When it comes to your business, one of your goals is likely to attract and retain top talent. One way you can do this is by looking at your internal equity. But, what is internal equity? And, what does it have to do with equal pay?
What is internal equity compensation?
Internal equity boils down to equal pay. With internal pay equity, employees with similar job positions or skills receive similar compensation. Equal pay can be in the form of salary or even additional benefits of the position.
As an employer, you are legally required to treat all of your employees equally and fairly based on The Equal Pay Act of 1963. The act made it illegal to pay men and women working in the same business different salaries for similar work or responsibilities. And, the act also comes into play with other forms of compensation and benefits, like a bonus.
Some states, like California, may have additional and stricter laws about equal wages. To ensure you’re compliant, check with your state to see if they have any additional requirements.
You must ensure fair pay as a business owner. However you decide to compensate for similar roles, you must pay all employees on the same level equally.
Whether or not you pay employees the same can vary based on the scenario. For example, if you have two employees with the same role but one of the workers has additional schooling specific for the job, you may decide to pay them a higher salary.
You can do an internal pay equity analysis by reviewing job position details and pay rates (which we’ll get into later).
Internal equity vs. external equity
While internal equity looks at fairness within the company, external equity looks at how your pay and benefits stack up compared to others in the industry.
External equity compares pay in your business against the external market. With external equity, you can see what the external market is paying for similar jobs within your industry. For example, you can look at external equity to see what your company is willing to pay versus one of your competitors.
Looking at external equity can help you make more competitive job offers, salary structures, and salary adjustments. Not to mention, it can help you attract and retain top talent.
You should look at both internal and external equity factors. That way, you can implement a solid compensation strategy and ensure your pay is fair and equal for each and every employee.
Internal equity example
Let’s say you own a bakery and have two decorators. The decorators both perform the exact same tasks, have the same responsibilities, and work the same amount of hours each week. Because the decorators have similar positions and tasks, you should pay them similar wages.
Now, let’s say one of the decorators goes to school to take advanced baking and decorating courses. Because the decorator’s skillset is more advanced than the other decorator, you can justify paying them a higher wage.
Need help determining fair and equal pay for your employees?
Take a look at our FREE guide, Determining Employee Compensation: Employer Responsibilities, to learn how to determine compensation, withhold taxes, and more.
Importance of internal equity
Internal equity compensation is important for a number of reasons. Obviously, you have to offer equal and fair pay for all employees by law. But, there are a few additional perks. Internal equity can:
- Make employees feel valued
- Boost employee morale
- Increase employee loyalty
- Attract top talent
- Reduce employee turnover
In short, internal equity is a must for employee engagement and retention. But, it’s absolutely necessary to ensure employees are treated fairly, stay compliant with the law, and avoid any discrimination lawsuits.
Creating fair pay in the workplace
To ensure you’re fairly and equally paying each of your employees, you can take a few steps to achieve and maintain internal equity. Follow these three steps on a regular basis (e.g., annually) to make sure you’re compliant.
1. Conduct internal audits
One of the best ways you can create equal pay in the workplace is by conducting an internal audit. That way, you can see what you’re currently paying each employee and do comparisons to ensure everything is fair and equal.
During your audit, you can compare the following across each role, department, etc.:
- Job titles and descriptions
- Employee wages
- Other compensation
- Non-monetary benefits
- Level of education, skills, and experience
If there are any employees who have varying pay with a similar role to another employee, you should be able to explain your decisions on employees’ compensation. When you set an employee’s wages, document all the factors that led you to your decision.
If you notice any discrepancies while conducting your audit, take notes and make adjustments if necessary.
On the importance of conducting audits for internal equity, Roy Morejon, President and Co-founder of Enventys Partners, said:
Internal equity is about fair compensation within any specific workplace, and the best way to maintain it is to invest in regularly auditing your compensation structures. Internal audits help to compare how different employees are being compensated for various roles, which is the best way to ensure there aren’t any discrepancies in wages or other benefits for workers with similar responsibilities.
2. Look into external equity
Remember our discussion about external equity? That’s right—you’re going to use that to your advantage to ensure you’re offering equal pay.
To create fair pay in your workplace, look into external equity. Research what other companies pay for the same or similar positions. You can use tools, like PayScale, to help do your external equity analysis and get insight on average pay of certain positions in specific areas.
If you see any big differences when it comes to pay ranges while conducting your research, consider making adjustments.
3. Be transparent
Employers cannot forbid employees (verbally or in a policy) from discussing pay or other job conditions among themselves. Because of this, employees may potentially discuss their pay with one another.
To prevent any disputes or conflicts in the workplace, be transparent with employees about their pay. Let each employee know how you determined their pay with internal and external data and processes. If an employee ever questions their wages, you can explain the exact reasons for choosing their wage amount (and be sure to document it, too).
The more open you are about pay, the better off your business will be.
This article has been updated from its original publication date of July 31, 2012.
This is not intended as legal advice; for more information, please click here.
Pay inequity is increasingly becoming a reputational risk for organisations in an era where employees can share and compare their pay levels. In many countries, it is now mandatory to disclose pay levels to promote transparency and accountability. Companies that pay fairly are more likely to attract and retain top talent, whilst companies that pay unfairly experience lower morale, create resentful employees and dampen commercial performance. The World Economic Forum estimates reputational risk as the equivalent to 25 percent of a company’s market value.
