Factors Affecting Compensation - Part I

In the previous sections, we looked at the components of the compensation and how each is used to assess the relative importance of an employee as far as remuneration is concerned. In this article, we look at some of the factors that determine how much compensation is to be paid out to the employee by looking at the issue from the perspective of the employer. The subsequent article would take a look at how the employee can influence the compensation setting process with negotiation and bargaining.

From the perspective of the employer, the factors that affect compensation are:

  • The Overall Macroeconomic situation where in the state of the economy of the country in which the firm is situated plays a major role in determining the compensation to be paid. For instance, if an economy is booming or is in a high growth trajectory, chances are that the employers would pay the employees more and conversely, if the economy is in a downward trajectory, chances are that the employers would pay the employees less. We often hear about how because of the recession, salary hikes have been deferred or cut down. This is a direct result of the linkage between firm performance and the performance of the economy.

  • The Demand for a particular skill weighs heavily on the way in which the employer fixes the compensation for the employee. For instance, premium skills like Consulting and Accountancy are paid more as are the Technology Professionals who might be experts in their chosen field. As discussed in earlier articles, it is the expertise and the relative scarcity of such experts that determines how much the employer is willing to pay.

  • The Position of the company in the Business Cycle often determines how much the company is willing to offer to the employee. For instance, if a company is a start-up, chances are that the company would pay more because of the need to get the best possible talent into the company. Further, many start-ups give their employees ESOP’s or Employee Stock Option Plans wherein the employees can redeem their stocks after the lock-in period.

  • Finally, the urgency of the firm in filling up the position plays an important role in determining how much the employer is willing to pay the employee and in many cases, if the time to get on board the employee is less, staffing managers along with the line manager in charge of hiring the employee might decide to pay more because they want the employee to come on board as quickly as possible.

These are some of the factors that determine the compensation to be paid to the employee from the perspective of the employer. This is not an exhaustive list but an indicative one and as the module progresses, we shall be revisiting some of these factors along with adding additional information. The next article would talk about how employees can negotiate with the employer for better compensation and perks.



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