Established and start-up companies alike periodically review their organization’s factors that influence internal pay structures. The most comprehensive analyses include looking at internal as well as external factors that create salary differences. It is helpful to understand external factors such as unemployment rates and market competition, and internal factors such as job analyses, influx of new talent and business conditions, in order to determine the appropriate levels of compensation. Show
Labor Market ConsiderationsThe labor market is an external factor that can have a significant impact on salary differences. When unemployment rates are high, there are many more people looking for work than there are jobs. In this case, employers might lower their starting wages because they anticipate job seekers may settle for lower wages. Conversely, when unemployment is low, it can be difficult for employers to recruit suitably qualified candidates. Offering more competitive salaries to recruit talent, and providing intermediate salary increases and cash incentives account for salary differences between newly hired employees and current employees. Gateways to ProfitabilityInternal factors affecting compensation may include company’s profitability. When an employer is safely operating in the black, it may revisit its compensation structure and modify salaries so they are more competitive with other employers in the industry. Raising salaries according to job analyses that identify key employees most valuable for achieving financial goals can account for salary differences between certain job groups. This may also account for salary differences among external candidates beginning at the newly revised starting salaries. Required QualificationsSalary differences are also attributed to internal factors such as revisions to job descriptions or job analyses that justify salary modifications, according to SHRM. Employers revise job descriptions and conduct job analyses according to business needs that call for improved skill sets and qualifications. Business needs also may dictate changes to salaries when the company needs to hire employees with qualifications and skill sets the company didn’t recruit for in the past. Business StrategyAlthough employers generally try to keep their salary structures competitive, there are companies with salaries slightly lower or higher than the market rate. There are a variety of factors influencing compensation policy, including the company’s strategy for appealing to a certain segment of the applicant pool. For example, companies that do a lot of college recruiting might develop a reputation for grooming new graduates for roles within their companies. These companies may be operating on a strategy that involves paying slightly lower salaries to recent graduates in exchange for providing them with extensive training and professional development. The companies that don’t source recent graduates through college job fairs might offer higher pay to attract applicants who have some work experience but are still relatively new professionals. According to Gusto, this may be a highly effective tactic, as people tend to respond more to their perceived compensation rather than their actual compensation. Watching the CompetitionAn organization’s industry presence, standing and business reputation are a mix of both internal and external factors that affect salary differences. Companies that have a stronger presence, and thus, higher profits, may be inclined to raise salaries to a level where they can more effectively reach the best and the brightest talent. Competition can also have the opposite effect on salary differences where the employer is losing its ranking in the industry or is falling down the market share scale. Companies on the decline may have to adjust their salaries to keep the company afloat when another company gains a better, more competitive presence in the market. Variables/ Factors affecting compensation system are discussed below in detail: A) External Environmental VariablesWhen developing and designing a compensation system, organizations must take into consideration the external environment in which they do business. Many external environmental factors impact an organization, but only a few have a direct effect on an organization’s reward system. 1. Nature of the competition: When an organization has many product competitors, cost control assumes greater significance. Price pressures generally are downward and increased costs due to salary increases cannot be passed on to customers without risking the loss of market share. In this situation, non-economic rewards (such as promotion, job enrichment, and training and development programs) may assume greater importance in the pay scheme. Few competitors, on the other hand, increase flexibility in the design of the compensation system because wage increases are absorbed into the cost of the product or service. 2. Nature of the labor market: A discussion of the impact of the nature of the labor market on designing reward systems focuses on two issues: labor supply and demand and the wage levels that competitors are paying to their employees. When the demand for labor is greater up the cost of labor Applicants can afford to “shop around” for a company that pays a higher salary when labor is in demand. When the supply of labor is greater than the demand, the competition among job applicants for a limited number of positions permits companies to pay lower salaries. 3. Government Regulations: Government legislation affects almost every aspect of the compensation plan. It places a lower limit on wages that can be paid, it affects raise and incentive decisions, it proscribes wage discrimination, and it requires that certain benefits be paid to all employees.  B) Internal Environmental VariablesThere are some important internal environmental variables, which play a vital role in developing the compensation system. 1. Corporate Strategy: Direction for an organization is provided by corporate strategy. It’s mainly focused on the long term and the payment system should be supportive of this focus. 2. Management Philosophy: This value is reflected in the relationship between management and employees. As management is a powerful decision-making authority, it can take major initiative for wage structure. Central to the company’s mission is that it attempts to share values, ideals, and goals, and have respect for each person. 3. Type of job: Jobs differ in many ways. These differences include the variety of tasks performed, the amount of physical or mental effort, the pleasantness of the working conditions, the degree of autonomy (control over how, when, and what to do the responsibility for labor, materials, and equipment and the amount of interaction with others) 4. Productivity: Productivity is simple the ratio of outputs (product or service provided by the company) to inputs (for example, costs in terms of labor, capital, energy, materials, and machinery). Any increase in labor costs decreases productivity unless output increases or other costs decrease. How to minimize the impact of these salary increases on productivity requires careful consideration. You May Like Also:
What are the two types of compensation?There are two types of compensation: Direct compensation (financial) Indirect compensation (combination of financial and non-financial)
What are the two key factors we consider when establishing a compensation plan?Besides the current cost of the pay structure, you should also consider the plan's future cost. A sustainable compensation plan should balance the current and future organizational needs without compromising its ability to attract and retain talent.
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