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Internal equity which is often referred to as internal alignment is the strategy by which an organization determines the modes of compensation and payment of its employees in relation to their jobs. Internal equity means that the persons doing the same kind of work in an organization should be compensated equally. This compensation is determined by the value of the job and the person in relationship to the contribution of the person towards adding to the value of the company which is usually determined by the different job and person evaluation systems in the organization. As Heneman notes, the organization which put more emphasis on the productivity of the human capital is more likely to adopt internal alignment policies and equity compensation owing to the inherent value it attaches to the human capital as a business strategy.
The internal alignment strategies that seek to determine the pay for each employee employs evaluating the value that a person adds to the wellbeing of the organization in achieving its goals. These strategies may include the human capital and job characteristic assessment procedures. Some organization place more on the job emphasis rather than the person where the strategies of determining the pay for the employees is based on job classifications, job evaluation and job descriptions systems. However in recent times organizations have gone further to put more emphasis to the person rather than the job. This individual based focus has been instrumental in encouraging innovation, quality and the human capital as important business strategies that will help the organizations achieve its objectives. Also it is noted that, an organization that employs the internal equity strategy may also use the results in relation to the behaviour of different employees to determine the compensation strategy for the employees. In trying to determine the pay using the result strategy the organization focuses on the output of the person in different levels and job characteristics to determine how much the compensation is to be for the employee. In addition, other strategies that are used to determine the compensation for employees in an organization include seniority in relationship to performance, education and skills of the employees.
How relationships form a pay structure
An organization can effectively set up its pay structure by adopting the pay systems and rates as applied by their competitors. External competitiveness describes the pay relationships that are external o the organization. The employer should position his pay to his/ her employees by first looking at the pay being offered by the competitors. This includes the incentives, benefits, etc, that will help achieve the compensation goals. When the employers decide to adopt the external relationships pay strategies they are able to set their pay at levels that will attract employees as well as retain a competitive human capital in their organizations (Milkovich, n.d: p 11).
Pay structure refers to the systematic arrangement of the pay rates for different employees in an organization which depends on the type of work or skills. The structure is created by the levels of work in the organization, differentials in the pay among workers in different levels and the criteria employed in determining the differences in the pay is what creates the structure. The pay structure in an organization should be such that the variations in the structure supports the workflow is fair to all employees in different levels and motivates them to embrace behaviors that will make them achieve the objectives of the organization. While employing the internal equity focus, the employees should get satisfied with the pay structure and the strategy used in its formulation. It is noted that the employees analyze the equitability of the structure by comparing the compensation/ reward with the qualifications required, work done, and the contribution of the work towards achieving the organization’s goals. It is believed that the variations in internal pay structures influence workers’ attitude and work behaviour and has a significant impact to the success of the organization.
Any organization is faced with the challenge of compensation its employees fairly. One major important use of the pay structure is to demonstrate the philosophy with which the organization compensates its employees, which form part of the organization culture. The effectiveness of a pay structure can be determined by how the organization attracts employees as well as its ability to retain the people who can help it achieve its goals. The pay structure gives a logical framework in which equitable, just and consistent reward to employees can be exercised. In addition, organizations use pay structures to help monitor and control the implementation of pay practices and as a basis for effective management of relativities. It is the media used by organizations to communicate to the outside community on the opportunities that are available to the employees.
Different organizations employ different types of pay structures in compensating their employees. The most common two types of pay structures are the internal equity method and the use of market pricing structure. The internal equity pay structures are usually used by the organizations that embrace internal equity as a business strategy. In this strategy there are two main types of pay structures: the narrow- graded –pay structure and the broad banded pay structure. Armstrong demonstrates that the narrow- graded pay structure involves a sequence of grades of job where workers doing jobs of equivalent value are slotted. In this case a pay range is given to each grade. In the narrow- graded structure, in each grade, the range between the maximum and the minimum pay is between twenty percent and fifty percent above the minimum. Organizations that use the narrow- graded structure have grades of employees ranging from ten to fifteen. The hierarchy of the employees is followed in determining the pay for the workers. The decisive factor in forming the grades may is defined by use of job evaluation, grade definitions or any other criteria. On the other hand, organizations using the internal equity as a compensating strategy can use the broadbanded pay structure. In this case the range of pay between workers is significantly higher. The width in the band may range up to 100 percent or more. Usually in this structure the boundaries in the band are determined by job evaluation. Also the pay in this structure may be based on the prevailing market rates or a combination of both the market rates and job evaluation. In this structure the number of job grades are significantly reduced to as low as five.
