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Equity in Executive Compensation

THE NOTION of equity is a useful guide in compensation policy and in creating effective compensation plans. It has been found to be of particular use in building up a salary structure or framework to control future salary movements and to simplify salary reviews1. Equity refers to the extent to which employees think a pay system to be fair and equitable. Equity in compensation is of two types, viz., (i) equity in relation to other organisations; and (ii) equity in relation to other jobs in the same organisation. The former implies external equity while the latter is known as internal equity. While external equity or competitiveness is concerned with the determination of a salary level and range, internal equity implies a pay structure with adequate and rational differentials between jobs or levels in the organisational hierarchy. Executives want salaries that are equitable not only in relation to those of their counterparts in similar firms but in relation to other jobs within their own organisation. "To be successful a salary programme for executives must be both fair and competitive, for executive satisfaction depends as much on equity within the organisation as it does on how pay compares with that in other organisations. Both internal equity and external competitiveness are necessary"2•