EQUITY
Equity is commonly defined as anything of value earned Definitions through providing or investing something of
value. Fairness is of Equity achieved when the return on equity is equivalent to the investment made. As it relates
to compensation, fairness is achieved when pay equates to the value of the work performed. Inequity, on the other
hand, occurs when the value of the work performed does not match the value of the compensation received
One can view equity from either an internal or an external perspective. Internally, equity can be expressed in
terms of employees who do the following:
Perform similar jobs.
Perform dissimilar jobs.
Work within the same department.
Work in different departments.
Externally, equity can be expressed in terms of employees who have these relationships to one another:
In the same industry.
In different industries.
In the same union.
In the same profession.
In the same geographic location.
In different geographic locations.
In organizations of similar size.
In organizations of differing sizes.
Specifically, equity can be grouped into four major categories:
external equity,
internal equity,
individual equity,
and personal equity.
EXTERNAL EQUITY : External equity exists when an employer pays a wage rate commensurate with the
wages prevailing in external labor markets~ Assessing external equity requires measuring these labor markets.
There is, however, no single labor market for a particular job. Supply and demand differ substantially among
markets, resulting in significant variation in wages across labor markets.
The following factors contribute to these wage differences among markets:
Geographic location.
Industry sector.
Union status.
Organization size.
Product competition.
Company prestige..
Education and experience level of available work force.
Licensing or certification requirements called for by the job.
INTERNAL EQUITY: Internal equity exists when an employer pays wages commensurate with the relative
internal value of each job. This is established according to the employer's perception of the importance of the
work performed.
Before an organization can estimate the importance of each job, however, it must first determine the job-related
factors that will be used for setting compensation levels - in short, compensable factors. Here are some typical
compensable factors used for lower-level jobs:
Education required.
Experience required.
Physical demands.
Responsibility for equipment/materials.
Responsibility for the safety of others.
Supervisory/managerial responsibility.
Working conditions.
Accident or health hazards.
Public contact.
Manual dexterity.
Determining the relative internal value of jobs in a large or complex organization can be a difficult process. Jobevaluation methods are often used to develop a job hierarchy that reflects the relative value of jobs on the basis of
skill, effort, responsibility, and working conditions. A number of job-evaluation approaches have been developed.
Such approaches include (1) whole job ranking, (2) classification, (3) point factors, (4) factor comparison, (5)
slotting, and (6) scored questionnaires.
INDIVIDUAL EQUITY: Individual equity exists when an employer compensates individuals who are in similar
jobs on the basis of variations in individual performance - so-called pay for performance. Excellent performers,
for example, would receive more compensation than average performers. For reasons that will be explored in
greater detail later, the most important compensation decisions are those that differentiate between the pay
received by individuals within the company who are performing the same job.
PERSONAL EQUITY : Personal equity, unlike external, internal, or individual equity, involves no direct
comparison of one individual's compensation with another's. Personal equity exists when an employer pays a
wage rate that satisfies an employee's own perception of his or her worth. The standards applied by each person
relate to that particular individual's previous experiences and his or her knowledge of the market value of similar
jobs. These internal standards can determine the employee's pay satisfaction or dissatisfaction
TEAM-BASED REWARDS Team-based rewards are payments or other forms of non-financial rewards
provided to members of a formally established team which are linked to the performance of that team. Team
based rewards are shared amongst the members of teams in accordance with a scheme or ad hoc basis for
exceptional achievements. Rewards for individuals may also be influenced by assessments of their contribution to
team results. To develop and manage team rewards it is necessary to understand the nature of teams and how they
function. Team-based rewards are not always easy to design or manage.
Team based pay is a type of performance based pay used in some organizations. In a team based pay
compensation structure, a portion of an employee's wages or bonus is tied to the success of team goals, with all
team members typically receiving the same or similar incentive pay. While increasingly popular, team based pay
still has many critics.
TEAM COMPENSATION ADVANTAGES
In team compensation, employees may perform better in hopes of not letting down the team. This is especially so
in project-based jobs which require every team member to complete a task before the rest of the team can advance
to the next stage of work. Information is shared more freely when teams are reviewed and compensated as a
group because the incentive to withhold information for personal gain is reduced. A 2010 study by University of
California, Santa Barbara, states workers will try to perform in a way may make them "willing to make sacrifices
for teammates ("take one for the team") that they would not otherwise make."
TEAM COMPENSATION DISADVANTAGES
Team compensation can lead to individual employees carrying too much burden and others being compensated
for poor performance. Arguments among the team in these cases may diminish morale and harm the quality of the
deliverable. Power struggles for credit when a task goes well or blame when it goes poorly can arise in a group
compensation model.
KNOWLEDGE-BASED PAY
A system of payment where employees are compensated based on their individual skill level
and education attainment. Under this system, employees are rewarded for reaching certain goals in
education, training and skill development. Knowledge-based pay systems provide incentive for employees
to improve their skill set and education.
. With knowledge-based pay, more emphasis is placed on the ability of the employee to do the job.
the concept of knowledge-based pay focuses on an individual employees ability to improve their education to
increase salary or other compensation. As the employee increases their scope of knowledge earned, the employee
can generally take on more complicated and lucrative projects on behalf of the company.
KNOWLEDGE-BASED PROS
Knowledge-based pay rewards employees who set goals to learn new skills and acquire new knowledge.
Ambitious, self-motivated employees typically prefer this approach because it gives them a reason to focus on
career development. It also provides a mechanism to reward employees who want to perform at a higher level.
When companies pay for knowledge and skill development, they contribute to a systemic raising of the bar for
performance across all jobs.
KNOWLEDGE-BASED CONS
Because knowledge-based pay is inherently more competitive within job ranks, it may cause conflict among
colleagues and co-workers. Colleagues may feel slighted or bitter toward you if you make more money
performing similar tasks. You may also feel underpaid and undervalued if you aren't paid the same as someone
doing the same job at a competing company. Plus, with a knowledge based pay system, you have to spend time to
take classes or training and continue to develop skills if you want to make more money.
