Compensation 253are underrewarded. To develop compensation systems, employers rely on
three types of equity: external, internal, and employee.External Equity
External equity is the standard that compares an employer ’ s wages with
the rates prevailing in external markets for the employee ’ s position. What
do other organizations pay employees who perform similar tasks and have
similar responsibilities? For example, what do other counties pay entry - level
budget analysts? What do program directors at nonprofi ts that provide ser-
vices to the victims of domestic violence get paid? The federal government
and state governments want to know the salary range for chemists with a
doctorate working in industry or universities.
External equity is determined by surveying the competitive labor
market. Labor markets are identifi ed and defi ned by some combination
of the following factors: education and technical background require-
ments, licensing or certifi cation requirements, experience required by the
job, occupational membership, and geographical location, such as local,
regional, or national labor markets (Wallace & Fay, 1988). The labor mar-
ket refl ects the forces of supply and demand for qualifi ed labor within an
area. These forces infl uence the wages required to recruit or retain quali-
fi ed employees. If employees do not see their pay as equitable compared
to what other organizations pay for similar work, they are likely to leave if
they have an opportunity.
Local governments seeking to determine relevant employers for wage
comparisons typically look at the size of the government ’ s population,
the size of its workforce, its urban/rural mix, and its equalized assessed
value (EAV), which is the assessed value of real property multiplied by
the state equalization factor. (The state equalization factor is a device to
provide equity across the state in property tax by equalizing or balanc-
ing the property value between jurisdictions.) The EAV is divided by the
population to understand per capita wealth. Each state has its own ratio.
It is the base against which tax rates are calculated and translates into the
government ’ s ability to pay salaries. Using these criteria, small local gov-
ernments would seek other small local governments with similar features
as their reference points rather than large industrial cities.
Nonprofi t agencies should also look for comparable organizations.
That may be more difficult because nonprofit services and structures
evolve in response to a variety of forces. Programs and services often
have been developed by the professional staff and board of directors to