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Employee Equity and Merit Pay for Performance Essay

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Updated: Apr 23rd, 2021

Psychology

Discuss internal and external employee equity

Internal employee equity refers to the justness that takes place where the employer pays his or her employees their due wages that are commensurate with the value of the job they do. According to Al-Zawahreh and Al-Madi (2012, p.158), internal equity is highly dependent on how the employer perceives the work done by his or her employees. On the other hand, external employee equity is evidenced when the employer pays his employees at a rate that is commensurate with the prevailing external labor markets. External equity is dependent on the employer’s ability to assess the labor market. Internal equity requires that the employer understand the essence of every job in the organization. The importance of the job depends on various job-dependent factors that determine the level of compensation for specific jobs. Such factors may include education level, physical ability, level of experience, equipment to be used, management or leadership responsibility, the condition of work, contact with the public, and manual dexterity among others.

Moreover, it is through job evaluation that the human resource person can determine the value of the job about the efforts required, skills, working conditions, and the responsibility of the employee. According to EL-Hajji (2011, p.31), internal equity calls for job evaluation, which is reflected in the whole job ranking, point factors, slotting, classification, factor comparison, and the use of scored questionnaires. Consequently, the level of success in internal equity depends on the accuracy of the human resource persons in job evaluation. On the other hand, external equity is dependent on the level of success that the human resource person achieves in assessing external labor markets. Labor markets differ across the world. Out of this variation, supply and demand differ by markets hence becoming very hard to set wages in some labor markets. These differences result from union status, sector of the industry, size of the organization, location, licensing, authorization demands for the job, and product competition.

Criticisms of Merit Pay for Performance Systems

Merit pay has been widely criticized. According to Rubery (1995, p.637), performance pay is expensive since employees need occasional compensation for a certain achievement. Most employees understand the objective of the company and the reasons for compensation. They will become demoralized in case they achieve and the company fails to compensate them as it has always done. On the same note, employees will tend to use unscrupulous methods to achieve their merits to be compensated. This opens doors for corruption and dishonesty tainting the image of the company in the process. The process can easily backfire. In addition, EL-Hajji (2011, p.31) asserts that merit pay has been criticized for enhancing cynicism, jealousy, and anger among employees and supervisors.

Factors affecting compensation outside organization’s control

Various factors affect compensation from outside the organization. One of these factors is the labor market. The labor market keeps on changing. For example, some periods of the year are characterized by high demands for laborers in a certain area due to increased demand for a specific product in that line. For instance, coffee processing firms require more machine operators during the peak season. Such a factor is not dependent on the organization. Another factor is that industries differ in products and processes. Al-Zawahreh and Al-Madi (2012, p.159) confirm that product type is one of the determinants of compensation. It also determines the level of skills required for the job. Companies may not reveal such details to their competitors. Hence, it may be difficult to do external equity concerning such competitors. Moreover, a company may not be able to control labor laws that regulate salaries in the country. Companies have to obey since it is the prerogative of the government.

Since the equity relies partly on employees’ perceiving that they are receiving fair treatment, how can the concepts of SHRM be applied to strengthen this perception?

As industries compare their compensation levels with other industries, employees also do so with workers in other companies. SHRM should therefore focus on ensuring that employees in an organization are remunerated relatively or similarly with others in other companies. Rubery (1995, p.639) recommends that SHRM should also ensure that employees receive comparable pay for the same work and responsibilities both within and outside the organization. There should be no wide disparities in the pay for employees with equal academic qualifications, work experience, and responsibilities. Doing so will make employees feel equal. Hence, they will enhance teamwork and hard work. Pay rise should be done at a particular point of employment for all employees without discrimination. The SHRM should also ensure that there are objectivity and merit in rewarding employees especially in terms of pay. It is only by so doing that jealousy and hatred will be reduced among employees. Human resource managers should also ensure that no employee receives below-standard wages or salaries. Such moves will ensure that employees are motivated to work. It will also ensure that the company attracts the best potential employees hence providing the best quality service in the future.

Reference List

Al-Zawahreh, A., & Al-Madi, F. (2012). The Utility of Equity Theory in Enhancing Organizational Effectiveness. European Journal of Economics, Finance & Administrative Sciences, 1(46), 158-170.

EL-Hajji, A. (2011). Wage Consistency in the Context of Job Evaluation: An Analytical View. International Journal of Business & Social Science, 2(10), 31-37.

Rubery, J. (1995). Performance-Related Pay and the Prospects for Gender Pay Equity. Journal of Management Studies, 32(5), 637-654.

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IvyPanda. (2021) 'Employee Equity and Merit Pay for Performance'. 23 April.

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