What Is Internal Equity and Why Does It Matter?

When you’re running a small business, thinking about how you’re going to pay and retain the top talent in your field is likely something you think about often. You want your staff to feel valued and respected in the workplace, but how do you make sure that everyone’s being paid what they’re worth? That’s where internal equity comes in.

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We’ll answer your questions on what internal equity actually is, why it’s important, and how you can start to build an employee compensation system that keeps your team happy in the long term.

What Is Internal Equity?

Simply put, internal equity means that employees with similar positions or skillsets within a company are compensated in a similar way, whether that be in their salary or any additional benefits that come with the position. In other words, internal equity is about equal pay for equal work.

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Treating all of your employees fairly and equally is also a legal mandate. The Federal Equal Pay Act of 1963 expressly prohibits any gender-based discrimination between men and women working in the same organization who are working in jobs that require a "similar skill level, effort or responsibility." This goes beyond monetary compensation too, including expense accounts, bonuses, and more. 

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Depending on how your business is structured, there are different ways to build your internal pay structure that mean you're within legal compliance. For example, you could decide that all director-level positions, no matter the department, are offered something within a predetermined pay range, with a set number of vacation or sick leave days. 

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While the day-to-day work for these employees may look very different, their job titles may be similar enough to warrant a certain pay rate. Just remember that, however you choose to compensate similar positions, these must be paid in the same form across all employees at that level.

How Is Internal Equity Different from External Equity?

While internal equity is focused on pay equality within and across the organization, external equity is also an important factor when considering your employee compensation. This means taking into account what the wider external market is paying for similar jobs within your industry.

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Frequently exploring market data is an important step in staying up-to-date on current rates and job descriptions for the various positions that your business may be hiring for. Leadership should be working closely with the human resources (HR) team to better understand market rates, and provide competitive pay and benefits to any prospective employees currently in the job market. 

Region and industry-specific data is helpful to compare—after all, salary expectations in a major city or metropolitan area for a new college graduate will look very different to those in a more rural location. It's unrealistic to assume that your small business will be able to match the pay level of a multinational corporation, but there are other benefits that your recruitment team can use to sell your company as a great place to work.

Why Is Fair Pay Important for Both Employees and Business Owners?

There are plenty of advantages related to implementing an internal equity policy within your organization. Here are a few of the top benefits.

1. You’re More Likely to Retain Your Top Team Members

These days, talking about money is no longer as taboo as it once was and it's now easier than ever for your employees to find out what their coworkers, or people in your region with similar jobs, are making. 

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If members of your team realize that they're being underpaid, it's very likely that they'll jump ship to a competitor very soon. The perception of unfair pay, even if that's not the case in reality, is often enough to make employees question their status within the company.

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As a business owner, retention should always be something you're thinking about. It's much more expensive to hire and train new employees than it is to continue working with existing ones, so addressing internal equity and creating a more transparent compensation system will help to prevent possible employee conflict later down the line. 

2. It Mitigates the Risk of Discrimination Lawsuits

Using external market data to inform your company payscales and focusing on internal equity across your company can mitigate the risks of an equal pay discrimination lawsuit.

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Thanks to the 2009 Lilly Ledbetter Fair Pay Act, employees can file a lawsuit within 180 days of the last paycheck in which the discrimination occurred, rather than the date at which discrimination began. The Act aims to provide workers with greater discrimination protection, but it also means that your business runs the risk of a lawsuit if a disgruntled employee discovers that they aren't being paid the same as someone in a similar role.

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While most of the laws around equal pay are at the national level, it’s important to check for any state-specific regulations and requirements that may impact your business. The California Fair Pay Act is a great example of this. Not only do the national Equal Pay Act laws apply in California, but this state mandate means that employers are required to pay equal wages to anyone doing similar work and employees can openly discuss their wages without fear of discrimination or retaliation.

3. You Help Fight the Gender and Race Pay Gap

According to a recent study by the Bureau of Labor Statistics, women's annual earnings in 2020 were 82.3 percent of men's, meaning that women only earn 82 cents for every dollar a man in a similar position to them makes. 

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The issue extends beyond gender alone, and statistics around the racial pay gap are just as dismal. In fact, it's estimated that Black and Latina women will experience earning losses of over $1 million across a 40-year career. While most people are aware of pay disparities between men and women, over 50 percent of Americans were not aware that there was a racial pay gap between Black and white women in 2019, even for those with comparable educational backgrounds.

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There's still a long way to go before we can say that everyone is paid equally for the work they do. But by ensuring that all of your team members are compensated appropriately, your business not only improves its competitiveness in the marketplace, but also demonstrates a commitment to diversity and inclusion.

How Do You Calculate Internal Equity?

Combining your internal and external pay equity research is the best way to start addressing any inequity in pay scales across your organization. Work with your HR team to conduct audits on at least an annual basis to review current pay and skill sets across each department. Don't forget to include any additional information on non-monetary benefits provided to employees. 

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Match this to data with your industry and regional market (a site like PayScale can be helpful for this) to see if what you're offering is competitive. From here, you'll be able to clearly see where you may be falling short with existing employees and take steps to improve this, like paying higher wages to both current team members and new hires.

Lead the Way as a Fair Pay Employer

Ultimately, the final decisions about what you should pay your employees is in your hands. By increasing transparency and equity within your company pay structure, you're more likely to keep your employees happy and continue to grow a successful business.