Assume you are serving on the board of directors of a medium-sized corporation,

Question

Assume you are serving on the board of directors of a medium-sized corporation, and you are responsible for establishing the compensation provided to senior management. You believe that the company's CEO is very talented, but your concern is that she may be looking for a better job and may want to boost the company's short-run performance (perhaps at the expense of long-run profitability) to make herself look better to other corporations. What effect might these concerns have on the compensation policy you put in place?

Explanation / Answer

Internal Equity - Internal equity deals with the perceived worth of a job relative to other jobs in the organization. All employees compare their jobs to other jobs within the organization. Generally, they consider skill, effort, responsibility and working conditions in this comparison in order to determine the value of their jobs relative to other jobs. Likewise, management must often determine the "worth" or "value" of one job in relation other jobs for the purpose of pay programs. Maintaining appropriate pay relative to value or worth is achieving internal equity. External Equity - External equity deals with the issue of market rates for jobs. An employer's goal should be to pay what is necessary to attract, retain and motivate a sufficient number of qualified employees. This requires a base pay program that pays competitively. Among others, internal data such as turnover rates and exit interviews can be helpful in determining the competitiveness of pay rates. Employees also compare their jobs and pay to the jobs and pay in other organizations. Generally, employees consider much more than base pay in determining external equity. Depending on the individual employee, serious consideration may be given to employee benefits, job security, physical work environment, commuting distance, opportunity for advancement and the employee relations practices of the employer in determining external equity issues. In the Pacific Northwest, a frequent consideration is also lifestyle and quality of life. An important issue to employees in determining external equity is the transferability of their skills. If an employee's skills are valued more highly in a different type of job or industry in the area, the employee may believe that s/he is being treated inequitably. Note: An organization may choose to place the primary emphasis of its base pay program on internal equity, external equity or a blend of the two. There are important ramifications to this decision that should "fit" with other organizational structure issues and overall management objectives. Individual Equity - Individual equity deals with how individuals perceive how they are being paid relative to other individuals within the organization and perhaps within the same position. This focus of individual equity is on the merits of the person filling a job, as opposed to the job itself. In simple terms, employees want to feel that the rewards they receive for how they do their work are comparable to the rewards received by others for the same amount of effort or output, all other factors being equal. How merit rewards or increases are given strongly impacts perceptions of individual equity. Process Equity - How employees perceive the fairness or equity in the administration of the compensation system is process equity. Process equity, in the perceptions of employees, is strongly influenced by the openness of the system, communication of the system to employees, participation in design or administration of the system and a grievance appeal procedure. Performance Incentives - A significant element of a base pay program is to encourage higher or increased levels of employee performance. Pay systems need to be designed to improve organizational performance.

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