Internal and External Equity Compensation

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Internal and External Equity Comparison Internal and External Equity Comparison Total compensation is be defined as the rewards, which employees receive for their labor. A well designed compensation package will attract skilled employees, reduce turnover, and increase employee productivity. Two factors that affect a compensation plan is internal and external equity. “Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization. The relationship forms a pay structure that should support the organization strategy, support the workflow, be fair to employees, and motivate behavior toward organization objectives” (Milkovich & Newman, 2009, para. 60). Internal Equity Internal equity occurs when an employee perceives his or her compensation package fair or equitable in relationship to other employees who have similar positions within the organization. Lockheed Martin, described a global security, aerospace, and information-technology company, is an example of a company who uses internal equity within the company’s engineering structure to form the pay structure. This structure consists of six levels of engineers ranging from an entry-level to consultant. Each engineer can see clearly the relationships in the descriptions of each level, the pay structure of each level and how each level supports the company’s organizational strategy. Lockheed has designed an internal pay structure that gives the engineers have a “line-of-sight,” and therefore are more likely to believe pay equity exists, be motivated to work hard to obtain the next higher paying level, and help achieve the company’s objectives. External Equity External equity exists when employees in an organization perceive that they are compensated fairly in relation to those who perform similar jobs in other

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