Which of the following is true of external equity pay comparison?
A. It involves comparisons with employees with lower level jobs in the organization.
B. It involves comparisons with employees with higher level jobs in the organization.
C. It influences whether employees accept transfers.
D. It influences employees’ willingness to accept promotions.
E. It influences decisions of employees of whether to stay or move to another organization.
The correct answer and explanation is :
The correct answer is E. It influences decisions of employees of whether to stay or move to another organization.
Explanation:
External equity pay comparison refers to the process of comparing the pay of employees in one organization with the pay levels of employees in other organizations performing similar roles. The goal is to ensure that an organization’s compensation is competitive in the labor market, which can directly influence employee satisfaction, retention, and recruitment.
Here’s why option E is correct:
- External equity pay comparison plays a critical role in determining whether employees feel their pay is fair relative to others in the broader job market. If employees feel that their compensation is not competitive compared to what other organizations are offering, they may be more likely to leave the organization for a higher-paying job. This can impact an organization’s employee retention rates. Therefore, this type of pay comparison influences decisions of employees about whether to stay with their current employer or move to another organization that offers better compensation.
Let’s break down why the other options are not correct:
- A. It involves comparisons with employees with lower level jobs in the organization: This refers to internal equity rather than external equity. Internal equity focuses on pay comparisons within the same organization, ensuring that employees with similar responsibilities are paid fairly relative to one another.
- B. It involves comparisons with employees with higher level jobs in the organization: Again, this is related to internal equity. External equity is about comparing pay across organizations, not within an organization or between job levels within it.
- C. It influences whether employees accept transfers: While external equity may influence employees’ decisions about whether to leave for better-paying roles elsewhere, the decision to accept a transfer within the same organization would more likely be influenced by internal equity or other factors like career advancement opportunities.
- D. It influences employees’ willingness to accept promotions: Promotions typically involve internal equity pay considerations—whether employees are being offered fair pay increases relative to the organization’s salary structure and their role. External equity has less impact on promotion decisions.
In summary, external equity pay comparisons mainly impact whether employees feel they are being compensated fairly compared to others in the job market, influencing whether they stay or leave for better opportunities.