognizing employees’ efforts publicly and providing tangible rewards helps create a culture of fairness and motivates others to strive for excellence.
• Foster fair promotion and advancement practices based on merit and aligned with employees’ skills, qualifications, and performance. Implement clear guidelines and processes for promotions, minimizing bias, and favoritism. 
• Leverage data and analytics: Data-driven decision-making is instrumental in addressing salary disparities and maintaining internal equity. HR professionals can leverage data and analytics tools to identify trends, forecast future salary needs, and make informed decisions about compensation strategies. By harnessing the power of data, companies can ensure that salary decisions are based on objective criteria rather than subjective preferences. 

Summing up 

Addressing internal equity requires a combination of proactive measures, ongoing monitoring, and open communication. Aligning compensation with performance and contribution leads to a more motivated and satisfied workforce, better business outcomes, and improved employee attraction and retention.   

This blog was written by Gina Milonas.