One role of management is to create work environments that attract, motivate, and maintain competent employees. Since achieving these goals is accomplished largely through a firm’s compensation system, managers must foster an environment that provides for challenging, engaging work, and where there is compensation equity. Equity refers to the perception that one is being treated fairly. When chief executives are paid millions of dollars in one year and receive huge bonuses along with other benefits but middle managers and front-line employees are forced to accept cutbacks, for example, serious questions arise within organizations as to what constitutes fairness.

A condition of external equity exists when a firm’s employees are paid comparably to those who perform similar jobs in other firms. Compensation surveys enable organizations to determine the level of external equity. Internal equity exists when employees are paid according to the relative value of their jobs within an organization, and an effective job evaluation is the means for describing whether that internal equity exists. Employee equity can be defined as a process of ensuring that individuals performing similar jobs for the same firm are rewarded according to factors unique to the employee, such as performance level or seniority. Equity concerns might include salary equity, promotion equity, recognition equity, and raise equity. Team equity is achieved when more productive teams receive greater rewards than less productive groups. Performance levels are generally determined through appraisal systems.