internal equity

Examples of internal equity in the following topics:

• Pay

  • By considering internal and external equity, a company can work toward a fair base pay system, attracting and retaining the best employees.
  • The manager looks at the internal and external equity to determine that $8.00 an hour is a fair base pay for workers.
  • An important question in external equity is how you define your market.
  • How do companies combine internal and external equity to decide the pay associated with each job?
  • Combine internal equity and external equity analysis to determine fair pay

• Combining internal and external equity

  • In other words, the straight line generated by the regression analysis will be the line that best combines the internal value of a job (from job evaluation points) and the external value of a job (from the market survey).
  • Finally, they look at the relationship between what they value internally and what the market values externally.

• Owners' Equity

  • Shareholders' equity is the difference between total assets and total liabilities.
  • Ownership equity may include common stock, preferred stock, retained earnings, treasury stock, and reserve.
  • If liability exceeds assets, negative equity exists.
  • Ownership equity is also known as risk capital or liable capital.
  • Accounts listed under ownership equity include (for example):

• Internal equity

  • The first consideration is that the base pay system needs to be internally equitable.
  • Internal equity implies that pay rates should be the same for jobs where the work is similar and different for jobs where the work is dissimilar.

• Debt Finance

  • Bonds may be traded in bond markets, and are widely used as relatively safe investments in comparison to equity.
  • Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity.
  • This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.
  • For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources).

• Profitability Ratios

  • The profit margin is mostly used for internal comparison.
  • Return on Equity: The return on equity (ROE) measures profitability related to ownership.
  • It measures a firm's efficiency at generating profits from every unit of the shareholders' equity.
  • The ROE is equal to the net income divided by the shareholder equity.

• Financial Accounting

  • Financial accounting focuses on the tracking and preparation of financial statements for internal management and external stakeholders, such as suppliers, investors, government agencies, owners, and other interest groups.
  • A balance sheet demonstrates the overall value of organizational assets by listing current and long-term assets (fixed or otherwise) alongside short term and long term liabilities and stakeholder equity.
  • Through balancing the assets against the combination of liabilities and stakeholder equity, the financial accounting should encounter a zero sum game.
  • Simply put: Assets = Liabilities + Shareholder Equity.

• Equity Finance

  • Companies can use equity financing to raise money and/or increase shareholder liquidity (through an IPO).
  • Financing a company through the sale of stock in a company is known as equity financing.
  • In finance, the cost of equity is the return, often expressed as a rate of return, a firm theoretically pays to its equity investors, (i.e., shareholders) to compensate for the risk they undertake by investing their capital.
  • Firms obtain capital from two kinds of sources: lenders and equity investors.
  • Such costs are separated into a firm's cost of debt and cost of equity and attributed to these two kinds of capital sources.

• Equity Theory

  • Equity theory states that perceptions of equality in the input/outcome ratio of employees determines their relative job satisfaction.
  • Thus, groups will evolve such systems of equity, and will attempt to induce members to accept and adhere to these systems.
  • According to equity theory, the person who gets "too much" and the person who gets "too little" both feel distressed.
  • Individuals who discover they are in inequitable relationships will attempt to eliminate their distress by restoring equity.
  • Employees expect a fair return for what they contribute to their jobs, a concept referred to as the "equity norm."

• The Accounting Equation

  • The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
  • A company with $30,000 in liabilities and $10,000 in owners' equity would have $40,000 in assets according to the accounting equation.
  • The fundamental accounting equation, which is also known as the balance sheet equation, looks like this: $\text{assets} = \text{liabilities} + \text{owner's equity}$.
  • On the right side of the equation are claims of ownership on those assets: liabilities are the claims of creditors (those "outside" the business); and equity, or owners' equity, is the claim of the owners of the business (those "inside" the business).
  • If the company issues stock to obtain the funds for the purchase, then assets and equity both increase.