Fairness in payments or equity of pay can be assessed both internally as well as externally. The idea is based on Equity Theory which is a theory related to motivation. The theory is based on the concept that an individual will be scrutinized on the basis of what he/she brings to the company (inputs) and thus what he/she receives from the company (outcome/result); it also states it also helps to prefer an individual over another based on this inputs and outcomes or results (Bertrand and Mullainathan, 2001). A CEO when joins a company brings in with him/ her a huge amount of market experience, knowledge about the business and efforts that he/she will put into the present organization so if not paid in a right manner might make him lack of motivation and if their payments are not at par with that of the others in different organizations they will feel unjustly compensated (Gelina and Baillargeon, 2013). So external equity here means fairness in compensation of the CEOs as others are paid for similar post in other organizations and internal equity will mean a detailed assessment of the justice done to other job posts within the same company. There are two forms of pay structures one is hierarchical and other is egalitarian. In the last case there is not much different between the highest and the lowest paid employees within the company whereas in case of hierarchical structure the difference is more between the topmost post holder and lowest post holder.
Equity Theory is accepted when looked into the matter both externally as well as internally as it is determined on how much an individual contributes towards his/her organization compared to what he/she receives as salary (Gabaix and Landier, 2008).
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