The truth behind internal equity

ieIf you have worked in HR long enough, you have without doubt used the term internal equity/parity at least once. This versatile term can be put to use anytime a conversation around compensation creeps up. It can be at the time of hiring, internal transfer or at the much loved annual appraisal cycle when a manager tries relentlessly to pay their star performer more. When all other arguments fail, bring up internal equity and you’ve won your case. This is probably because no one really knows how internal equity works.

If you were to go by pure meaning, internal equity is how one employee’s pay compares to others within the organization. The general understanding is that the term is meant to ensure fair pay and avoid extremely large discrepancies that would give rise to a feeling of unfairness. In short, if an employee complains about not being paid enough, you can point to everyone else and say – ‘Hey! You earn as much as everyone else at the same position and level.’ Problem solved. The truth is internal equity is the cloak behind which every inept HR professional hides.

The greatest HR giants have always advocated paying people disproportionately (Laszlo Bock, Patty McCord etc.). Be it the bell curve or the power law, irrespective of which way you look at it, some people do perform exponentially better than the others. In such situations, it is fair to pay them proportional to the contributions. In some cases, this means disturbing internal parity and that is ok. The ranges, compa ratio and all other terms that exist are guidelines and not laws set in stone. It is the HR professional involved that needs to make a decision on what is the right number and not use the easiest determiner i.e. internal equity.

Rejecting a proposal purely based on internal equity is sheer madness. For example, if you are trying to hire someone who has the potential to transform your team, you will need to accept that they will likely cost you more than the others on the team. Of course, there is the question of ramp-up time, the lack of assurance that they will be as spectacular once they join or of offending other existing high performers. However, there are risks one must take. When it is a combination of hiring a niche skill and someone with demonstrated past success, it is a good time to take that risk. Sometimes they will fit within the range but at a higher compa-ratio (go for it), sometimes they may not fit into the range (consider still). Over time, you will intuitively know which risks play out and which don’t. These will give you a much stronger reason to revise offers than internal equity.

The same holds true for the annual appraisal cycles. Sometimes decisions around compensation are taken too late in the game (i.e. when an employee has already decided to leave). If a manager comes with a request to bump up the salary of an individual, don’t dismiss it on the count of internal parity. Ask questions – is it a niche skill, is the talent difficult to replace, are they exceptional performers – if yes, put internal parity aside. If no, you have your reason right there.

I am not propagating shattering the myth of internal equity. It has its benefits. My only ask is that the next time you are explaining why we cannot make the offer that is on the table, pull out a better reason. If internal equity is the only reason you can come up with, maybe it is time to relook at your suggestion.

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