What external pay equity means
External pay equity (العدالة الخارجية للأجور) is the condition in which what an establishment pays for a particular job stands in a known and intended relationship to what is paid for the same job outside it. The comparison is between a job and a market, not between one employee and a colleague.
Its output is not a verdict that pay is “fair” or “unfair”. It is a known position: where the establishment’s pay range for the job sits against the reference it has chosen, and whether that position is the one it intended or one it drifted into. The general principle of pay equity is that every difference in pay should have a reason that can be stated and examined. What external pay equity adds is that the reason required here is a reason for choosing the position against the market, not a reason for the gap between two colleagues.
External pay equity does not price every job from the market
The first step is to recognise that the external comparison is not run across the whole structure. Market data do not exist for every job, and job titles do not line up closely enough to be matched. So a limited number of jobs that are easy to match, called benchmark jobs (الوظائف المرجعية), are chosen, their pay is tied to the market, and the rest of the salary structure is built on them.
One consequence can be overlooked: external pay equity is measured at a few points and carried to the remaining jobs through the internal ranking. A job with no counterpart in the market has no position that can be measured directly. Its position comes from where it stands against the benchmark jobs in the job evaluation ranking. A structure whose internal ranking is disordered therefore passes that disorder on to every job that was not priced directly, even when the points that tie it to the market are themselves sound.
The matching condition at those points applies to the content of the work, not to the title. It is stricter in the external comparison than in an internal one, because the other side of the comparison is outside the establishment and nobody can check how its job was described.
External pay equity and the compa ratio: two measures for one employee give two verdicts
The clearest way to separate the internal axis from the external one is a case in which a single employee stands in two different positions at the same time. Take a benchmark job whose internal range runs from SAR 8,500 to SAR 11,500, so that its midpoint is SAR 10,000. A range of this kind is also described by its range spread, the distance between its top and bottom as a proportion of the bottom. The external reference chosen for the job is SAR 11,200, and the employee is paid SAR 9,600. The internal measure is the compa ratio (نسبة المقارنة الأجرية), pay divided by the range midpoint:
| Measure | Calculation | Result | What it says |
|---|---|---|---|
| Compa ratio | 9,600 ÷ 10,000 | 96% | A reassuring position inside the range, close to the midpoint |
| Pay against the external reference | 9,600 ÷ 11,200 | 85.7% | SAR 1,600 below the reference |
| The range itself against the reference | 10,000 ÷ 11,200 | 89.3% | The whole range is set below the reference |
The two denominators are different: one is an internal midpoint, the other a figure from outside the establishment. The third row explains the two above it. The employee is not behind their colleagues; their whole range sits about 11% below the reference. An internal review cannot reveal this, because it compares pay with other pay inside the establishment, not with anything outside it.
The compa ratio is worth nothing if the range itself is unsound, because the midpoint rests on job evaluation and on current market data. The calculation above is that warning expressed in numbers.
The tension between external pay equity and internal equity, and where it is resolved
Suppose the establishment wants to correct the position of the employee above, and raises their pay to SAR 11,200. Three colleagues at the same level are paid SAR 9,400, SAR 9,900 and SAR 10,100:
- The gap between the employee and the nearest of them is now SAR 1,100, and the gap to the lowest paid is SAR 1,800.
- Those gaps have no reason connected with the work, because all four sit at one level after evaluation. Their real cause is that one of the four was corrected and three were not.
Correcting the external position for one person has created an internal imbalance that did not exist before. The right place for the correction is the range, not the person, because the cause of the imbalance is a range set below the reference. Raising the midpoint from SAR 10,000 to SAR 11,200 means raising all four together. Their pay today is SAR 9,600, SAR 9,400, SAR 9,900 and SAR 10,100, a total of SAR 39,000 a month. Raising it by 12%, the proportion by which the midpoint rises, costs SAR 4,680 a month, or SAR 56,160 a year, for these four employees alone.
That figure is the practical difference between the two responses. The first costs SAR 1,600 a month and creates three unexplained cases; the second costs SAR 4,680 a month and creates none. The choice between them is a declared budget decision, not a result that comes out of a spreadsheet of market data.
What the external comparison in external pay equity does not tell you
- It does not say how much the establishment should pay. It says where the pay for a job stands against the market. How much to pay is a decision that combines the establishment’s position, what it can afford and its retention policy.
