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Pay-Structures

Once job analysis has been done organizations need to decide upon the pay
structures. Pay structure refers to the process of setting up the pay for a job in an
organization. The process deals with internal and external analysis to estimate the
compensation package for a job profile. Internal equity, External equity and Individual
equity are the most popular pay structures. Job description provides the in depth
knowledge about the job profile and its worth.

Pay structures are the strong determinant of employees value in the organization. It
helps in analyzing the employees role and status in the organization. It provides for
fair treatment to all employees. Pay structures also include the estimation of
incentives.The level of incentives also depends on the level of job position in the
organizational hierarchy.I

Internal and External Equity Comparison

Equity Pay

The internal and external analysis allows an organization to evaluate the


compensation plan based on the fairness of employee compensation. The impact of
the internal and external forces is important when dealing with pay structure. Equity
pay is ensuring that all parties involved are receiving the same benefits based on the
internal and external factors.

Adam's Equity Theory

Equity theory suggests that once an individual has chosen an action that is expected
to satisfy his or her needs, the individual assesses the equity or fairness of the
outcome (Adams, 1965). Three attitudes are possible; an individual may feel equitably
rewarded, under rewarded, or over rewarded. When individuals feel under rewarded or
over rewarded, they will do something to reduce the inequity.

Fairness Theory

A further development 'Fairness theory' takes into account the notion of accountability
and blame. 'When people identify an instance of unfair treatment, they are holding
someone accountable for an action that threatens another person's material or
psychological well-being. If no one is to blame, there is no social injustice'(Greenberg
and Cropanzo, 2001). Managers should be aware of the importance of implementing
decisions in order to achieve organisational goals in a fair and equitable manner.
Compensation systems consist of two components; direct and indirect and an
equitable system must incorporate three types of equity: internal, external and
individual (Mello, 2011).

Internal Equity

Employers need to establish a pay structure that meets employees' equity


expectancies. One way is through internal equity, whereby the system aims to
achieve a fair pay differential among all the employees aligned to each position within
the organisation. Managing and implementing an internally equitable pay structure
can be delicate and difficult to achieve. Research has proved that 'seventy eight
percent of employees would be most angered if they found themselves paid less than
others doing the same job in their own organization' (Nash, 1972). As it is often easy
for an employee to know their colleagues' salaries, fairness is essential when a system
is chosen. Good communication needs to be present in the organisation and
employers have to make sure that their employees fully understand the paying
decisions in order to keep good morale and low turnover of staff. To have a
successfully established compensation system and to correctly evaluate the different
jobs within an organisation, four techniques are available; 'job ranking, job
classification, point systems and factor comparison' (Mello, 2011). These techniques
are adjustable to different kinds of organisation. Job ranking can be the simplest and
the most suitable for small organisations, as it consists of a hierarchical ranking of the
positions. Scientific organisation of the jobs, with the points systems or factor
comparison focuses in a more or less quantitative way on the different factors that
make a job more important on a compensation level. Once the pay system is designed
and implemented, high executives and CEO pay needs to be carefully considered in
order that all employees perceive their pay as equitable. Salary compression 'happens
when new hires earn higher salaries than employees who have more experience'
(Mello, 2011). If salaries are not adjusted to the new hires, a fall in morale and loyalty
is to be expected.

External Equity

Here the market pricing analysis is done. Ores aligned with the prevailing
compensation packages in the market. This entails for fair treatment to the
employees. At times organizations offer higher compensation packages to attract and
retain the best talent in their organizations.

A simple definition of external equity is employee's perception of the conditions and


rewards of their employment, compared with employees from other firms. External
equity is the term used to describe fair and competitive compensation with respect to
the market value of a job. Considering external equity involves researching alignment
to what competing employers pay to attract and retain employees who have similar
skills and responsibilities as the prospective new hire. Compensation is a tool used by
management for a variety of purposes to further the existence of the company.
Compensation may be adjusted according to business needs, goals and available
resources. External equity is the situation that exists when an organisation's pay rates
are at least equal to market rates. It is also known as matching strategy. An
employer's goal should be to pay what is necessary to attract, retain and motivate a
sufficient number of qualified employees. This requires a base pay program that pays
competitively. Data as turnover rates and exit interviews can be helpful in determining
the competitiveness and fairness of pay rates. There is however no single labour
market for a particular job. Supply and demand differ across markets resulting in wage
gaps in the labour market. This is due to a number of factors including geographic
location, industry sector, organisation size, product competition, education and
experience level. Most organisations set the pay for jobs to about the same as what
other organisations pay for the same job. If an organisation increases costs of pay,
they will attract a higher standard of applicants for the job resulting in lower turnover
rates and more experienced and qualified applicants getting the job. Some
organisations set the pay below that of other organisations which results in higher
turnover rates and less qualified applicants applying for the position. An applicant
might apply for this organisation as they see a chance of promotion and growth within
the company.

Advantages and Disadvantages

The advantages of internal and external factors are an important tool used to define
and implement a solid base pay, cash compensation, or benefits. Internal equity
allows the organization to warrant an equal pay among the employees based on the
pay scale or performance. The disadvantage of internal equity is the perception of the
employees. An employee can perceive that he or she is doing the same job as another
employee and should receive the same pay. Perception of employees may differ from
the perception of the employers. The employee may feel that his or her individual
performance is the same or above in comparison to the employees who are
performing. It creates tension and lowers morale within the workplace. External equity
advantages allow the organization to remain competitive for sought out profession or
geographical area.

The disadvantages of external equities are the cost to remain in a competitive market.
There seems to be no set preference in which factors is more important whether it is
internal or external equity. It is still undecided on which is the most important between
internal and external equity and there is no right or wrong answer (Kent Romanoffken,
1986, p. 8, Balancing external and internal equity). Finding a balance and ensuring
that the internal and external equities in the organization is important. A fair and
honest compensation policy that is communicated to the employees which define the
value and worth of an employee is best. The external and internal compensation plan
should meet the organizational goals will create the culture it seeks.