External Competitiveness & Internal Equity in an Effective Compensation Program

Assignment Instructions

The ability to create a successful market-based compensation program is contingent on a number of key variables. Yet none is more important than gaining a clear understanding of what it takes to have a compensation program that is externally competitive, while at the same time internally equitable.

In this assignment—

  • Discuss what is meant by a market-based compensation program.
  • Explain how an organization can balance external competitiveness with internal equity to achieve a successful market-based compensation program. Be specific.
  • Illustrate with actual examples of employers achieving this balance. Also, provide examples of organizations failing to achieve one or both and illustrate what might result.

Bring in at least 5 library sources to help strengthen and support your discussion. Paper length: 4-5 pages, not counting the cover and reference pages.

Sample Answer

Compensation Programs: External Competitiveness & Internal Equity

A market-based compensation program (MBCP) is a philosophy of staff compensation hinged on prevailing market value circumstances for drawing favorable talent. Organizations that have the program are sensitive to what their contemporaries, external job market, pay their staff in comparable job cadres. The organizations are keen to offer their employees compensation packages that are comparable to those offered in the external job market. For instance, if the mean salary offered to a researcher with a given qualification in a given industry is $30,000 per annum as salary (Renz & Herman, 2010; Smith & Mazin, 2011).

A company in the same industry, which has a MBCP, is likely to pay its researchers with the same qualification around $30,000 per annum as salary. Such a salary would be deemed, especially by the company, as externally competitive. Notably, compensation strategies are considered good if they strike balances between given internal equities and the corresponding external competitiveness.

Compensation strategies striking balances the equities and the corresponding external competitiveness are supportive of staff happiness and productivity. They are taken as resulting into creative staff compensation regimes. Equity, as a term, compares value between diverse investments, opportunities or choices. Organizational behavior studies show that workers are persistently monitoring, as well as appraising, their workplace roles and compensation against their peers’ workplace roles and compensation.

Supposed unfairness in the workplace roles and compensation may occasion grave production challenges. Businesses operate successfully when they formulate compensation schemes that enable them to concurrently offer compensations that their employees deem fair and optimize their profits. Compensation equity has diverse approaches: it is either externally driven or job valuation-driven. Externally, market forces drive the equity. The valuation is executed by employers.

Market-based compensation packages are the consequences of the utilization of market pricing in establishing staff wages (Smith & Mazin, 2011). The packages represent a best practice scheme for the design of compensation policies within market segments that are deemed highly competitive. Such segments include NGOs, healthcare, and hospitality. The systems used to determine the packages have their strengths based on their intrinsic empirical nature, and the actuality that they are developed from research surveys. The systems are influenced by labor demand along with labor supply.

Internal equity means how employers perceive the compensation packages they offer as being just with respect to their organizations’ specific circumstances or dynamics. External equity, or competitiveness, forms own basis on the duties and functions of given jobs. Even then, internal equity forms own basis on the responsibilities and autonomy defining the jobs. A company with several incumbents in similar job positions and sharing a job title but enjoying diverse compensation packages, their compensation differences hinged on internal equity considerations (WorldatWork, 2007).

The analysis of internal equity is done similarly with that of external competitiveness of the packages. In both cases, the packages are considered in relation to job titles that are benchmarked. Even then, the difference between the analyses stems from the actuality that the benchmarking of the titles is established internally. A given internal benchmark is especially assistive in appraising hybrid and unique job titles with nonexistent externally established benchmarks.

The balancing of internal equity of given compensation packages and the corresponding external competitiveness is a process that is rather dynamic. The balancing necessitates the constant vigilance of human resources professionals and departments within organizations as regards business, or market, demand and condition changes. Organizations that are keen on the balancing give consideration to both internal equity and market competitiveness when formulating compensation packages (Henderson, 1982; Patten, 1977).

The organizations utilize market surveys to create the basis of their evaluation of the market competitiveness of the packages. The balancing is aimed at retaining the strengths of consideration of both internal equity and market competitiveness: the attraction, as well as retention, of capable workforces. There are several organizations that offer their employees packages hinged on the balancing (Evans, 2006; Falcone, 2011).  They include Utah Valley University and the OUHSC (University of Oklahoma Health Sciences Centre).

Utah Valley University balances staff rewards’ internal equity and market competitiveness to ensure that it continues attracting, developing, retaining, and rewarding a workforce that is both diverse and markedly talented. It balances the two to ensure that the rewards fall within own limits of fiscal sustainability and feasibility. As well, it balances the two to ensure that the rewards remain competitive in the suitable labor markets, support internal equity in its different functions, and promotes constancy in fulfilling compliance needs while maintaining flexibility in reacting to external, as well as internal, changes in own workforce (Smith & Mazin, 2011).

To strike sustainable equilibriums between the rewards’ internal equity and market competitiveness, the university does several things. First, it determines salaries through the consideration of the average compensation rates for corresponding jobs in the university job markets. Second, it allows the base compensations of individual staff to surpass the corresponding average compensation rates in recognition of unique recruitment, as well as retention, requirements. In some cases, allows the base compensations of individual staff to surpass the corresponding average compensation rates to attract, as well as retain, staff in areas in which the university is keen on being an established market leader. Third, its performance-based compensation schemes are elementarily established using merit judgments informed by continuing evaluation of staff performance in the light of given standards.

Fourth, the compensation packages offered by the university provide principal elements that are similar to those in the markets. The elements include insurance, retirement, and leave allowances. Fifth, within individual effectiveness, function, and discipline parameters, the university rewards employees likewise for similar work devoid of discrimination. Lastly, the compensation offers that the university gives to employees are determined with regard to their individual experiences and competencies while taking into consideration the compensation packages enjoyed by extant staff within comparable job categories.

Hay Group recently helped the OUHSC to develop a pay regime based on both staff rewards’ internal equity and market competitiveness. Previously, the OUHSC was basing staff rewards on market-based analysis only. The approach was devoid of constancy in the assignment of given jobs to compensation grades. There were too many compensation grades and jobs, occasioning confusion (Muller, 2009). Jobs that were considered non-benchmark were assigned to compensation grades based on undefined presumptions. As well, the analysis was hinged on market-generated data that was not accurately representative for proper comparisons. Home Depot bases staff rewards on internal equity analysis only especially for its senior store staff. That means that the staff compensation packages it offers are not established using merit judgments informed by continuing evaluation of staff performance in the light of given standards. Such packages do not inspire staff to become more and more meritorious in their work as they view the organization as not compensating merit.

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