The importance of internal equity and how to address it

What is internal equity?

In a nutshell, internal equity occurs when a company’s compensation system treats all employees equally. No one receives less or more pay because of their gender, age, race, religion, or other protected features. There is no favoritism or special favors. All employees receive fair pay based on their qualifications, achievements, and skills.

Internal equity versus external equity

Internal equity is about achieving fair pay within a company. On the other hand, when you talk about competitive market pay and average pay ranges, you’ve entered the realm of external equity.

External pay equity means that your employees make the same or more than the market norm for their role. Those market norms take into account overall averages and consider factors such as organization size, industry, and location.

By contrast, internal pay equity ensures that your internal calculations treat everyone equally. Employees with similar responsibilities and qualifications earn comparable salaries, and any variations are trackable to job-related factors.

Now that we have an overview of what this methodology means, let’s find out why employers are beginning to pay more attention to it.

Why is internal equity important?

As the business world learns more about HR and how humans work, it’s become increasingly clear how “top-of-mind” equitable compensation is to job seekers and long-standing employees.

Impact on employee satisfaction

For younger workers, salary discussions at work are no longer a “taboo” topic, resulting in a trend toward transparency. According to a recent Skynova survey, 61% of employees, including 74% of millennials and 82% of baby boomers, believe that discussing salary in the workplace is appropriate.

Increased transparency means employees are more likely to consider comparable pay when evaluating workplace fairness. Research has shown that believing that the workplace is fair and equitable correlates directly with increased job satisfaction and more trust in the employer.

Influence on retention rates

In the same salary transparency survey, 16% of respondents started looking for a new job after comparing their pay with that of coworkers. Internal equity can help reduce employee turnover by assuring employees that the company treats them equitably. They are secure in the knowledge that the company values all employees and compensates them based on their expertise.

Contribution to organizational performance

Research also shows that fair pay improves the employee experience, encouraging people to go above and beyond their assigned tasks. Employees who feel that the organization values and respects them are more likely to contribute more to the company’s success.

Now that we know more about the value internal equity offers, it’s time to find out more about what influences it.

Factors influencing internal equity

In compensation, internal equity seems like a simple idea, but in practice, a little bit of planning goes a long way. Because each job has unique requirements and each person brings something different to their role, it’s natural for compensation to differ from employee to employee. Equity happens when a company accounts for those differences and develops a system for weighing them.

Skills and competencies

The first step to establishing internal equity is defining the skills each job requires. Positions that require more advanced expertise or a broader skill set will naturally pay more. The challenge is assigning a value to each skill and ensuring that pay grades align with those value combinations. If you match pay with competencies, you are on your way to equitable compensation.

Experience and tenure

One of the basic expectations of the job market is that experienced employees earn more. Equity requires a system for associating years and types of experience with pay levels. You may also offer tenure-based raises. These are particularly common for jobs under $75,000 per year, but can work well for any company where internal knowledge is highly valuable. If you decide to incorporate tenure in your compensation strategy, ensure that tenure-based raises are comparable across positions.

Job responsibilities and contributions

Job duties can be the most challenging factor in establishing equity. Each position has different responsibilities and offers unique opportunities to contribute. Businesses can achieve equity by establishing standards for levels of responsibility. For example, two members of management might occupy the same pay tier if they have a certain number of direct reports.

Moving on, let’s find out more about how companies take internal equity from idea to concrete plan that can have a positive impact on the bottom line.

Strategies to achieve internal equity

Like many HR challenges, achieving internal equity requires strategy and a documented process. These essential steps put you on the right track from day one.

Conducting pay audits

Pay equity audits take a closer look at employee pay. The company examines each employee’s earnings and assesses whether individuals in comparable positions earn similar salaries. If disparities exist, the company examines the data to learn why.

In a Society for Human Resource Management (SHRM) survey, 83% of companies conducting pay equity audits ultimately adjusted employee pay.

Standardizing job evaluations

Compensation will always vary by job title and level. To preserve pay equity, companies need to use a consistent system to measure each position’s value. The job evaluation process helps to ensure equitable pay for existing and new candidates. It allows companies to create and publish a pay range for each position and create performance-based pay benchmarks.

Among SHRM survey respondents, only 20% of organizations track information tying candidate compensation to qualifications, despite 90% offering higher starting pay for stronger credentials. Developing a standardized fair process helps your business to stand out.

Addressing unconscious bias

Bias may be the most unsettling internal equity factor to address, but it’s also one of the most broadly effective. Wage biases are a painful reality in the labor market as a whole, with men earning 16 percent more than women, and Black and Hispanic workers earning less on average than their white and Asian counterparts. The only way to achieve equity is to examine the numbers. Have the courage to determine whether your organization has a wage gap and commit to closing it. Acknowledging bias is nothing shameful if it leads to action.

We’ve covered a lot of ground, but before we wrap up, let’s discuss some of the positive effects this methodology can have on everyone in an organization.

The benefits of achieving internal equity

When you work to achieve internal equity, your entire organization benefits. Here are three of the most valuable benefits.

Enhanced workplace culture

Pay equity instills a sense of unity and team identity, which support a better workplace culture. In Skynova’s survey on pay transparency, discoveries of unequal pay led to jealousy in almost 30% of cases, a number that’s even higher in small companies. Pay equity eliminates those sources of envy, especially when employers can back up any pay disparities with evidence. Employee engagement increases as resentment decreases, creating a culture of positivity at work.

Promotion of fairness and trust

When you commit to internal pay equity and back up that commitment with action, team members trust you to be fair in other ways as well. Data shows that procedural transparency increases the perception of a company as fair and trustworthy, including clarity related to pay.

Reduced discrimination

An equitable compensation system safeguards your company against bias and discrimination. It provides an objective system for setting an employee’s pay based on their responsibilities, skills, and qualifications. As long as your company bases all pay decisions on that rubric, there is no room for discriminatory pay practices.