The alternative of using the internal equity strategies in developing a pay structure is to use the market pricing where the pay for the workers is adjusted according to the prevailing market rates.
Shareholders in an organization
Shareholders are the stock owners in any organization. In actual sense the shareholders are the owners of any organization. The shareholders provide the capital for any business organization along with other investors. The assets provide by the shareholders are highly firm specific and are invested for a lifetime of the business. Shareholders are rewarded by sharing the profits and dividends and appreciation of their stock. The shareholders being the real owners of the business organization retains the power to control the running of the business by participating in decision making especially regarding the management of the business. Shareholders remain the chief beneficiary of the activities being carried out by the firm. According to the contractual theory, the shareholders are the capital providers who willingly remit their capital available to the firm and have a claim on what remains after the bondholders, employees, suppliers and other groups’ interests are satisfied.
On the other hand, the authentic shareholders bear the residual risk i.e. the risk that remains after the firm satisfies its legal obligations. In this case the shareholders in any organization are compensated only when the organization makes profits.
One of the major roles of the shareholders in any organization is the role or electing the directors and manages of the organization to run the organization on their behalf.
How to tailor to organization structure and work flow to make the pay structure
In a business organization, work flow refers to the process by resources are put in place and people needed for those tasks are grouped in order to achieve a given goal. The structure of the organization determines the different job grades available and their roles in achieving the goals of the organization. Well tailored organization structures provides for well defined jobs with detailed tasks. In ensuring that the goods are effectively delivered to the consumers, an organization structure with a well tailored structure enables the workers to have specific duties a strategy that enhances the productivity of the workers.
In this way the work flow is carried effectively at low cost. The organization applying the internal equity strategy can therefore be able to recognize individual work and the value of the job by the persons in the organization. Also the organization structure with hierarchical administration can be used to determine the pay structure for the employees while following the levels created by the hierarchy in relation to the individual performance. Work flow analysis can be used with the objective of improving on the efficiency of the workers and also as a tool to determine the pay structure in any organization.
In order to determine the work flow process that ensures reduction in the slack time from one process to another, the organization structure in the organization has to be affected by properly defining each employee’s functions in a more consistent manner. The organization structure to be adopted can therefore be utilized to formulate a pay structure that recognizes individual’s job as well as his/ her efficiency in the job assigned. In addition it is only by defining the functions that the value for each job in the organization can be effectively determined.
Importance of equity theory
Equity theory tries to foster fairness. According to Equity - Overview of Equity Theory (2010), equity theory makes the following assumption. First, that people are self interested and will work towards maximizing their personal gains. Secondly the theory suggests that people will always reward those organizations that threat other equitably and generally punish those that treat others otherwise. Thirdly, is that people find themselves distressed by working in groups in which members are involved in inequitable relationships. Lastly, the theory assumes that when people discover inequitable relationships, they make moves towards establishing equity. In relating to this theory in an organization regarding the fairness in the pay system, the equity theory establishes that workers make comparisons of their inputs and rewards with that of similar workers in the organizations. Also employees demand to address the imbalance in the reward systems by altering their inputs. As a remedy to the above, the theory suggest that fairness of reward in an organization can be established through job ranking, job classification, point systems and factor comparisons and tagging differential pays between differential jobs. Therefore fairness in pay differential among individuals in the same job can the established and justified through using seniority- based pay systems that reward the length of time individuals have worked for the organization, merit-based pay system in which employee’s performance is rewarded, skill-based pay system, team-based system, incentive plans among other strategies. In this case, equity prompts the employees to improve on their services and productivity as a strategy for maximizing their personal gains. This contributes positively to the organization in increasing its efficiency in product or service delivery.
Efficiency, fairness and compliance
According to Milkovich, pay systems in organizations are designed to meet efficiency, fairness and compliance as the strategic objectives. Efficiency is the improvement of performance, quality or increasing the customers or stockholders satisfaction with the businesses of the organization. Also, efficiency in this case is used to mean cutting on the labour costs.
The objective of fairness in pay systems brings about the aspect of ensuring fair treatment among different employees in different levels. Fairness in this case does not necessarily mean that the employees are treated equally but instead it means that they ate treated in a just way. This is achieved by recognizing the employee’s contribution versus his/ her needs. Fairness is also important in reaching the decisions about pay therefore the employees attach as equal importance in the way the decisions about pay are reached as the pay itself.
Lastly the pay objective of compliance is concerned with the level of conformity of the pay system with already established compensation laws and regulations e.g. at federal level, provincial, or territory level. Since the laws and regulations are constantly changed, the pay systems in organizations should be properly adjusted to conform to the existing laws.