Internal pay equity approaches and checklist
05/11/2007
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Significant pay inequities among executives and between executives and other employees can cause significant strife (see article HERE). 

Interestingly, internal pay equity was routinely used as a tool to help set CEO pay levels until relatively recently. In fact, at the turn of the last century, J. Piermont Morgan was purported to have refused to provide a loan to any company where the CEO’s compensation was more than 50% greater than the next highest executive at the company. His rationale was that he didn’t trust any CEO who thought too highly of himself and was paid accordingly.

Compared to companies in the US and UK, this has not been considered an important matter for Australian companies, given that Australian pay practices can be considered egalitarian relative to those in most other countries.  However, the research indicates that perceptions of inequity are confined to the zeitgeist of local cultural norms, rather than a universal benchmark.  So it may be worth considering an annual checkup of internal equity to minimise company risk stemming from practices that depart from the norm. 
 
There are many possible ways to establish an internal pay equity methodology.  Some companies in countries where internal equity is more a national issue have written these into their disclosed remuneration policy explanation to shareholders. 

A remuneration committee checklist for company methodology may include:

– A numerical relationship between the CEO’s pay and that of other executive officers (e.g. see Dupont’s US disclosures)
– A numerical relationship between the CEO’s pay and that of the company’s overall workforce (e.g. see Intel’s US disclosures)
– A numerical relationship between the aggregate pay of all senior managers and that of the company’s overall workforce

Organisation structure and culture will influence the appropriate internal pay equity ratio. Here is a checklist of considerations to take into account:

• High vs. low number of general managers (high number could lead to lower ratio)
• Team-oriented vs. hierarchical (team-oriented would also have a lower ratio)
• Presence of a COO (if COO is absent, ratio of CEO to 2nd highest paid may be higher)

© Guerdon Associates 2021
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