Valuing employees is a huge conversation in the business world. Less talked about is valuing employees through equal pay, or internal equity. Read on to understand why and how to build it into your organization.

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What Is Internal Equity?

Internal equity means equal pay within an organization. Employees with similar positions, skill sets, and experience within a company are paid similarly. This includes salary, benefits, and other forms of pay.

Internal Equity vs External Equity

Internal equity focuses inside the company and compares employees to one another. External equity focuses on the external job market, exploring whether the employee is being paid equitably compared to those with the same jobs and skills in other companies.

Why Is Internal Equity Important for HR?

Internal equity relates to many different parts of HR. If an employee finds out a coworker in the same job and with the same skillset is making more, they will be unhappy. This could lead to decreased productivity, a poor culture, and decreased turnover. Listed below are some benefits of internal equity.

  • Increased productivity. An employer who feels they are treated fairly is more productive than one who feels cheated or unappreciated.
  • Reduced turnover. Fair pay reduces employee turnover because employees feel valued.
  • Acquiring talent. Demonstrating that your company pays its employees fairly helps you attract top talent.
  • Equality. It’s important to ensure that you are treating all employees fairly. As a part of this, fair pay reduces the risk of discrimination lawsuits. Fair pay also fights the gender pay gap (which we discuss further).
  • Improved culture. Having fair pay keeps the company culture positive and collaborative.

Why Is Internal Equity Important for the Business?

There are many reasons why internal equity is important to the business. The rest of the business does not always have the same incentives and purpose as HR. Understanding this can help you get other leaders on your side to help execute these changes.

  • Reduce turnover. Did you know that it costs 1.5 to 2 times the cost of an employee’s salary to replace that employee? Reducing turnover also reduces recruiting costs, subsequently saving the company money.
  • Save money. On the same note, avoiding and reducing discrimination claims will also save a lot of money. The Equal Employment Opportunity Commission reports that the average cost of an out-of-court discirmination case is $40,000.
  • Increase productivity. Executives care about productivity just as much as HR does. The more productive the employee is, the more the business benefits.

How to Calculate Internal Equity

Every company should take the time to calculate internal equity because it is both fair to employees and beneficial to the company.

Step 1: Conduct an Audit

An internal audit is a way to compare what you are currently paying each employee and ensure it is equal. Audits often look at the role (such as job title and description), the employee’s experience, and all compensation (wages, benefits, bonuses). (See useful articles on competitive pay and job evaluation.)

Step 2: Find Discrepancies

While going through the audit, look for any discrepancies in pay between similar positions, and make a note of them. A spreadsheet is a great way to keep track of all discrepancies, and can often be created straight from data already collected. A spreadsheet is a great way for HR to record the progress of pay equity.

Step 3: Look for an Explanation

When looking at pay discrepancies, look for logical explanations. It is easy to look solely at job roles and compensation, but there are many other factors, such as education level, seniority and location. If you use an HRIS system, notes can often be made on the employee profile. Otherwise, it is beneficial to use a secure document like the spreadsheet mentioned above.

Step 4: Make Necessary Adjustments

Adjustments are necessary when inequalities are found and there is no explanation as to why there is a pay difference.

For some companies, it can be hard to make an adjustment when the budget is tight. There are two steps HR can take. The first would be to keep the employee with the higher pay at that pay until the equivalent employee makes the same rate. With this option, it is important to provide the first employee with other forms of reward, such as bonuses instead of salary increases.

Creating or reevaluating salary ranges is another great way to prevent future inequity. While not the only preventative measure, salary ranges can help close the pay gap upfront. Read this article to learn more about salary ranges.

Step 5: Be Transparent

Employees appreciate honesty, and this is especially true in regards to pay. Transparency is part of the whole process: beforehand, during, and after. Transparency beforehand happens when a company is forthcoming about their pay ranges and compensation philosophy. Transparency during means honesty about audits and pay inequities that are found. After the audits, transparency means the company is open about changes and adjustments that are made.

Commons Areas of Pay Inequity

Below are several examples of common internal inequity that can be improved by consistently conducting audits and making adjustments.

Gender

A 2020 report shows that women make 82.3% of what men make. Looking at it another way, that means women would need to work an extra 42 days per year to earn that men do.

In 2017, 42% of women said they had experienced gender distrimination at work (compared to 22% of men). One of the most reported forms of discrimination was pay inequity. Of employed women, 25% said they had earned less than a man doing the same job, compared to only 5% of men who said they had earned less than a woman doing the same job.

Race

Many Americans are aware of the gender pay gap, but even less are aware of the racial pay gap. Black men earn 87% of what white men earn. Hispanics earn 91% of what a white man earns.

The gap even larger is for black women, who are paid only 63% of what white men make. In a low-wage occupation, that translates to a $14,300 yearly loss. In a high-wage occupation, the loss is closer to $40,000 yearly. This shows that the combination of gender and race leads to an even larger pay inequity.

Education

Even with a degree, a black or Hispanic worker often earns less than a white worker with the same (or lesser) education. Education level is a great tool to measure for pay inequities, as if it often shows inequalities within gender and race.

Questions You’ve Asked Us About Internal Equity

Maintaining internal equity is when a company consistently monitors and audits the compensation of their employees to ensure everyone is paid fairly. It includes making adjustments as necessary (usually raising pay), creating pay ranges and sticking to them (read this article (https://eddy.com/hr-encyclopedia/salary-range/) to learn more about salary ranges), and being transparent.
When a company conducts an audit and finds variance in pay for similar roles, the company needs to either be able to explain the difference in compensation or adjust the pay to make it equal. This often means raising the lower pay to match the other.

Katie is currently studying at BYU, with a HRM major and Statistics minor. She works there as an HR research assistant and also works as an HR Generalist at a local company, and both jobs provide her with a wide variety of experiences. Katie’s passion lies in HR and People Analytics, where she can discover and use data to help everyone understand and improve the workplace for a universal benefit.

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