- It does not justify an internal difference. A market figure is not a reason in itself unless the establishment says why it chose that reference and not another.
- It does not measure performance. The comparison here concerns the pay for a job, not how well a process performs. The general rule of benchmarking applies to it all the same: a comparison holds only when both sides measure the same thing in the same way. A figure published for a whole sector also combines establishments that differ in size, activity and operating model, and that limit applies to pay data as it does to any other data.
Article 95 of the Labor Law is not a market standard for external pay equity
It might be thought that the Saudi Labor Law (نظام العمل) supports this axis, because Article 95 of the Labor Law mentions the custom of the trade in the locality where the work is performed within the sequence it sets. It does not.
Article 95 of the Labor Law is a rule for filling a gap, not a market standard or a tool for comparison. Where neither the contract nor the work regulation (لائحة تنظيم العمل) states the wage, it sets a sequence in which each step is used only when the one before it cannot be: first the wage assessed for work of the same kind in the establishment; failing that, the custom of the trade in the locality; failing that, the labour court (المحكمة العمالية) assesses the wage according to the requirements of justice. It is called upon when the wage has not been set in the contract and the work regulation, not when a wage has been set and its fairness is in dispute.
In the sources we reviewed, we found no statutory obligation that ties an establishment’s pay to the level of the market. What we did find in this area is an internal comparison, not an external one. Discrimination in pay between men and women for work of equal value is a violation listed in the Schedule of Violations and Penalties (جدول المخالفات والعقوبات), issued by Ministerial Decision No. 112377 dated 21/8/1447H (9 February 2026). What that row compares is the pay of men and women for work of equal value, not the establishment’s pay against the market. The same row also covers discrimination on grounds such as age, and its amounts are set out in our glossary entry on ageism. The silence of our sources on anything further is not a basis for a conclusion beyond that.
The market position in external pay equity is declared, not inferred
An external figure decides nothing until the establishment says where it wants to stand against it. Three positions are possible, and each carries a visible cost and a deferred one:
- Standing at the reference. The cost is known, and pay neither wins nor loses the establishment an advantage in competing for talent.
- Standing above it. The pay bill rises in every job tied to the reference, not only in the job that started the discussion, because the increase falls on the range and is carried by the internal ranking to the jobs beyond it.
- Standing below it. The pay bill falls, but the cost appears elsewhere: in difficulty filling the jobs tied to the reference, and in departures by people who receive an offer closer to it.
The definition of external pay equity sets no recommended position among the three. Whether an establishment aims at the reference or above it is a decision that is its alone, built on what it can afford and on the market in which it competes for talent, not a rule that can be carried from one establishment to another.
The difference between an establishment that stands below the reference on purpose and one that stands below it without knowing is not in the figure, which is the same in both cases. It lies in the fact that the first knows where it will pay the cost and has set aside an alternative outside pay, while the second discovers the cost in a rate of departures, or in a post that stays vacant for months and shows up in its time to fill, without knowing why.
A single job may also face more than one market: a market defined by activity and a market defined by location. The second is the ground of geographic pay differentials, which vary the range for one job from city to city. A measure that merges these markets into one figure gives an average that resembles none of them. Defining the intended market is therefore part of the question, not a preliminary to it.
What corrupts the measurement of external pay equity
- Old data. Outdated market data corrupt the benchmark, and the benchmark job is the point through which ageing data enter the whole range.
- A reference with a different definition of pay. A figure that includes allowances, compared with a basic wage, produces a gap that comes from the definition. Settling which element of pay is being compared comes before the comparison, not after it.
- Too few anchor points. The whole structure then hangs on two or three references, and one mistake in matching a single job becomes a mistake in half the structure.
- A reference unlike the establishment in size, activity or location. The establishment is then measured against a market that is not the one in which it competes for the same employee.
The definition does not specify a source of pay data for the Saudi market. We name no body and no survey, and we found no published reference establishing an official benchmark for this purpose. We also found nothing that sets an interval for reviewing external pay equity; in practice, the interval is set by the age of the data available.
Two things about external pay equity hold in every case. An external figure does not become a decision until the establishment says what it is aiming for against it. And every external correction passes through the internal ranking before it is carried out; otherwise it closes one gap and opens another.
This is an explanation of the concept and of the statutory provisions cited, not legal advice.
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