Introduction
Fairness is one of the main criteria for the validity of employee compensation. The following memo examines the concept of the market-based compensation program, defines the roles of the external competitiveness and internal equity, and suggests an approach to balancing them. The suggestion is substantiated with an example of the company which successfully uses a balanced approach. An example of the company which fails in introducing internal equity is also presented, with the suggestions of the aftermath of such negligence.
Defining Market-Based Compensation Program
A compensation program needs to be attractive for the employee while at the same time objective in terms of reward. In other words, an organization must fairly compensate its workers by providing incentives that reward their effort, expertise, competence, determination, and skill. Such fairness can be achieved in several ways, with the market-based approach being the most evident one. A program that uses pricing on the job market to determine the size of salaries and incentives is thus called a market-based compensation program (Armstrong, Brown, & Reilly, 2011).
Several techniques can be used to determine an average market compensation size. The easiest one involves simple non-systematic research of the closest competitors. Such an approach creates a range of serious barriers and demands several adjustments to produce meaningful data. For instance, the sample selected for such inquiry may be small or the process of selection may involve bias, the size, and market share of the competing companies can distort the picture, and some parts of the reward package may not be evident or, more commonly, difficult to measure and quantify (Armstrong, 2012). For these reasons, the inquiry usually involves benchmarking tools that evaluate multiple aspects of the compensation programs on the market to produce relevant information.
Balancing External Competitiveness & Internal Equity
Two factors that define the fairness of compensation are external competitiveness and internal equity. Both are important to foster loyalty and motivate the employees. While different views exist regarding which of the two factors needs to be prioritized, most scholars emphasize the need to find a balance between them for the best result.
External competitiveness describes the ratio of the salaries and compensations characteristic for certain jobs in the company to the common compensation rates of similar entities on the market. In simple terms, the higher the company evaluates the labor of its employees, the more externally competitive it is. This factor has two effects. First, the company which offers the above market pay is more attractive for the applicants and thus has a better supply of workforce to choose from. Second, such a company has higher retention rates since the employees are less likely to be dissatisfied with wages.
Internal equity is determined by differences between salaries within the company. The more equalized the compensation is among workers, the higher the equity. On the other hand, if the gap in wages is noticeable, the staff is more likely to suspect that they are treated unfairly. Internal equity is more nuanced and complex than external competitiveness. First, the concept understandably presumes the comparison of positions within the same workload, a range of responsibilities, and required competencies. Naturally, not all of these characteristics are easily measured.
Thus, the employees usually perceive the competencies, responsibilities, and skills on an intuitive basis, which is only appropriate in some instances. Nevertheless, this perception still influences the motivation of individuals. For instance, an employee who feels he is paid less than his co-worker but does his work better is expected to either be dissatisfied or reluctant to increase productivity (Pedulla, 2013). Alternatively, an employee who has a higher salary than that of his peers without a clear understanding of the reasons behind it may be stressed by the guilt he feels towards his co-workers. Notably, in both situations, it is enough for the employee to feel the inequity rather than to possess reliable information about it. Thus, it is obvious that the two aspects must be balanced to avoid dissatisfaction, foster loyalty, and promote commitment.
One of the ways to unite them into a meaningful and comprehensible format is to develop a set of standards defining the requirements for each position and benchmarks for performance evaluation (Dow, Morajda, & McMullen, 2006). Such a set will improve external competitiveness by presenting a clear and transparent image of what is expected of the new applicant, which, in turn, will eliminate ambiguities and streamline hiring practices. On the other hand, the benchmarks and requirements can be used to illustrate the reasons behind changes in payment and other rewards for each employee. Additionally, the open and accessible nature of the guidelines will allow the staff to evaluate the fairness of compensation independently should such need arise.
The preferred format of such standards is a set of characteristics rather than a list of descriptions for each position. Such form will improve the flexibility and adaptability of the document to a wider scope of jobs and improve overall equity. Currently, the diversity of positions and the variations introduced by different companies make the external evaluation extremely time- and resource-consuming. Admittedly, the cumulative nature of the suggested procedure can be an additional challenge for the employees, but this drawback can be overcome with some training and will eventually lead to improvement. Thus, it should be viewed as an investment rather than as a source of expense.
Example of Employer Achieving Equity
The University of Oklahoma Health Sciences Center (OUHSC) is an example of a successful balance struck between external competitiveness and internal equity. The OUHSC used a straightforward market-based approach. Considering the vast amount of jobs it had to deal with, the slot assignment was cumbersome, inconsistent, and imprecise. To improve the matters, the organization sought help from Hay Group, a job evaluation and consultation agency (Hay Group, n.d.). By using a rigorous and comprehensive survey, Hay Group representatives assembled and processed information that provided them with an understanding of the issues permeating the working culture. Simultaneously, several in-depth interviews were conducted with key executives. The obtained data were used to create a pay grade policy. Now, instead of fitting the jobs which do not match the listed categories using a best guess approach, one of the sixteen pay grades is applied and adjusted as necessary. This not only streamlines the process but also greatly improves the consistency of internal equity: the compensation decisions are made based on the set of rules rather than intuitive matching.
Example of Employer Not Achieving Equity
The companies are understandably reluctant to publish information on the failure of establishing internal equity. Nevertheless, it is sometimes reported by dissatisfied employees. For example, a former Google employee claims to detect huge discrepancies in payment among the staff. The self-administered survey allegedly revealed inequitable compensation practices (Brown, 2015). While it is hard to observe any meaningful results, the fact of the employee-driven survey signifies distrust to the employer, which may lead to loss of motivation and, eventually, a search for a fairer working environment.
References
Armstrong, M. (2012). Armstrong’s handbook of reward management practice: Improving performance through reward. London, England: Kogan Page.
Armstrong, M., Brown, D., & Reilly, P. (2011). Increasing the effectiveness of reward management: An evidence-based approach. Employee Relations, 33(2), 106-120.
Brown, K. V. (2015). Ex-Googler says she exposed company-wide pay inequality with crowdsourced spreadsheet. Web.
Dow, S., Morajda, D., & McMullen, T. D. (2006). Evaluating pay program effectiveness. WorldatWork Journal, 15(2), 50-59.
Hay Group. (n.d.). University of Oklahoma Health Sciences Center: Balancing internal equity and external competitiveness in pay practices. Web.
Pedulla, D. S. (2013). The hidden costs of contingency: Employers’ use of contingent workers and standard employees’ outcomes. Social Forces, 92(2), 691-722.
Grading Rubric
HRM511 Module 4 Case Study Checklist (Rev. 4-6-16)
Instructions for student: After you complete your references section in your assignment, copy and paste this grading rubric to your Word document and use it as a checklist to help make sure you covered all the required content, structure, and mechanical expectations.