Chief Executive Officer and External Equity

April 23, 2018 Management

Organizations truly appreciate the value of compensation when it comes to recruiting and retaining skilled employees. Internal and External equity are vital factors in an organization and I will identify the compensation plan for an organization focused on internal and external equity. I will also compare the advantages and disadvantages of both internal and external equity of an organization. I will conclude by explaining how each plan supports the organizations total compensation objective as well as the relationship of the organization’s financial situation to its plan.

Internal and external equity The internal equity method of structuring pay involves creating a series of pay grades or bands, with quantitative ranges at the top of the pay chart and minimum ranges at the bottom. Each pay grade represents a different level within the company. Based on how many employees are required the organization must determine how many employees of each pay grade are needed to fill those positions in the company.

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A company of 30 people might start with 10 to 15 grades, although smaller businesses normally do not benefit from pay grades as much as larger organizations because of the frequent instance of hybrid positions in small companies. Coca Cola is a company concerned with the manufacture of a wide range of both non-carbonated as well as carbonated drinks and other products however, uses external equity to inform its pay structure. In this case, there is an analysis of the market pricing and a compensation plan is formulated based on a detailed industry and competitor standards assessment.

It is argued that setting the employees compensation packages based on the market’s prevailing compensation rates enhances fairness. PepsiCo has over time been able to retain competent talent as a result of its basis of pay structure on external equity (Heneman 2002). Internal equity: advantages and disadvantages In the case of Intel, the effectiveness of managing internal equity seems to be working due to the high morale and motivation.

When managed properly the effects of other people being aware of what his or her colleagues make isn’t an issue because proper management helps motivate employees perception of fairness as far as pay scales are concerned. Further, Intel has consistently used internal equity to keep internal disaffection in check as far as the CEO’s compensation and that of senior organizational management is concerned. Further, it acts as a check against excess compensation and also effectively checks against market biases. However, by relying entirely on internal equity, Intel risks losing some of its most competent staff to competition.

Also, according to Armstrong (2007), internal equity may prove to be beneficial in the short term but be costly in the long run. External equity: advantages and disadvantages External equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations. External equity has been highly effective in the case of Coca cola as far as attracting as well as retaining competent or the best minds in the marketplace is concerned.

Similarly, staff turnover rates have been reduced, as employees are aware that the company’s compensation structures are benchmarked on the labor markets best standards. With this, employees identify more with the company and are hence more motivated to support the various organizational goals. However, by developing a pay structure based on internal equity, a company like Coca-Cola risk being adversely affected by industry or market biases where pay structures are largely artificial and do not reflect the economic prevailing conditions or otherwise.

Effect of the compensation plans on each organizations compensation objectives When it comes to Intel, an internal equity plan has been in line with the Organizations objective of enhancing the relationship (numerical) between the Chief Executive Officer’s pay and that of the Company’s various executive officers. The compensation objective is also in line with Intel’s organizational structure as well as culture, which largely influence the formulation of internal pay equity ratio.

Taking into consideration the Organization’s financial situation, this plan has been beneficial to the organization oven the volatility of revenues informed by severe competition in the technology sector. Conclusion Companies have been known to compensate individuals in other ways than internal and external equity, such as personal and individual equity. A company will base its compensation plan on the financial situation and unique compensation objectives of that organization.


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