How to More Easily Address External Equity in a Company

External equity ensures fair compensation by comparing salaries with similar positions outside the organization to maintain competitive job offers. Without external pay equity, companies risk losing out on skilled candidates to competitors offering higher wages. 

However, maintaining external pay equity can be challenging due to varying industry standards influenced by factors like business location, scale, and job functions. Despite these challenges, organizations can use external data and tools like Salary.com's Pay Equity feature to ensure fair compensation and retain the best talent. 

Understanding pay equity 

Pay equity refers to ensuring that employees performing similar jobs with comparable responsibilities receive equal pay, considering their experience and tenure within the organization. Employers are legally obligated to do so as mandated by The Equal Pay Act of 1963, which calls for men and women in the same business to be compensated equally for similar work, making it illegal to have pay disparities based on gender.  

Without a solid compensation strategy that includes both internal and external equity, companies risk losing their best employees to organizations offering fair pay and transparent salary structures. Regular external equity analysis helps ensure that employee compensation aligns with the external market. 

External equity vs. internal equity 

Internal equity refers to the fairness of pay among employees within the same company who perform similar jobs. Organizations that ensure internal equity demonstrate an eagerness to maintain fair compensation based on similar responsibilities, skills, performance, and experience. 

However, external equity, as mentioned above, refers to the fairness of pay compared to the external market. It involves comparing what a company pays its employees to what other organizations pay for comparable positions to ensure competitive job offers, pay transparency, and fair compensation relative to the broader industry. 

Both internal and external equity are equally important aspects of a solid compensation strategy. Balancing them helps organizations attract and retain top talent while ensuring employees feel rewarded fairly both within the company and in comparison to the external market. 

Pay Equity Audit and Certification can help organizations assess both internal and external compensation strategies and determine the extent to which employees across the organization are paid fairly.  

Why does external pay equity matter? 

External equity ensures employees are paid fairly compared to those in similar positions at other organizations. This compensation strategy helps companies attract and retain top talent by offering competitive job offers and maintaining employee engagement.  

For example, a company that regularly uses external data to perform external equity analysis can make salary adjustments to stay current with the market. By doing this, they ensure internal and external equity to address issues of pay disparities. 

Benefits of addressing external equity  

External equity ensures that employees are paid fairly compared to those in similar positions at other organizations. Businesses that demonstrate their commitment to external equity can expect the following: 

1. Attracts the best talent 

   It helps companies attract the best talent by offering competitive salaries. When an organization ensures its pay ranges align with the market average salary for similar roles, it becomes more appealing to job seekers.  

2. Promotes transparency and communication 

   When compensation is based on clear criteria such as job titles, skills, and industry standards, employees understand the factors behind their wages. This transparency helps build trust between the employer and employees. Pay Equity Communication feature helps establish a consistent message about pay and affirms that your organization believes in fair and equitable pay for all.  

3. Enhances employee morale and motivation 

   Ensuring both internal and external equity in pay can significantly boost employee morale. Employees who perceive their compensation as fair compared to other employees doing the same level of work are more motivated.  

4. Boosts employee retention 

   When every employee feels they are compensated fairly compared to others in similar positions, job satisfaction increases. Regularly reviewing and adjusting salaries to maintain equity helps reduce turnover and keep valuable employees. 

5. Improves organizational reputation 

   Organizations build a reputation for fairness and integrity and demonstrate their commitment to fair compensation and other benefits. This positive reputation attracts both customers and potential employees, benefiting the business in the long term. 

To contribute to such cause, organizations can use Regression & Cohort Analyses to determine if there are any pay differences between gender and other protected classes that are statistically significant.

Factors affecting external equity 

While external equity is beneficial for both employees and organizations, it can be a challenge to implement. External equity factors include: 

Market conditions 

Market conditions significantly impact external pay equity. Organizations must regularly assess the market to understand how economic trends and demand for certain skills influence salary ranges and levels.  

Industry standards 

Different industries have varying compensation benchmarks. Companies need to align their pay ranges with industry standards to maintain external equity.  

Geographic location 

Salaries can vary significantly based on geographic location. Employers need to consider the cost of living and local wage trends to ensure fair pay. By doing so, organizations can maintain external equity and attract talent from different regions. 

Company size and financial health 

Larger organizations or those in a strong financial position can often offer better compensation and benefits. Regular assessment of financial capabilities helps in implementing fair pay practices. 

Employee skills and experience 

Employers must evaluate the market value of specific skills to ensure equal pay. By doing this, companies can achieve both internal and external pay equity, ensuring that employees feel fairly compensated for their expertise. 

How to more easily address external equity in a company 

Now that you understand the benefits of external pay equity for both companies and employees, here is a step-by-step guide on how you can address external equity for your company: 

1. Step 1: Evaluate internal and external pay structures

   Assess both internal and external pay structures within your organization. Analyze how your company's compensation compares to market rates for similar roles. This step lays the foundation for understanding where adjustments may be needed to ensure fair pay for every employee. 

   Pay Gap Assessment helps evaluate compensation practices, pay levels, and determine if they are aligned with your business goals and DE&I initiatives. 

2. Step 2: Define pay ranges

   Clearly define pay ranges for different job titles based on internal and external pay equity benchmarks. Establishing transparent pay bands helps ensure consistency and fairness across the organization.  

3. Step 3: Implement a fair pay policy

   Develop and implement a fair pay policy that outlines the company's commitment to equitable compensation practices. This policy should define how salaries are determined, considering factors such as skills, experience, and market rates. Communicate this policy to employees to develop trust and transparency. 

4. Step 4: Do not neglect internal pay equity

   In addition to external equity, pay attention to internal pay equity to maintain fairness within your organization. Compare salaries for employees and different departments to identify any pay disparities. 

5. Step 5:Consider other benefits

   While salary is important, consider other benefits and perks that contribute to overall compensation fairness. Some employees prefer these perks over higher pay. In a survey, employees identified benefits that would help them the most: guaranteed retirement benefits (62%), retiree medical benefits (53%), and more paid time off and sick leave (50%). 

6. Step 6: Regularly monitor and update compensation

   Implement a system for regularly monitoring and updating compensation to reflect changes in the market and within the organization. Staying proactive allows organizations to address any disparities before they become larger issues. With Continuous Pay Analysis, you can manage your pay equity process as frequently as you like and archive all results for audit purposes.  

7. Step 7: Seek feedback and adapt

   Continuously seek feedback from employees regarding their perceptions of fairness in compensation. Use this feedback to make necessary adjustments to your pay structure and policies. Being open to feedback and demonstrating a willingness to adapt makes for satisfied and productive employees. 

Without a solid compensation strategy that includes both internal and external equity, companies risk losing their best employees to organizations offering fair pay and transparent salary structures. Look for inspiration in other organizations that effectively manage their external and internal compensation so that you can replicate the same results for your organization. Salary.com's Pay Equity feature can streamline this process and help your organization achieve equitable pay structures.