Internal and External Equity Comparison

Internal and External Equity Comparison

Compensation plan stands out as a vital factor affecting the operations of any organization. The management team often finds itself entangled in a dilemma of choosing between internal or external equity compensation plans. With this in mind, it is worth noting that the choice of a designed plan goes a long way to determine the organization's ability to attract, motivate, and retain employees. This paper seeks to identify the compensation plans for a company focusing on the internal equity and for another company that concentrates on external equity. Further, advantages and disadvantages of these plans are analyzed. Finally, these plans are explored in the light of their support to the objectives of the organizations and the relationship between the organizations financial state and its plan.

Intel Inc. is an example of a company that focuses its plan on internal equity. This company aims at harmonizing the compensation of all employees by establishing a numerical relationship between what the CEO's are paid and the rest of the workforce. On the other hand, Coca Cola Company is a multinational entity that focuses its compensation on the external equity. This company seeks to ensure that its management team and employees are compensated relative to the forces which exist in the market.

An effectively managed internal equity is crucial as far as eliminating the morale and motivational issues in an organization are concerned. This is anchored on the idea that employee tend to be aware of what their colleagues are paid unlike the wage rate existing in other similar organizations. Therefore, employees tend to perceive fairness in the manner pay scales is managed within the organization, and hence become or remain motivated. In addition, internal compensation serves as a check against excessive compensation and biases that may exist in the market. However, concentrating on internal equity is bound to be risky as far as retaining competent staff is concerned. This is because such a staff is bound to give in to the better packages offered by the competitors of their current organization (Armstrong, 2007).

On the other hand, organizations that focus on external equity enjoys the advantage of attracting and retaining highly qualified employees. Similarly, the rate of staff turnover is extremely minimal as the staffs remain aware that their organization is offering compensation packages, which are streamlined accordingly with the compensation in the market. However, insisting on the external equity bears also some disadvantages. For instance, by focusing on the prevailing market compensation, an organization whose economic state does not support such pay package ends up hurting its operations. Similarly, resentment within the top brass, such as CEO's and other managers may crop due to inequality dictated by the conditions in the market (CCH, Incorporated and Myers, 2003).