Advantages of External Equity
When running a company, figuring out how to compensate employees is one of the most critical aspects of the business. One method, known as external equity, looks at the average compensation provided in the marketplace before deciding on pay rates for employees. This method of compensation provides some advantages over other compensation strategies.
One of the advantages of considering external equity is that it allows you to keep up with the competition in your marketplace. If you are continually lagging behind other companies in your wages, employees will not want to work for you. Eventually, even the most loyal employees may be swayed by higher wages offered by your competitors.
When employees work for you for a certain amount of time, they may find it necessary to ask for a raise. If you use an external equity solution for your compensation packages, it provides you with some extra ammunition to use in negotiation. When you offer similar pay structures to what other companies offer, you can point to that fact during the negotiation process. If your pay is much lower than what competitors offer, your employees may use this as leverage during negotiations.
Keeping your wages in line with other employers in your market or industry puts you in better shape against the competition. The wages you pay your employees are ultimately priced into the products and services you sell. If you pay your employees much more than the competition, it may be more difficult to contend on a price standpoint. Matching the rest of the market puts you in a better position to compete in sales.
Another benefit of using an external equity method of compensation is that it forces you to stay on top of the market. To figure out what other companies are paying, you have to do market research. If you use an internal equity structure, you may not pay much attention to the competition in these areas, which eventually could lead to your company being outdated. Conducting regular research on your market helps you stay up on the latest trends.