What is External Pay Equity and How Does it Matter?
Senior women executives in India make an average of 85% of what male senior executives earn, per a recent IIM Ahmedabad survey published in the Economic Times. According to another study, senior women executives (including top management) make a lower average compensation of 1.91 crores compared to 2.24 crores paid to their male counterparts. In addition to gender parity and pay equity in the workplace, external pay equity is equally important. So, we need to consider both external and internal equity. This blog teaches what external pay equity is and how it matters.
An employee’s pay or salary was a taboo subject of discussion amongst colleagues earlier. Many companies may still follow the age-old tradition; however, in many countries, it is now mandatory to disclose the pay levels to promote accountability and better transparency. More and more employees are vocal in discussing pay parity and equity. A wide pay gap poses a reputational risk to the Organization. However, bridging this pay gap issue is very challenging.
To begin with, we need first to understand what is pay equity, What is external pay equity and how does it matter? Now, the pay parity might be external or internal equity. Compensation plans must ensure that employees are compensated competitively relative to their peers and the external marketplace.
What is External Pay Equity?
To start with, let’s decode internal equity. Equal pay is the essence of internal equity. Employees with similar job positions or skills are compensated similarly under internal pay equity. Equal pay can take the form of a salary or even additional job benefits. External competition, market pressure, organisational size, geographic location, and cost of living contribute to pay disparities across industries for similar roles.
Alternatively, external pay equity includes how your salary and benefits compare to others in the industry. External equity compares pay in your company to the external market. You can use external equity to see what the external market is paying for similar jobs in your industry. For example, you can examine external equity to determine what your company is willing to pay compared to one of your competitors.
Examining external equity can assist you in developing more competitive job offers, salary structures, and adjustments. It can also help you in attracting and retain top talent.
Pay Equity- Why Does it Matter?
External equity is the foundation for competitive job offers, salary adjustments, and pay structures. It is critical to monitor market changes and stay current because failing to do so can result in losing valuable employees. A regular (at least annual) review of all jobs helps to keep an eye on compensation, make necessary adjustments, and ensure the compensation strategy remains fair and equitable.
Access to salary survey data and the analyses that result, as well as reviewing your jobs, the organization’s needs, and strategic goals, are all critical to developing a solid understanding of the current labour force, both internal and external. Internal and external equity is significant; one is not more important than the other. Both should be taken into account when making a decision.
Factors Influencing Fair Pay
It is impossible to ensure fair pay unless appropriate salary ranges for each position are established. This should be as per industry and regionally-specific market data. Moreover, it should be noted that pay standards across industries may vary. It depends on various factors other than the employee’s position. These factors include:
- Organizational Fairness
- Market Rate
- Industry Standards
- Competitor’s Offer
- Location of the business
- Size of the Business
- The level of the jobs
- The functions that the employee must perform
As a result, external equity pay can be somewhat inconsistent.
4 Key Steps to Manage Pay Equity
Step 1: Have a solid approach to measuring jobs and salaries to diagnose, understand, and address salary disparities in your workforce.
Step 2: Be open and honest about your company’s pay policies, trends, and changing workforce demands. Speak openly about the skills required and the skills you anticipate needing in the future.
Step 3: Create a compensation strategy that incorporates a risk management strategy. Create a list of all the internal and external pressures that have historically influenced salary levels and those that are likely to do so in the future. And develop solutions to mitigate each risk as it arises.
Step 4: Upskill people to help them move up the corporate ladder, raise their wages, and improve how skills are taught at work.
How to Address Pay Equity?
Here are some key actions to address external pay parity/ equity.
- Use of objective internal and external benchmarking data to remove potential bias
- Discontinuation of historical salary data
- Annual pay equity analysis and adjustments, as needed
- Transparent communication of individual pay positions concerning internal and external benchmark data
Meanwhile, to guarantee pay equity, you must stay updated with the knowledge, be wise while negotiating, take a consistent step towards growth, and regulate in case of differences. To sum it up, it is critical to strike a balance between internal and external pay equity within an organisation. Having either one will undoubtedly increase the organization’s productivity; however, having a balance of both – internal and external equity – is what propels the organisation to the next level. If you understand it and follow the advice given above, you will have no trouble developing a payment system with a pay standard that is fair and comparable to market pay.
1. What are external and internal equity?
External equity refers to an employee’s perception of being treated similarly to employees in the same job but at a competing organisation. In contrast, internal equity refers to an employee’s perception of being treated similarly to employees within a focal organisation (Werner and Mero, 1999).
2. What are some benefits of pay equity?
Employers can increase efficiency, creativity, and productivity by attracting the best employees, reducing turnover, and improving organizational commitment by ensuring employees are paid fairly.
3. How do external factors help determine the appropriate compensation levels?
To determine the appropriate compensation levels, it is helpful to understand external factors such as unemployment rates and market competition, as well as internal factors such as job analyses, the influx of new talent, and business conditions.