But ensuring pay equity is a complex issue. We commonly encounter news headlines illustrating inequality by comparing executive pay with those of lower-level roles. Such an approach ignores the multi-dimensional pressures that drive, diminish or stagnate employee compensation over time. For instance, in Australia, a CEO can earn as much as 105 times the average worker salary while in India, headlines suggests they earn 229 times more. Such numbers however, don’t reveal the full picture. The average salary of ASX100 Chief Executives in Australia is $5.7 million while the average wage of full time workers is $81K. In India, by contrast, a CEO earns on average U$1.5M while the average wage is reported to be U$18K. Instead of jumping to conclusions that people doing the top jobs are being overpaid, it’s important to understand the forces that create these pay disparities. These driving forces can come from both inside the organisation and the external market.
Here is a summary that can explain why certain gaps exist:
Internal equity helps organisations ensure that similar level jobs are paid about the same; and “bigger” jobs are paid more than “smaller” jobs. Using Work Measurement techniques gives companies and employees an understanding of what is a “bigger” or “smaller” job.
Organisations that achieve internal equity pay employees fairly compared to their co-workers. Factors that impact internal equity include: Business units, location, job functions, job levels and any unique requirements of specific roles.
External equity exists when employees in an organisation are rewarded fairly in relation to those who perform similar jobs in other organisations. Factors such as external competition, market pressure, organisational size, geographic location, and cost of living can create pay differences across industries for similar roles.
Pay equity is more prevalent in certain businesses
While pay equity issues can exist in any business, they’re more prominent in certain industries and types of organisations where the shape of a company can impact on how remuneration is distributed.
A company that employs more people at a lower wage will have a higher disparity between top and bottom, especially if it’s a multinational organisation operating in markets with lower wage costs and a lower cost of living. By contrast, a professional services company will have lower pay disparity, even if the CEO earns more.
So, a company that has fewer people, but primarily hires skilled people (like a consulting firm, a law firm, or even an investment bank) will have much lower disparity but may have CEOs who earn far more than those in a manufacturing company.
To put it another way – if a company is entirely comprised of people earning in the top 1 per cent of worldwide pay levels, their CEO automatically looks more ‘equal’ than a company who employ people earning a broader range of wages. The simple illustration (below) shows the typical numbers of people at each job level for a retailer and a professional services company.
Forces at play
Korn Ferry’s PayNet database provides organisations with access to pay levels of more than 24,000 global organisations in over 110 countries. The database accurately reports what the market is paying for similar roles, enabling organisations to be confident they pay employees fairly. The PayNet database classifies roles according to job levels and a recent PayNet analysis of data variances in APAC salaries of lower level employees (level 8 - Clerical Worker) compared to executive roles (level 24 - CEO) shows the gap continues to grow in most countries.
In India, business executive salaries were on average 29 times the average Level 8 salary in 2011, compared with 74 in 2017 showing a substantial increase in executive salaries. In China salaries followed a similar pattern.
Industry type can influence organisational compensation distribution. For example, India’s primary industries are manufacturing oriented, indicating that most workers are entry-level and unskilled. Business executives feature sparingly at the top of a hierarchical organisational chart. Another big driver of this discrepancy in pay ratio is that CEOs are paid in an international or global market, whereas workers at the bottom are paid according to the local cost of living which in some countries like China and India, is very low.
In contrast, Hong Kong and Australia showed a reduction in the compensation gap between business executives and workers. This decline could be reflecting the influence of the increasing globalisation, digitalisation and professionalisation of workers on their compensation.
When we exclude the very top and bottom-level jobs, the gaps are not as pronounced, and more countries show an overall reduction in pay inequity rather than an increase. The decrease in compensation variation between workers at level 20 (higher-level managers) and level 12 (IT Programmer) can reflect the increasing growth of wages at the professional level as well as the talent scarcity of some skills and people capable of working in complex environments. For example, higher-level managers (level 20) are responsible for more people and more responsibilities. An IT programmer (level 12) requires skills that are in high demand.
Organisations cannot easily control the variables that regulate wages. For example, to attract new talent during times of skills shortage, companies traditionally offer higher than average salaries to attract top talent, but this has the potential to upset internal pay inequity because two roles at the same level, one high-demand and the other in less demand, would no longer be paid the same. But there are measures that organisations can implement to minimise wage discrepancies and resentment and to maximise staff retention and performance.
Four steps to manage pay equity
- Put in place a robust approach to measure jobs and salaries to diagnose, understand and address salary variance in your workforce.
- Be transparent about pay policies, trends and the changing demands of your workforce. Speak openly about the skills needed and the skills you expect you’ll need in the future. This is not necessarily confined to your company – there may be a need for this on a national or international level, especially when it comes to training young people.
- Be realistic and plan for these changes. Develop a compensation strategy that includes a risk management plan. Map out all the internal and external pressures that have historically affected salary levels, as well as those likely to in the future. And devise solutions to mitigate each risk when they occur. From skills shortages, to downturns, rogue business managers who recruit their own talent and ignore salary bands: Each eventuality can be planned for and tackled. Stakeholder management is key when an organisation’s reputation is risk.
- Develop people to move up the ladder, improve their wages and how skills are taught at work.
- This is particularly needed with young people. In many cases, they haven’t yet learned the ‘soft skills’ needed in the workplace.
- Our Best Companies for Leadership study shows the best companies develop these skills internally (and promote from within), which is both cost effective and more reliable than going to the market. This can take the form of placements in different areas to diversify skills.
Internal and external pay inequity is a complex, multi-dimensional issue that reflects market and organisational pressures. CEO compensation packages receives a high level of public attention; however, it is often reflective of industry, market as well as geographic location trends. Every organisation needs to create a well-crafted compensation strategy that manages internal and external pressures and ensures ongoing pay equity for all employees, while mitigating reputational risk and driving superior performance.
Learn more about the Korn Ferry EQUAL model to address pay disparities.