What is Internal Equity and How to Address It

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What is Internal Equity and How to Address It

A fair and unbiased workplace is essential for both employees and organizations to thrive, and internal equity plays a vital role in achieving this goal. As HR professionals, it’s our responsibility to ensure that every employee is compensated fairly and justly based on their skill set, responsibilities, and experience level. That’s exactly what internal equity is all about.

But, achieving internal equity isn’t an easy task. It can pose numerous challenges, especially for organizations of all sizes.

This article will look at the difference between internal and external equity, share some best practices for achieving internal equity, explore common challenges, and provide insights into the crucial role HR professionals play in promoting internal equity.

What is internal equity
Internal vs external equity
Best practices for achieving internal equity
Challenges of implementing internal equity
Companies that have implemented internal equity approaches 
How to maintain internal equity at your organization

What is internal equity

Internal equity is about ensuring that employees are compensated fairly and equitably based on their contributions to the organization, without discrimination based on personal characteristics such as gender, race, or age. In other words, it ensures that employees are paid according to their skills, responsibilities, and experience, regardless of other factors.

This approach to compensation can benefit both employees and organizations by fostering a sense of fairness and promoting retention and motivation. To further emphasize the concept of “fairness”, survey research reported that 60 percent of participants who viewed their work environment as just and impartial also reported that it yielded more effectiveness and motivation

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Internal vs external equity

External and internal pay equity are two essential concepts that need to be factored in when developing compensation packages. External pay equity refers to the pay levels of an organization’s employees in comparison to those of its competitors in the same industry or market. In contrast, internal pay equity refers to the fairness and equity of pay among employees within an organization.

To make things clearer, here’s a comparison of the differences between external and internal pay equity:

External pay equity:

  • Comparison of pay levels with other companies in the same industry or market
  • Determines if employees are paid at or above the market rate
  • Considers factors such as the size of the organization, location, and industry.
  • Crucial in attracting and retaining top talent.

Internal pay equity:

  • Fairness and equity of pay among employees within an organization
  • Ensures that employees are compensated fairly and equitably based on their skills, responsibilities, and experience level, regardless of personal characteristics
  • Considers factors such as job duties, experience, and performance
  • Important for promoting fairness and ensuring employee satisfaction within an organization.

HR professionals play an essential role in ensuring internal equity within organizations. This includes developing and implementing fair compensation policies and practices, conducting regular pay equity analyses, and providing training to managers and employees on the importance of internal equity.

HR is also responsible for addressing any issues or concerns related to pay equity and promoting a culture of transparency and fairness throughout the organization. By prioritizing internal equity, HR can help create a workplace where all employees feel valued, respected, and motivated to contribute their best work.

Challenges of implementing internal equity

Implementing internal equity can come with its own set of challenges for HR teams. Here are some common challenges you may face:

  1. Resistance to change from employees: It is natural for employees to resist change, especially when it comes to compensation. To overcome this challenge, you can clearly communicate the benefits of internal equity and involve employees in the process of creating a fair and transparent pay structure. Think about your employee value proposition – how will this benefit them and how can you convey this to employees?
  2. Limited resources such as budget, staff, and time: You may face challenges in allocating the necessary resources to implement internal equity. Organizations can start small and gradually build on top of that. For example, HR can focus on specific job roles and conduct a thorough job analysis and performance analysis before any changes are implemented
  3. Leadership support for internal equity initiatives: Without leadership support, it can be challenging to implement internal equity initiatives. HR teams can educate leaders about the benefits of internal equity and how it can improve employee satisfaction and retention. You should also ensure that your leaders are aligned with the idea of implementing a fair and transparent pay structure.
  4. Managing employee expectations and concerns: Employees may have concerns about how internal equity will impact their pay and may expect immediate changes. Your HR team should clearly communicate the process and timeline for implementing internal equity. Let them feel heard and valued too! It’s also important to be as transparent as possible about any pay disparities and how you address them. In a recent study of pay transparency by Talent.com, 77% of the study’s participants feel that pay transparency creates a just and motivating environment. 

