External equity exists when a firm’s employees receive pay comparable to workers who perform similar jobs in other firms. A problem that exists is that often employees perceive that workers in other companies earn more. However, a recent survey by HR Solutions International Inc. found that although employees frequently think that peers at other firms earn more in reality they typically are paid about the same. Compensation surveys help organizations determine the extent to which external equity is present. Internal equity exists when employees receive pay according to the relative value of their jobs within the same organization. It was with regard to internal equity that Peter Drucker was referring to at the beginning of the chapter.
Job evaluation (discussed later in the chapter) is a primary means for determining internal equity. Most workers are concerned with both internal and external because employees have more information about pay matters within their own organization. And they use this information to form perceptions of equity. In a competitive environment, and especially for high-demand employees, it becomes clear that the market is of primary importance (external equity)