Factors Considered in Deciding the Compensation

Employers decide on what is the right compensation after taking into account the

following points. The Job Description of the employee that specifies how much should be

paid and the parts of the compensation package. The Job Description is further made up of

responsibilities, functions, duties, location of the job and the other factors like environment

etc. These elements of the job description are taken individually to arrive at the basic

compensation along with the other components like benefits, variable pay and bonus. It

needs to be remembered that the HRA or the House Rental Allowance is determined by a

mix of factors that includes the location of the employee and governmental policies along

with the grade of the employee. Hence, it is common to find a minimum level of HRA that

is common to all the employees and which increases in proportion to the factors mentioned

above.

The Job Evaluation that is a system for arriving at the net worth of employees

based on comparison with appropriate compensation levels for comparable jobs across the

industry as well as within the company. Factors like Experience, Qualifications, Expertise

and Need of the company determine how much the employer is willing to pay for the

employee. It is often the case that employers compare the jobs across the industry and

arrive at a particular compensation after taking into account the specific needs of their

firm and in this respect salary surveys and research results done by market research firms

as to how much different companies in the same industry are paying for similar roles. The

components of compensation that have been discussed above are the base requirements

for any HR Manager who is in charge of fixing the compensation for potential employees.

Hence, all HR professionals and managers must take this following aspect into account

when they determine the compensation to be paid to employees

External Factors

 Demand and Supply of Labour

Wage is a price or compensation for the services rendered by a worker. The firm

requires these services, and it must pay a price that will bring forth the supply which is

controlled by the individual worker or by a group of workers acting together through their

unions. The primary result of the operation of the law of supply and demand is the creation

of the going wage rate. It is not practicable to draw demand and supply curves for each job

in an organization even though, theoretically, a separate curve exists for each job.

 Cost of Living

Another important factor affecting the wage is the cost of living adjustments of

wages. This tends to vary money wage depending upon the variations in the cost of living

index following rise or fall in the general price level and consumer price index. It is an

essential ingredient of long-term labour contract unless provision is made to reopen the

wage clause periodically.

 Labour Union

Organized labor is able to ensure better wages than the unorganized one. Higher

wages may have to be paid by the firm to its workers under the pressure or trade union.

If the trade union fails in their attempt to raise the wage and other allowances through

collective bargaining, they resort to strike and other methods hereby the supply of labour is

restricted. This exerts a kind of influence on the employer to concede at least partially the

demands of the labour unions.

 Government

To protect the working class from the exploitations of powerful employers, the

government has enacted several laws. Laws on minimum wages, hours of work, equal pay for

equal work, payment of dearness and other allowances, payment of bonus, etc., have been

enacted and enforced to bring about a measure of fairness in compensating the working

class. Thus, the laws enacted and the labour policies framed by the government have an

important influence on wages and salaries paid by the employers. Wages and salaries can’t
be fixed below the level prescribed by the government.

 Prevailing Wage Rates

Wages in a firm are influenced by the general wage level or the wages paid for similar

occupations in the industry, region and the economy as a whole. External alignment of

wages is essential because if wages paid by a firm are lower than those paid by other firms,

the firm will not be able to attract and retain efficient employees. For instance, there is a

wide difference between the pay packages offered by multinational and Indian companies.

It is because of this difference that the multinational corporations are able to attract the

most talented workforce.

Internal Factors

 Ability to Pay

Employer’s ability to pay is an important factor affecting wages not only for the

individual firm, but also for the entire industry. This depends upon the financial position

and profitability of the firm. However, the fundamental determinants of the wage rate for

the individual firm emanate from supply and demand of labour. If the firm is marginal and

cannot afford to pay competitive rates, its employees will generally leave it for better paying

jobs in other organizations. But, this adjustment is neither immediate nor perfect because

of problems of labour immobility and lack of perfect knowledge of alternatives. If the firm

is highly successful, there is little need to pay more than the competitive rates to obtain

personnel. Ability to pay is an important factor affecting wages, not only for the individual

firm but also for the entire industry.

 Top Management Philosophy

Wage rates to be paid to the employees are also affected by the top management’s

philosophy, values and attitudes. As wage and salary payments constitute a major portion

of costs and /or apportionment of profits to the employees, top management may like to

keep it to the minimum. On the other hand, top management may like to pay higher pay to

attract top talent.

To achieve the best results from the workers and to motivate him to increase his

efficiency, wages have to be productivity based. There has been a trend towards gearing

wage increase to productivity increases. Productivity is the key factor in the operation

of a company. High wages and low costs are possible only when productivity increases

appreciably.

 Job Requirements

Job requirements indicating measures of job difficulty provide a basis for determining

the relative value of one job against another in an enterprise. Explicitly, job may be graded

in terms of a relative degree of skill, effort and responsibility needed and the adversity of

working conditions. The occupational wage differentials in terms of

a) Hardship,

b) Difficulty of learning the job

c) Stability of employment

d) Responsibility of learning the job and

f) Change for success or failure in the work.

This reforms a basis for job evaluation plans and thus, determines wage levels in an

industry.

Employees Related Factors

Several employees related factors interact to determine his remuneration. These include

i) Performance: productivity is always rewarded with a pay increase. Rewarding

performance motivates the employees to do better in future.

ii) Seniority: Unions view seniority as the most objective criteria for pay increases

whereas management prefer performance to effect pay increases.

iii) Experience: Makes an employee gain valuable insights and is generally rewarded

iv) Potential: organizations do pay some employees based on their potential. Young

managers are paid more because of their potential to perform even if they are short

of experience.