HR and Compensation & Benefits (C&B) professionals are under increasing pressure to design pay structures that are both externally competitive and internally fair. On one side lies market salary data, which reflects what other employers are paying for similar roles. On the other is internal equity, which ensures employees are compensated fairly based on their contributions, responsibilities, and tenure within the organization.

Striking the right balance between these two forces is not just a technical challenge—it’s a strategic imperative. Misalignment can lead to disengagement, turnover, legal risk, and a damaged employer brand (SHRM, 2023). This article explores how to navigate this tension and build a compensation framework that supports both fairness and competitiveness.

Understanding Market Salary

Market salary refers to the prevailing pay rates for a specific role in a defined labor market. It is typically gathered from salary surveys, compensation databases, or real-time analytics from job postings and offer data (WorldatWork, 2023). Organizations use this data to ensure they can attract and retain talent in a competitive landscape.

Market rates vary based on:

Many employers align to specific percentiles in market data (e.g., 50th, 60th, 75th), based on their compensation philosophy and competitive position (Mercer, 2023).

Why it matters: Paying below market rates risks losing talent to better-paying competitors. Conversely, overpaying relative to the market can inflate labor costs and create internal pay disparities.

What Is Internal Equity?

Internal equity ensures that employees are compensated fairly relative to others within the same organization, considering factors like:

Employees often evaluate fairness by comparing their compensation with peers in similar roles. Disparities can lead to perceptions of favoritism, bias, or lack of recognition—especially in organizations that lack transparent compensation frameworks (Colquitt et al., 2001).

Why it matters: Internal equity reinforces trust, promotes employee engagement, and is essential for complying with pay equity laws in jurisdictions like California, New York, and the EU.

The Tension: Where Market and Internal Equity Collide

C&B professionals often face difficult questions:

These scenarios reflect the strategic tension between market salary and internal equity. Organizations that lean too far toward market pricing risk pay compression and employee resentment. Those that prioritize internal equity without regard to external competitiveness may struggle to attract talent.

According to a 2022 WorldatWork report, 61% of HR leaders cite balancing market data with internal equity as one of their top compensation challenges (WorldatWork, 2022).

Strategies for Balancing Market Salary and Internal Equity

1. Establish a Clear Compensation Philosophy

Begin with a documented pay philosophy that answers:

This philosophy becomes the foundation for consistent, fair, and strategic pay decisions (SHRM, 2023).

2. Design Pay Structures with Flexibility

Use salary bands or pay grades that are informed by market data but wide enough to accommodate different levels of experience and tenure. This allows internal mobility and reduces the risk of compression.

For example:

3. Regularly Benchmark Roles and Audit for Equity

Conduct annual or biannual market pricing reviews using reliable data sources. At the same time, perform internal equity audits to detect gaps between employees in comparable roles.

Leverage compensation software or AI tools that flag inconsistencies based on job family, performance, gender, or race—helping you stay compliant with evolving pay transparency regulations (Gartner, 2023).

4. Address Pay Compression Proactively

If new hires demand market-rate salaries higher than existing team members, take steps to:

Ignoring pay compression risks long-term morale and retention costs (Gallup, 2021).

5. Communicate Pay Decisions Transparently

Transparency doesn’t require disclosing every detail, but it does mean being clear about:

Employees are more likely to accept differences in pay if they understand the system behind it (SHRM, 2023).

The Impact of Remote Work and Pay Transparency

Two forces are reshaping how organizations balance market and internal pay:

1. Remote Work and Geographic Pay

Market salaries are increasingly influenced by cost of labor in specific regions. Companies must decide whether to offer location-based pay (e.g., different salaries for New York vs. Kansas) or adopt geo-neutral compensation policies.

Each approach has equity implications. Geo-based pay may save costs but create internal disparities. Geo-neutral pay supports fairness but may exceed local market rates (Deloitte, 2023).

2. Pay Transparency Laws

As more jurisdictions require employers to post salary ranges, employees are gaining access to external market benchmarks—whether their employer acknowledges them or not.

Proactive employers are using this trend to build trust and align internal equity practices with public commitments.

Conclusion

Balancing market salaries with internal equity is not a one-time task—it’s a continuous, strategic process. Market data tells you what’s competitive. Internal equity tells you what’s fair. When used together, they form the backbone of a compensation strategy that supports both organizational performance and employee satisfaction.

For HR and Compensation professionals, the path forward is clear:

Achieving the right balance isn’t easy—but it’s essential.

References

Colquitt, J. A., Conlon, D. E., Wesson, M. J., Porter, C. O., & Ng, K. Y. (2001). Justice at the millennium: A meta-analytic review of 25 years of organizational justice research. Journal of Applied Psychology, 86(3), 425–445. https://doi.org/10.1037/0021-9010.86.3.425

Deloitte. (2023). The future of compensation in a hybrid world. https://www2.deloitte.com/

Gallup. (2021). State of the Global Workplace Report. https://www.gallup.com

Gartner. (2023). Compensation Planning in the Era of Pay Transparency. https://www.gartner.com

Mercer. (2023). Compensation Planning Survey. https://www.mercer.com

SHRM. (2023). 2023 Compensation and Benefits Report. Society for Human Resource Management. https://www.shrm.org

WorldatWork. (2022). Salary Budget Survey. https://www.worldatwork.org

WorldatWork. (2023). Compensation Strategy Guidebook. https://www.worldatwork.org