Navigating Internal and External Equity in Compensation: 7 Strategies for 2025

What’s more important: ensuring employees’ salaries are competitive compared to the external market, or that they’re internally fair and consistent? In our view, both internal and external equity are crucial factors that should shape every company’s compensation strategy. Read our full guide to learn more. 

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Internal vs. external equity: definitions 

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Internal equity refers to fairness of pay between employees working for the same company in the same or similar roles. Though there may be some differences based on things like location, seniority and performance, the general idea is that employees should be paid the same for the same work, regardless of demographic factors like their race, gender, age or ability. 

External equity, on the other hand, is all about how an employee’s pay compares to the external market. A salary that’s externally equitable is comparable to the amount paid by other companies that are similar in terms of size, industry and location. Because salaries change over time, maintaining external equity is a constant process that involves staying informed about market dynamics. 

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Why internal equity matters

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Internal pay equity ensures that every employee is compensated according to the work they do and that factors like race or gender don’t have an impact. Not only is this the right thing to do, but it’s also a legal requirement in many cases. For example, equal pay for men and women is one of the founding principles of the European Union, and gender-based pay discrimination is illegal in all EU countries.

Aside from legal considerations, maintaining internal pay equity shows employees that they are valued for the work they do. This helps employers to build more positive company cultures and ensures employees are engaged and satisfied at work. In turn, this can lead to better retention rates, since employees don’t need to look elsewhere for an employer that truly values them. 

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Why external equity matters

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External pay equity ensures that employees’ salaries are competitive. This is important for one simple reason: it enables businesses to attract talent. After all, candidates are unlikely to choose your organisation over another company that’s willing to pay more for the same role. Paying competitive salaries also sends a strong message to employees that you value their contributions and are willing to pay for them. 

It’s important to remember that external equity isn’t something you can consider at the hiring stage and then forget about. Since the market moves quickly, an employee who is hired at a competitive rate may soon end up underpaid compared to the market if their salary isn’t adjusted. Keeping a close eye on external equity through regular salary benchmarking can help you to retain employees for longer. 

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When internal and external equity conflict: avoiding pay compression 

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Pay compression is when employees receive the same or similar compensation despite differences in their experience, seniority or performance. For example, hiring an employee at a competitive rate in a fast-moving industry might mean paying them the same salary as existing employees, simply because the market has shifted since they were hired. This means more seasoned employees are effectively being underpaid compared to their new colleague when their additional experience and tenure are taken into account. 

This situation isn’t inevitable: it’s possible to attract new hires with competitive compensation while also maintaining fair and equitable internal pay structures. However, businesses do need to put in place specific strategies to maintain both internal and external pay equity and ensure they don’t counteract each other. 

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Key strategies to maintain both internal and external equity 

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Ready? Let’s dive into our top tips for maintaining both internal and external equity in your compensation structure. 

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1. Use salary bands to ensure internal consistency 

When employers have no clear process or structure in place for determining the right salaries to pay, internal inequity is almost inevitable. That’s because each individual manager and recruiter has their own idea of what an employee is worth. Of course, unconscious bias can also play a role. 

Salary bands contribute to internal pay equity by ensuring that everyone is paid according to set criteria like their role, level and location. Putting a salary band system in place helps to standardise pay across the organisation and prevent irrelevant or discriminatory factors from having an impact. 

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2. Stay up to date with market trends

Ensuring external equity is impossible without at least some form of market research. There are several sources employers can use to understand what competitors are paying, from self-reported stats on sites like Glassdoor to robust, up-to-date data from platforms like Figures. 

Either way, benchmarking salaries isn’t something that should only be done at the beginning of the employment journey. Instead, employers should conduct regular market research to ensure pay remains fair and competitive even as market dynamics change.

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3. Conduct regular compensation reviews

Both your internal and external equity will suffer if you’re not regularly reviewing your employees' salaries. Conducting regular salary reviews allows you to: 

• Adjust salaries to keep them in line with changing market conditions 
• Correct any internal pay discrepancies
• Reward top performers with salary increases 
• Ensure pay structures are still aligned with your compensation philosophy
• Demonstrate your commitment to both internal and external pay equity

Most companies conduct reviews at least once a year. However, we’re now seeing more and more companies opt for biannual reviews to allow for even more reactivity. 

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4. Set objective performance criteria 

In many organisations, pay increases are at least partially tied to performance ratings. The reasoning behind this is simple: it ensures employees who are going above and beyond are rewarded, while also encouraging others to work hard in the hopes of getting an increase. 

The problem? The criteria companies use to define performance are often vague and unhelpful at best, if not outright biased. If you want to avoid internal inequity, setting objective, fair and consistent criteria for performance reviews is crucial. You’ll also need to provide managers with training to ensure these are applied consistently across the organisation. 

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5. Train managers on compensation and communication 

In most organisations, pay policies and compensation philosophies are set by the company’s leadership. However, the people responsible for putting those policies into practice are managers and team leaders. That means educating managers on compensation practices is crucial to maintaining both internal and external equity. 

As a minimum, managers should understand the various criteria that go into pay decisions at your company. Providing training on communication about compensation is also important since the way managers discuss money can have a big impact on perceptions of fairness. 

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6. Conduct pay equity audits 

A pay equity analysis is a statistical process that involves cross-referencing pay with factors like gender, age, ethnicity, seniority and performance. The idea is to establish whether any differences in compensation are down to legitimate factors like performance or seniority, or whether bias and discrimination are at play. 

Even when organisations have good intentions, internal inequities can arise. Conducting a pay equity analysis can help you spot discrepancies you may otherwise have missed — which is the first step to correcting them. 

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7. Adopt a transparent compensation policy 

Pay inequity becomes much less common when employees have a clear idea of how their pay compares to their peers, simply because employers can’t get away with it. And, while many employers are understandably wary about pay transparency, we at Figures believe it’s the only way to truly ensure pay is equitable and fair. 

Part of this is about ensuring employees have an understanding of the different factors that determine their pay. But another important aspect is transparency in job ads. By telling candidates upfront what they’re willing to pay, employers can prevent unfair factors like the candidate’s negotiation skills or the hiring manager’s unconscious bias from impacting starting salaries. 

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Taking a holistic approach to pay equity 

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Internal and external equity are two sides of the same coin. And, while you could theoretically have one without the other, neither would be very beneficial for an organisation. 

Think about it: an organisation with only internal pay equity would soon lose employees to companies that are willing to pay more. And an employer that focused on keeping salaries externally competitive without paying attention to internal equity would likely see problems with employee engagement, satisfaction and retention — not to mention legal issues. 

Employers shouldn’t think about internal and external equity as competing forces. Instead, they should keep both concepts in mind when making decisions about pay. This ensures that compensation structures remain both competitive on the external market and internally fair and consistent. 

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Figures: one tool for external and internal equity 

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Figures is an all-in-one compensation management suite that can help you maintain both internal and external pay equity. 

Employers can use Figures to easily benchmark salaries against the external market and build robust salary band structures to ensure pay is internally consistent. Figures’ compensation review module can help employers run efficient compensation reviews in a fraction of the time, ensuring pay remains fair and equitable even as markets and internal company dynamics evolve. 

Want to learn more? Sign up for a demo to find out what Figures could do for your business. 

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