Which of the following is a focus of external equity pay?
A) other employees in the same organization but in a different job are paid.
B) other employees in the same organization in the same job are paid.
C) employees in other organizations are paid for doing other jobs with higher responsibility.
D) employees in other organizations are paid for doing other jobs with lower responsibility.
E) employees in other organizations are paid for doing the same general job.
The correct answer and explanation is :
The correct answer is:
E) Employees in other organizations are paid for doing the same general job.
Explanation:
External equity in compensation refers to the fairness of an organization’s pay structure in comparison to similar jobs in the external labor market. It ensures that employees are compensated at a competitive rate relative to what other companies pay for the same general job. External equity is essential for attracting and retaining talent, as employees may leave for better-paying opportunities elsewhere if they perceive their compensation to be below industry standards.
Organizations determine external equity through benchmarking, where they compare their pay rates with those of competitors or industry averages. This is often done using salary surveys, government reports, and market analysis. If a company’s wages are too low compared to the market, it may struggle with employee retention and recruitment. Conversely, if wages are significantly higher, it may face unnecessary financial strain.
Answer choices A and B focus on internal equity, which deals with fairness in pay within the same organization, rather than comparisons with external organizations. Choices C and D refer to comparisons with jobs of different levels of responsibility, which is not the primary focus of external equity.
Maintaining external equity is crucial in industries with high demand for skilled workers, as failing to offer competitive salaries can lead to talent shortages and decreased morale. Companies must balance external competitiveness with internal fairness to create a pay structure that is both equitable and sustainable.