External equity is how employees perceive a company’s compensation structure. Paying below market rate results in negative equity, while paying above it may not attract better employees. Companies can evaluate their external capital through internal and external HR factors. Compensation plans include wages/salaries and benefits, which can be used to raise external capital. The level of required skills also affects compensation.
External equity represents employees’ perception of a company’s compensation structure and compensation system. In a market society, companies often have to pay the market rate to hire competent employees. Paying below the market rate results in negative external equity as individuals see no value in working for the company. Compensation rates above the market rate will attract more potential employees, but there is no guarantee that these individuals will be any better than those paid at the market rate. Companies can evaluate their perceived external capital through a review of internal and external HR factors.
Like all activities in a market economy, the hiring and compensation of employees can fall within a traditional supply and demand curve. The demand curve – on a right-angle graph – slopes from the upper left to the lower right. The supply curve is opposite, sloping from top to top right to bottom. The intersection of the two lines indicates the current breakeven point, which is the point at which a company can hire and compensate the most employees at a specific level. This point, however, may not fall where a firm can achieve maximum external equity.
A company may find it difficult to determine its true point of external equity. The bigger issue here is that employees — and other people, such as prospective employees — can have a different opinion about the company’s pay structure and compensation. For example, a company may feel it is competitive in its compensation plans based on current market guidelines. Employees, however, may not feel that the amount of work for the specific compensation is actually worthwhile. Overcoming this divide is among the biggest issues a company faces in correcting this perceived inequality.
A compensation plan often includes wages or salaries and a number of benefits. The wage or salary depends on the market rate paid to individuals at a standard rate. This rate can vary widely depending on the importance of the position to the business. Companies that pay lower wages at the market rate can offset this compensation with better benefits. Benefit packages that include insurance coverage, paid vacation, and retirement account matching can all be ways for a business to raise its external capital.
The level of employee skills required for a job position may determine the corresponding consideration. Higher skills required by employees tend to increase compensation. Employee net worth can also be higher. Less qualified positions pay less compensation and may be considered with less external capital by outside parties.
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