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What Is Internal Equity?

Video: What Is Internal Equity? | Establishing Fair Pay with Internal Equity

Choosing how much you will pay an employee can be tricky. You want to be fair to all employees in your decision. Also, you want all of your employees to feel valued. As a small business, you cannot afford to lose any employees.

By using internal equity, you can create a pay system that maintains employee loyalty and happiness.

Internal equity defined

Internal equity is the comparison of positions within your business to ensure fair pay. You must pay employees fairly compared to coworkers.

Employees must also perceive that they are paid fairly compared to their coworkers. Otherwise, they might feel unvalued and leave. It is easy for employees to find out how much other employees earn via the Internet and word of mouth. If an employee works hard but is paid less than her coworkers who do not work as hard, she might become upset about her wages.

When you adopt a straightforward and honest payment system, your employees will believe that they are being paid fairly and with equality. This boosts company morale and employee loyalty, bringing many benefits in the long run.

Achieving internal equity

To create fair pay, you compare employees who do similar jobs for your company. You should consider the tasks your employees do. If two employees perform similar tasks, they should earn similar wages.

You should not base employee wages solely on job titles. Two workers that have different titles but perform similar tasks should have similar wages.

Similar tasks are the main consideration when you set employee wages. However, there are other things you should consider. This includes each employee’s educational background and experience.

To maintain transparency and fairness within your business payroll, you should be able to explain your decisions on employees’ compensation. When you set an employee’s wages, document all the factors that led you to your decision. If an employee ever questions their wages, you can explain the exact reasons for choosing their wage.

Examples

The main scenario: Imagine you own a small hotel. You have two chefs on your hotel’s kitchen staff. Both chefs perform the exact same tasks: managing other kitchen workers, preparing meals, and basic clean up. The chefs work the same amount of time each week. Because the chefs have similar positions with similar tasks, you should pay them similar wages.

Variation 1: Now, imagine the same scenario, but this time one chef took advanced training courses. Because of the advanced training, you can justify paying this chef higher wages.

Variation 2: Go back to the original scenario. Everything about the two chefs is the same. However, now imagine that you have employed one chef for 3 years and the other for 8 years. You could justify paying higher wages to the employee you have employed longer.

Variation 3: One last time, let’s use the first example. The two chefs perform the same tasks, but you assigned them different titles: chef and head cook. Despite their different titles, you should pay the chefs similar wages because they have similar tasks.

With all these situations, you should be able to prove how you chose the compensation for each employee.

Laws about employee equity

If employees believe they are being paid unfairly, they can file a lawsuit against you. If this happens to you, it is extremely important to have the documents where you explain how you determined each employee’s wages.

Equal Pay Act

The Equal Pay Act is a federal law that requires you to consider internal equity, specifically between men and women. Men and women who have equal jobs must be equally compensated. You cannot use a person’s sex to justify higher wages.

California Fair Pay Act

The California Fair Pay Act is more strict than the Equal Pay Act. Beginning on Jan. 1, 2016, employers in California must pay equal wages to employees who do similar work. The job duties do not have to be exactly identical, but they do have to be similar.

The Act also allows employees to openly discuss their wages. California employers cannot retaliate against employees who discuss their wages.

Paying employees can be tricky. Our easy small business payroll software can help. We handle all calculations for you, and we can even remit taxes on your behalf. Try a free trial today!
This article was updated on 12/10/2015. (Original publication date: 7/31/2012).

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