This document discusses external equity in compensation structures. External equity exists when employees perceive they are fairly rewarded compared to those in similar jobs elsewhere. An organization's pay rates should be at least equal to average market or sector rates to attract and retain qualified employees. Compensation surveys are important to evaluate if pay and benefits are comparable to other organizations for similar roles. Non-monetary factors like benefits, job security, and advancement opportunities also impact perceptions of external equity. Comparisons must account for differences in roles, sectors, and work hours between organizations.

1. External Equity
Pay Structures

2. Prepared By
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Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com

3. External Equity
• “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”.

4. 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.

5. External Equity
• 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.

6. External Equity
• Employees also compare
their roles and pay to roles
and pay in other
organizations. Unfortunately
they do not always compare
with similar types of
organizations or even in the
same sector.

7. External Equity
• Generally, employees
consider much more than
base pay in determining
external equity. For some
more emphasis may be
placed on employee
benefits, job security,
physical work environment
or the opportunity for
advancement in deciding if
external equity exists.

8. External Equity
• The use of salary surveys is
critical in your ability to
determine if your
compensation and benefits
are comparable to similar
roles in other organizations.

9. External Equity
• It is important to ensure that
the key responsibilities and
goals of the roles being
compared are similar; as is
the sector the organization is
aligned with.

10. External Equity

11. Example
• A number of nonprofit
organizations have tried to
address quality of life
concerns by only requiring
full-time employees to work
a 35-hour week, while many
other organizations require
their employees to work
37.5 or even 40 hours per
week.

12. Example
• It is important that if the
base pay for a specific role
from group one was to be
compared to the same role
in group two, that the
difference in hours is
understood and accounted
for.

13. Example
• While the difference in hours
may seem small, if a person
who worked a 37.5 hour week
made $40,000/year, they
would be making $20.51/hour.
If the person working the 35-
hour week were also being
paid $20.51/hour, their annual
salary would only be $37,328
per year. This could seem
inequitable unless the
difference in hours was clear.