Total compensation strategies and implementation

Total Compensation: External Competitiveness and Internal Equity

In order to stay competitive in today's market, it is critically important to retain and nurture talent. However acquisition, retention and nurturing of talent are closely connected with compensation packages being offered. Managers are under pressure to find balance between external competitiveness and internal equity and for this reason; they must weight the importance of these two concepts in connection with their organization.

The one important thing to consider is the need for talent. If a firm depends on talented workers and if its existence is closely connected with retention of talent, then for such a firm it would be important to first ensure that its pay system is competitive and then take into account internal considerations. However a firm that is not dependent on talent may first create an internal equitable system of pay by taking into account job hierarchy in the firm and then check how it stands in relative market. (Herman, 1994)

Internal equity in an organization refers to justice and fairness in salary maintained across job structure. In other words, how employees feel about their salary in relation to that of others in the firm is called internal equity. This equity needs to be maintained in order to get the best talent and retain it too. However for many companies, the other important concept comes into clash with internal equity and this is called external competitiveness. Sometimes in order to attract the very best, the firm may need to go overboard in developing its compensation package. For example CEOs in most organizations may actually be paid unfairly high in order simply because other organizations have an equal or better package.

Internal equity is maintained by some basic practices of compensation/reward management. These include job analysis, job evaluation and performance appraisal. (Bratton 2003) These methods give the employees a clear idea as to "what is being rewarded" and why they are being paid a certain salary. The firm must know the answer to "what does it reward" when performing these tasks. Is it hard work, it is overtime, is it honesty, is it simply talent or is it simply dedication? For a nonprofit organization for example, dedication may actually play an important role but for all other organizations, it is hard work and results that are rewarded. Most firms will also reward good values such as honesty, commitment, and good relations with customers.

While in most cases, employees will develop positive feelings about internal equity if they feel they are being paid fairly depending on how perfectly reward management works in the organization, but there is always a time when they will compare their salaries with those of others in the industries. This gives rise to the question of external competitiveness. What is the guarantee that an employee will not leave an organization when he learns that other firms are paying hire for the same job and title? In today's dynamic world, no such guarantees exist and retention can become a problem if employees find it easier to switch jobs. It is thus important to take external competitiveness into consideration as well.