External /Internal Equity

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The main purpose of this project is to point out the relationship between external equity in discussing pay versus benefits, and also to investigate the best compensation package (with special focus on external market competitiveness and internal equity) that will be of benefit to recruit and retain productive and motivated staff members. Key words: external equity, compensation, internal equity, motivation

1.1 Equity Theory
Basically, employees make comparison of their job inputs (Effort, experience, education, competence) and outcomes (Salary levels, raises, recognition) relative to those of others. Individuals tend to make comparison of their outcome-input ratio with the outcome –input ratio of relevant others. A state of equity exist when individuals perceive that their ratio is equal to relevant others, while inequity exist when the ratio are not the same. This led to the theory of social equity been proposed by J.Stacy Adams (1963) based upon Festinger’s (1957) theory of cognitive dissonance, that has received considerable attention in the organizational behavior literature (Vecchio 1981). According to Adams (1963), an employee brings to a job certain inputs (such as education, experience, training, and skill), and receives certain outcomes (such as intrinsic and extrinsic rewards). Inequity occurs when an individual perceives that the ratio of his or her outcomes to inputs is not equal to the ratio of some referent other, such as a work peer (Adams 1965). Individuals can feel inequity exists when they are undercompensated or overcompensated relative to their referent other (Walster, Berscheid, and Walster 1973). When inequity is perceived, individuals may experience "distress"--anger or resentment in the case of under compensation and guilt in the case of over compensation (Austin and Walster 1974). Evidence suggests that individuals may base perceptions of equity on a number of comparison others (Ronen, 1986; Hills, 1980; Middlemist & Peterson, 1976). based on common choices of comparison others, there are at least three distinct types of equity: external equity, internal equity, and employee equity. For the purpose of this project external and internal equity will be addressed. 1.2 EXTERNAL EQUITY

External equity exists when an organization's pay rates are at least equal to the average rates in the organization’s market or sector. Employers want to ensure that they are able to pay what is necessary to find, keep and motivate an adequate number of qualified employees. Creating a compensation structure that starts with competitive base pay is critical. Limited evidence suggests that managers at higher organizational levels may use external comparison others more than managers at lower organizational levels (Ronen, 1986; Heneman, Schwab, Standal, & Peterson, 1980). This may occur because greater participation in professional networks at higher levels may make inputs and outputs of external others more salient. One way organizations achieve external equity is through the use of labor market pay surveys (Davis, 1997). 1.3 INTERNAL EQUITY

Internal equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization. Another way of stating this is to say that a person’s perception of their responsibilities, rewards and work conditions is seen as fair or equitable when compared with those of other employees in similar positions in the same organization. Factors such as skill level, the effort and the responsibility of the role, as well as working conditions are considered. . Although employees use internal as well as external comparison others (Andrews & Henry, 1963; Finn & Lee, 1972), their relative importance is unclear. Finn and Lee (1972) found that employees using internal comparison others were...
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