All employees receive compensation for the work they have performed. Compensation is more than just monetary rewards. Compensation can be direct financial compensation (wages or salaries), indirect financial compensation (benefits or retirement plans), and non-financial compensation (employee recognition) (“Compensation & Benefits”, n.d.). Equity is, therefore, necessary both internally and externally. This paper will address internal equity, its importance and how to build an internally consistent compensation system.
Equity is defined as “anything of value earned through providing or investing something of value” (Mohanta, 2013). There are three levels of equity in any organization; workplace equity (all employees are treated fairly), external equity (employees are rewarded as other employees in other organizations) and internal equity (Mohanta, 2013). Internal equity exists when employees in an organization are rewarded by their employers according to the relative internal value of each job. The value of each job is often determined by the employer.
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Internally consistent compensation systems are critical to any organization. According to Kleiman (n.d.), people will always make comparisons when assessing their pay. If they feel that they are being underpaid or they feel others are overpaid, feelings of tension will be produced in the employees. To reduce this tension, the employees will either decrease inputs by reducing their performance or escape the situation by being absent, taking excessive work breaks and even quitting. This change in behavior will lead to an organization’s failure.
To achieve internal consistency, then the employees must first perceive that the rewards they get for their jobs are worth it. This perception can only be achieved if the organization takes measures to determine the value of each job by looking at the job-related factors (Mohanta, 2013). These job-related factors are used to determine the compensation levels. They include education required, experience required, physical demands, working conditions and supervisory/managerial responsibility.
Creating an Internally Consistent Compensation System
As stated before, it is the employer’s duty to determine the value of each job within their organization. This determination will always involve an assessment of job-related factors that are compensable such education or experience. Assessment of these factors can be achieved through two ways; job analysis and job evaluation. Both job evaluation and job analysis will help determine an internally consistent compensation system.
Job analysis is the process by which an organization determines the duties and requirements of jobs (Mohanta, 2013). It provides the necessary information needed to prepare job descriptions and carry out job evaluation. This information can be obtained using; observation (the employee is watched performing the job), interviews, activity logs, and questionnaires.
Job evaluation is the process by which an organization determines and quantifies the value of jobs (Mohanta, 2013). It is a tool used to classify the jobs within the appropriate pay ranges. One method of job evaluation is ranking which involves the creation of a job hierarchy by comparing jobs on factors that are common to all the jobs being evaluated. The following steps should be followed when carrying out a job evaluation:
Review the choice of evaluation method and select the method that is most appropriate.
Obtain relevant information on each job within the organization using job descriptions.
Ensure the job descriptions is comprehensive and covers all responsibilities of the job.
Evaluate the jobs using the chosen evaluation method and link the jobs with the organization’s current compensation system.
Create the appropriate pay grades and pay structure.
Review the job evaluation system periodically.
The organization can then determine pay grades using this information. The jobs should be grouped into pay grades based on their overall scores. When determining pay grades, it is important to agree on the number that should be established. Too many pay grades will result in a lot of administrative work while limited pay grades may create equity problems as many jobs would be classified together despite having different worth.
References
Compensation & Benefits. (n.d.). HR Council.Ca. Retrieved 1 February 2018, from http://hrcouncil.ca/hr-toolkit/compensation-systems.cfm
Kleiman, S. L. (n.d.). Employee Compensation. Reference for Business. Retrieved 1 February 2018, from http://www.referenceforbusiness.com/management/Em-Exp/Employee-Compensation.html
Mohanta C. G. (2013). Building Internally Consistent Compensation System. Al-Qurmoshi Institute of Business Management. SlideShare. Retrieved 1 February 2018, from https://www.slideshare.net/GaurangaMohanta/building-internally-consistent-compensation-system
