Internal Equity Trumps External Competitiveness

Internal equity will always get higher priority than external competitiveness.  The idea that pay should be based on a balanced combination of external marketplace competitiveness as measured by surveys and internal equity is well accepted in the Total Rewards community.  But how does it work in real life?  It is time for a close examination of the complex relationship between those two quite different perspectives.

Proving that a certain amount of money is “competitive” will not settle disputes when valid complaints can be made that the sum is not internally equitable.  Makes no difference how competitive your pay is, if team members learn that one peer earns substantially more, without a reason that is clear, obvious and acceptable to them. 

There is a fairly wide range of precise amounts that fall within the broad parameters of “competitive pay” which will be accepted as fair.  In fact, most experienced compensation professional are able to craft apparently objective survey comparisons to produce any number they want; that is one of the reasons compensation is as much art as science.  But if any of the externally competitive figures turn out to be less than the amount paid to an equally-performing more junior less experienced peer with inferior credentials, the trump card of internal equity will be played to justify an upwards adjustment.  Any given pay rate that is objectively “fair” based on objective external comparisons will be rejected as inadequate and unfair if it fails the final more important test of internal equity.

Hardly anyone notices when you pay “above average” compared to the outside world; but any perceived deficiency in “internal equity” is instantly inflammatory.  Since workers lack the detailed access to the reliable (and expensive) external market surveys available to management, claims about pay being competitive are rarely challenged.  But the moment an employee suspects a peer is paid more than (s)he is, a loud protest is quickly heard. 

Imagine that new person with standard credentials is hired into an important job at a higher pay level than the other incumbents.  Do the disgruntled "underpaid" veterans passed up by an unproven novice demand that the higher paid co-worker should take a pay cut?  Heck, no.  They argue that clearly qualified veterans should always earn more than a stranger from outside, so they should be made whole by equity adjustments.  Anything else would be unfair.  Sound familiar?

Hire a newbie at a dollar more than a senior co-worker and the the word gets out quickly.  Then indignation will swiftly follow, along with demands for parity increases to any still paid below the new norm.  People who won’t notice if you routinely pay everyone at the 66^th percentile or at the 75^th percentile will flip out the moment you give one individual more money than another peer.

Employees concentrating on their work generally lack any special insight into the external competitive marketplace “going rate” for their jobs... unless they are already energetically looking and juggling a number of offers to change jobs, of course.  However, those same people remain intensely focused on their relative internal status within their immediate work group. 

Strange to say, there is less latitude for variation in internal pay equity relationships than there is in external market competitiveness assessments.  Pay structures can lead, lag or target a specific observation sample distribution segment (like the 65^th percentile) without attracting much attention or creating any concern.  But let one Senior Accountant earn substantially more than any of the others and the internal equity hammer will pound you until all are raised to the same higher level.  Or until you persuasively explain why the variation is right and proper.

As the movement towards pay transparency gains strength, the immense power of internal equity arguments will make this topic increasingly important.  Resisting the easy impulse to give in, adjust everyone upwards and spend more money to buy peace will require firm determination and careful planning.  The reasons for outliers must be known to management and may need to be shared with the workers themselves.  This could be very disquieting.  Are we ready for it?

E. James (Jim) Brennan was Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Image "Teamwork" courtesy of pod pad/FreeDigitalPhotos.net

Comments

[Jacque Vilet]

Management needs to agree on what kind of skills should be considered "outliers" --- people with those skills will be paid/treated very well compared to other employees. However, there will be a problem, for example, if Accountants and HR people are paid higher than SW Engineers in a high tech company ---- even if not intentional. Agree Jim --- a lot of clean-up is necessary before companies become fully transparent.

[E. James (Jim) Brennan]

Yes, Jacque, STEM jobs or other "hot skill" positions can carry a premium without much controversy due to visible external market conditions, but disparate treatment to individuals holding the same titles can get nasty. One issue involves external comparisons while the other internal equity challenge is more problematic. Sometimes the trails cross, such as when a new person is hired at a much higher rate into a scarce-supply job with multiple peer incumbents who earn less despite apparently equal credentials and experience. If all the people in that same "hot skill" job are not "made whole," you will have trouble.

[Jacque Vilet]

Agree, Jim.

[Patty Tanji]

Preach each Jim! Not to mention it is illegal to pay a woman less than a man doing the same job with similar skills and responsibilities, although many employers do try. AND, in Minnesota we just passed a law making it unlawful for employers to retaliate against an employee for sharing their personal wage information. The beat goes on. I bow to your greatness.

[Patty Tanji]

Oopsy.Typo! Preach IT Jim!

[E. James (Jim) Brennan]

You are pretty much on target, Patty (except maybe re my greatness). Of course, it is only illegal in the U.S. to pay a woman less when she has the same job with EQUAL (rather than merely similar) skills and responsibilities. The Equal Pay Act is not the Comparable Pay Act, which has created many problems, in my experience. Tiny job distinctions have been used to justify disproportionately different pay through both internal equity and external competitiveness applications. On the other hand, I am well aware that MN has long led the way in both comparable pay and equal pay initiatives at the State level.