Does this sound familiar? "I can't pay our new manager $110k because the other manager in that department only earns $95k." Hiring managers often hamstring themselves over this kind of "internal equity" consideration. I've written previously about the dangers of hiring to fit the budget, instead of hiring someone with the skills to actually do the job. This "internal equity" consideration is exactly the same kind of problem.
To hire great people, only "market rate" matters. Market rate is what other employers consider to be a fair salary for the same candidate. Your budget and "internal equity" issues are irrelevant. In hiring you are competing with other employers to hire the most highly qualified person, and if you are weighed down with any considerations unrelated to "market rate" you are giving an artificial and unfair advantage to every other employer you are competing with.
Admittedly, "internal equity" only shows up as an issue when you are hiring, but it is really not a hiring issue. It is a compensation issue.
Internal equity problems do not occur in organizations that pay market rate. They only occur when someone has been underpaid for several years relative to their market value. And you cannot solve it by trying to hire new people at below-market salaries. To let an unresolved compensation issue affect your hiring will only compound the problem, constrain your hiring, and kick the can down the street to show up every time you hire in the future. (And you will have to hire a lot because paying below market causes turnover).
OK, so internal equity within a department is one thing, but sometimes I hear organizations debate equity between different departments. That just defies logic. You simply cannot try to pay all of your executives the same pay rates.
It isn't "more fair" to pay your Director of Sales the same pay as your Director of IT--it's just riskier.
Internal equity within a department (or skill set) is fine, but there is no such thing as internal equity between different skills.
In hiring, market rate is the only true benchmark (you can read more about salary surveys here). The minute you forget that, you start overpaying your less valuable people, and your more valuable people start quitting to go where their skills are properly valued.
For more perspective on setting salaries for new employees, see, How to Make a Job Offer and Negotiate Salary for a New Hire.
To gain more perspective on how salaries affect long-term employee retention, visit "What Drives Employee Retention and Employee Turnover?"
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