Best practices for achieving internal equity

As an HR professional, you want to ensure that compensation is fair and equitable across the organization. Here are some key steps you can take to achieve internal equity:

  1. Conduct a thorough job analysis: This involves clearly defining the various components of a job, including the duties, responsibilities, and qualifications needed. Think about what it takes to be a software developer, for example. You’ll want to identify the specific programming languages and software tools they need to be proficient in, as well as any necessary education or certifications.
  2. Establish a job evaluation system: One common method is to use a point system, where jobs are scored on a scale based on predetermined criteria. This helps ensure that jobs with similar levels of responsibility and required qualifications are compensated fairly.
  3. Conduct a pay analysis: This includes reviewing compensation data to identify any disparities in pay based on factors such as gender, race, or age. This analysis will shed light on pay disparities, such as whether female employees are consistently paid less than male employees in the same job category.
  4. Develop a pay structure: This involves creating a system for determining employee pay based on job value and market rates. You might decide to pay employees at or above the market rate for their job, or you might choose to pay a premium for specialized skills or experience.
  5. Communication is key: How will you let everyone at the company know? It’s important for every employee to understand how their pay is determined and how they can advance within the organization. This can be done through regular performance evaluations, salary reviews, and creative forms of internal communication like Slack or Notion docs.

Companies that have implemented internal equity approaches 

Let’s take a look at some successful examples of companies that have implemented internal equity approaches/policies: 

1. Salesforce

Salesforce has implemented an internal equity program that involves regular pay audits to ensure employees are paid fairly and equitably. Here are some key takeaways from their program implementation: 

  • Regular pay audits are conducted
  • Transparent pay was implemented
  • Employees were involved in the process

2. Buffer

Buffer has implemented a transparent salary formula that takes into account factors such as role, experience, and location. By doing so, they’ve: 

  • Used data to inform pay decisions
  • Communicated the pay structure to employees
  • Ensured that everyone is compensated fairly based on their contributions

3. Patagonia

Patagonia’s fair trade certification program ensures fair and equitable pay across the entire organization. This includes considering the impact of pay decisions beyond the immediate workforce and developing a clear set of values that guide their pay decisions.

Remember that there are many different approaches that companies can take, and what works for one organization may not work for another. Don’t be afraid to think outside the box when it comes to your own internal equity structure.

How to Address Internal Equity

How to maintain internal equity at your organization

Implementing internal equity is only half the battle. The real challenge is keeping it going over the long haul. It’s not enough to just set up a fair and transparent pay structure once and then let it be. You need to constantly evaluate and update your approach to make sure it’s aligned with the organization’s values and goals. Here are some tips on how to continue to address this within your organization:

1. Regular review and evaluation of the pay structure

You don’t want to wait for pay equity issues to snowball into a big problem. By conducting regular pay structure reviews, you can identify any discrepancies and ensure employees are compensated fairly.  Imagine you discover that your top-performing sales team isn’t getting paid as much as a lower-performing team. Regular reviews can help you identify cases like this and fix them before it’s late.

2. Updating pay structure based on job market or organizational needs

It’s important to keep up with the times when it comes to salaries too. The job market can be unpredictable, and your company’s needs might change over time. It’s crucial to stay on top of these changes and update your pay structure accordingly. If you notice that the salaries for a particular role have gone up in the job market, you may want to consider revising your pay structure to make sure your employees are being paid fairly and to stay competitive with other companies.

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3. Addressing and correcting any disparities in pay

Even with the best intentions, disparities in pay can arise. It’s essential to address and correct these disparities to maintain internal equity. For example, you may conduct a review and find that a female employee is paid less than her male counterpart for the same job role. You can take steps to address this disparity by increasing the female employee’s salary to match that of her male counterpart.

4. Consistent communication with employees

Let’s face it, nobody likes to be left in the dark when it comes to their paycheck. That’s why consistent communication with your employees about the pay structure and any changes is so important. Not only does it build trust, but it also helps employees understand how their pay is determined. So, make sure to keep your employees in the loop by communicating changes through various channels such as emails, company All-Hands, or one-on-one meetings. 

5. Fairness and consistency in HR practices

This means that you need to ensure that your hiring, promotion, and compensation practices are fair and consistent across the organization. For example, you may have a standard salary range for a particular job role, and you should ensure that this range is consistently applied across the organization. If your compensation strategy differs across locations, make it clear. 

Key takeaways

  • Internal equity: Employees should be compensated fairly and equitably based on their contributions to the organization, without discrimination based on personal characteristics such as gender, race, or age.
  • Best practices for achieving internal equity: Conducting a thorough job and pay analysis in your organization, establishing a job evaluation system, developing a pay structure, and communicating it to your employees openly
  • Challenges of implementing internal equity: Some of the challenges include resistance to change from employees, limited resources, lack of leadership support, and managing employee expectations and concerns.
  • Maintaining internal equity: Your organization can maintain internal equity through regular review of evaluation and pay, updating the pay structure based on changes in the job market, addressing disparities in pay, and communicating consistently to employees. 
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