November 4, 2012

MU0015 [Compensation Benefits] Set2 Q3

Q3. Define internal equity and explain its importance. 

The term equity in compensation theory and practice arises in many different contexts. The following are the major areas: 
The legal and economic issue related to equal pay for similar tasks performed by employees. 
• The difference in pay caused due to external competition or market pressures. 
• The fairness of individual wage rates for people performing the same task. 
• The views of individual employees of their value relative to their pay. 

We say that internal equity exists in an organisation when an employer pays wages appropriate to the relative internal value of each job. This is established in accordance with the employer's perception of the importance of the work performed. 

However, before an organisation can evaluate the importance of each job, it must first determine the job-related factors that will be used for setting compensation levels. This refers to the compensable factors. The following are some compensable factors that are used for lower level jobs. 
• Education required. 
• Physical demands. 
• Experience required. 
• Supervisory/managerial responsibility. 
• Working conditions. 
• Responsibility for equipment/materials. 
• Public contact. 
• Accident or health hazards. 
• Manual ability. 

Determining the relative internal value of jobs within a large or complex organisation could prove difficult. Job-evaluation methods are used to develop a job hierarchy that reflects the relative value of jobs, which is assessed on the basis of skills, effort, responsibility, and working conditions. Several job-evaluation approaches have been developed. These approaches include: 
• Whole job ranking. 
• Classification. 
• Point factors. 
• Factor comparison. 
• Slotting. 
• Scored questionnaires. 

An organisation may choose a rigorous and disciplined approach to job evaluation or a relatively simple one. However, it is important to note that all approaches are subjective, as they depend a lot on the judgement, accuracy and commitment of the top management of an organisation. 

Internal equity covers a wide range of subjects apart from the amount paid to employees such as stock plans, benefits, retirement plans, health and welfare plans, vacation time, and so on.

To maximise internal equity, an organisation must assess the value of each individual and the value of the job they are performing to the entire organisation. Such investments can be done in different ways and most of the companies benefit greatly by hiring an outside firm to check on methods to reduce costs and increase worker motivation. 

The internal equity method undertakes the positioning of a job in the organisational hierarchy. The main aim of the process is to balance the compensation provided to a job profile when compared to the compensation provided to its senior and junior level in the hierarchy. This fairness is ensured using methods such as: 
• Job ranking. 
• Job classification. 
• Factor comparison. 
• Point system. 

Figure depicts methods of Internal Equity. 
Figure Internal Equity

Job ranking: This method involves placing jobs in order, from the most valuable (or most difficult) to the least valuable (or least difficult) using a single factor such as job complexity or the importance of that job to the organisation. 
Job classification: In this method, each job is measured against a pre-existing set of job classes that have been designed to cover the complete range of work that the employees would perform. 
Factor comparison: In this method, a set of compensable factors are identified as determining the worth of jobs. The examples of compensable factors are skill, responsibilities, effort and working conditions. 
Point systems: In this method, clusters of jobs to be evaluated are determined. Jobs are clustered based on the type (for example sales job, factory job and so on), and an evaluation committee develops a point plan for a cluster or a group at a time. 

Several different techniques can be adopted in your business to maintain internal equity. A few of the techniques are as follows: 
Optimise employee performance. 
Reducing unnecessary levels of employee pay. 

One tool that can be used to achieve internal equity is variable pay scale. Using such a pay scale, you can pay your employees on the basis of their performance. In this manner, the employees who do a better job will receive greater compensation than those who perform average or less than expected. On the whole, employees are motivated to perform better and produce more when they understand how their performance affects their pay. Hence, educating them on how their pay is determined can make a big difference. 

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