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Internal equity index

It measures the level of equity for the compensation package of each employee.

Calculation steps:

  1. choose the reward element for comparison (Basic, Fixed, Total cash)
  2. sort employees by grade/level/band
  3. for each category calculate the median
  4. choose your deviation range for the Internal Acceptable Pay Range (APR)
  5. for each level calculate the minimum and maximum value
  6. take the reward element for each employee and compare it (divide it) to it's according median. Express the value as a percentage
  7. for each employee you will have a Comparison Ratio (CR)
  8. sort employees into 3 categories: below APR, within APR, above APR

Salaries within APR are characterized by internal equity.  


Reward element: Basic salary

Employee Basic salary: 13,200

Internal median for the level on which the employee is: 10,000

Deviation: +/-20%

Minimum: 8,000

Maximum: 12,000

Internal equity index = (13,200 / 10,000) x 100 = 132%

The index for this employee is above the maximum so the index is placed in the above APR category.

This means the employee is overpaid in comparison to his colleagues. When employees are found in "below APR" or "above APR" categories engagement issues may appear.

Understanding the context is very important. When looking at a comparison ratio index take in consideration the following:

  1. employee tenure - being in the company for a long time can mean that the employee received over the years multiple salary raises; beware that in some cases new employees can have a higher salary due to labor market characteristics
  2. employee performance - an employee with a constant high performance in company received higher salary raises in time
  3. department - for some departments the internal policy can be different - in some cases certain departments can have a different market benchmark, for example core departments can be payed at the upper quartile (P75) and the other departments at market median (P50). In this cases if the employee compensation package is compared to the overall level internal median the comparison rate will probably be above the APR. In this case it is advised to compare the package to the median for the level of all employees within the same policy
  4. qualifications or skill scarcity - if the employee has a set of skills or know how considered strategic in the company he might be treated as an exception to the pay policy

Note: Exceptions can occur and it's not a problem to have them. Beware not to have an exception policy.

This type of analysis is a very good way to:

  1. diagnose your current policy for potential risks
  2. identify the source of low engagement scores - it is advised to correlate this analysis with engagement scores

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