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Why Focusing on Internal Equity Isn’t a Compensation Strategy?

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Outside of my love for both Recruitment and Talent Management lies a fascination with Compensation Strategy. It is the window of opportunity that every company has to compete for talent. Not every company can deal the same cards. Some will lag the market, some will lead and others will mirror the market. Even more fascinating is this sentiment that a person’s worth in an organization should be marginalized by the salaries of others- a.k.a. internal equity.

If you are unaware of internal equity, here is the breakdown in a story: you are courting a new Accountant from the outside. You already have six other accountants company-wide with varying levels of knowledge, skills, abilities and tenure. You ask the new Accountant for their salary requirements; but before you oblige their wish list you check the salary spread across the six individuals you currently employ. In doing so, you find that the lowest paid Accountant gets $65,000 per year and the highest paid Accountant gets $85,000. Your rockstar Accountant candidate is making $85,000 plus a $10,000 per year bonus. To make him whole he is looking for $93,000- 96,000 per year. Despite your salary range of $63,800- $94,000, you decide to offer $87,000 because you would hate to disturb your internal equity among Accountants.

Here’s the issue with this strategy:

1) You are likely to either have your candidate decline your offer to move onto greener pastures or he will counteroffer and you get to play that game.

2) This person has an MBA, CPA and has worked at KPMG for over 15 years. You only have one other CPA on staff and they don’t possess the 15 years of experience at a big firm or an MBA. How can you offer him less when he is more qualified?

3) Depending on whether your ranges lag, lead or mimic the market, you may spend a long time trying to make this candidate whole which may become old and eventually push the candidate to seek new opportunities.

Don’t get me wrong, I like to look at internal equity to give me a barometer for how people are situated salary-wise in the organization. Additionally, it helps you to make equitable decisions regarding both internal and external candidates. However, I have seen companies use it to drive their compensation strategy. It isn’t a strategy at all. If someone meets and/or exceeds the functional and strategic needs of your organization, you may have to bust the internal bubble once in a while.

It is foolhardy to believe that every hire will conform to the confines of your salary structures. The key is to make the right compensation decisions and burst that internal equity bubble only when it makes the most sense. However, inconsistent compensation practices whereby certain employees are paid more and unqualified or under-performing will undoubtedly undermine any aspirations or hopes you have for a fairly compensated workforce. More often than not, I see under-performers that are better compensated than those who perform at or above their pay grade.

What does that say for internal equity?

If you truly care about a transparent and fair payment system, you have to start with the premise that every person regardless of race, gender, ethnicity etc. is worth the value they provide to the organization. Salary is just one piece of the puzzle, how else can you leverage rewards, benefits etc. to improve your overall offering. I understand the reasons why internal equity is needed, but as a strategy it is stifling and only as good as your overall compensation practices.

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