Determining the “right” compensation can be tricky. Not only is money a touchy subject, but so many factors play into determining compensation rates that are both fair and competitive. Here, we discuss the factors that influence compensation rates the most:
1. Years of experience and education level
It probably goes without saying, but the more experience and education a candidate has, the higher their expected compensation. So, if you’re hoping to attract job seekers with master’s degrees or more than 5 years’ experience, you need be ready and willing to compensate accordingly.
2. Industry
Workers with similar, or even the same job title can expect vastly different wages depending on what industry they’re in. There are many reasons for this discrepancy – in some cases their job function may be critical to a particular industry, or it may simply be a matter of one industry being considerably larger than the others.
3. Location
Cost of living, a major factor to consider when determining compensation, is largely dependent on location and, more specifically, the cost of housing. This is at least partially why salaries in large urban areas are generally higher than salaries for similar positions in more rural locations. However, with the surge in remote work, many employers have shifted to role-based compensation, rather than location-based. Do some research to see what the trend is in your field.
4. In-demand skill sets
When it comes to determining compensation, key skills may be an even more reliable metric to compare against than job title. After all, different companies may have very different definitions of the same job title. On top of that, many skill sets can apply to a wide variety of roles – all of which are effectively competing for the same talent. That’s why it’s important for employers to consider the value of key skills when determining compensation.
5. Supply and demand
It’s crucial to be aware of the availability of relevant talent in the geographic region where you’re recruiting. If you’re recruiting in an area where the demand for a certain skill sets and experience outweighs the supply, you should expect to pay more in order to attract talent.
The cost of not offering competitive pay
You may think you’re saving money by keeping compensation rates low; however, it’s important to consider what it’s costing you in other areas. For instance, many employers overlook the costs associated with having unfilled positions for extended periods of time. Similarly, keep in mind the burden an unfilled position can put on your current employees, who may be taking on extra work to fill the gaps – not to mention what that can do to morale.
What happens if you can’t pay market value?
Luckily, it is possible to attract top talent even if you can’t offer the most competitive salary. Supplementing your compensation package with low- or no-cost perks, such as development opportunities, remote work, more vacation time and flexible hours can go a long way in retaining your current workforce. Another option is to recruit from areas where compensation rates are lower, and let employees work remotely from home or from another office closer to where the employee lives.
Take the guesswork out of determining compensation
Unless you’re an amazing guesser, it’s important to do a little recon when it comes to determining competitive pay rates. Competitive intelligence is your best friend when it comes to determining compensation. CareerBuilder’s Supply & Demand Portal provides up-to-date and relevant compensation rates for even the most specific of positions. You should also be able to see where compensation rates may be lower or higher (if you’re considering recruiting in other location), and – perhaps even more intriguingly – get a peek at what your competitors are paying.
Compensation is far from the only factor candidates consider when applying to jobs. To attract more talent, check out what candidates want in today’s job market.
The wage policies of different organization vary some what. Marginal units pay the minimum necessary to attract the required number of kind of labor. Often, these units pay minimum wage rates required by labor legislation, and recruit marginal labor. At the other extreme, some units pay well about going rates in the labor market. They do so to attract and retain the highest caliber of labor force. Some managers believe in the economy of higher wages. They feel that, by paying high wages, they would attract better workers who will produce more than average worker in the industry. This greater production per employee means greater output per man hour. Hence, labor costs may turn those existing in firms using marginal labor. Some units pay high wages because of a combination of a favorable product market demand, higher ability to pay and the bargaining power of trade union. But a large number of them seek to be competitive in their wage programme, i.e., they aim at paying somewhere near the going rate in the labor they employ. Most units give greater weight to two wage criteria, viz, job requirements and the prevailing rates of wages in the labor market. Other factors, such as changes in the cost of living the supply and demand of labor, and ability to pay are accorded a secondary importance.
A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Beside the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
- The organizations ability to pay
- Supply and demand of labour
- The prevailing market rate
- The cost of living
- Living wage
- Productivity
- Trade unions bargaining power
- Job requirements
- Managerial attitudes and
- Psychological and sociological factors
- Levels of skills available in the market
The organizations ability to pay: Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher those which running at a loss or earning low profits because of higher cost of production or low sales. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need to pay no more if they wish to attract and keep workers. In the long run, the ability to pay is important. During the time of prosperity, pay high wages to carry on profitable operations and because of their increased ability to pay. But during the period of depression, wages are cut because the funds are not available. Marginal firms and non profit organization (like hospitals and educational institutions) pay relatively wages because of low or non profits.
Supply and demand of labour: The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills. When prolonged and acuter, these labour market pressures probably force most organizations to reclassify hard to fill jobs at a higher level” that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is a great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on going wage concepts since; in essence, all of these remuneration standards are determined by immediate market forces and factors.
Prevailing market rate: This is known as the ‘comparable wage’ or ‘going wage rate’, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons. First, competition demand that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade union encourages this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, a functionally related firm in the same industry requires essentially the same quality of employees, with same skill and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organizations competitors, it will not be able to attract and maintain the sufficient quantity and quality of manpower. Some companies pay on a high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organizations pay lower wages because economically they have to or because by lowering hiring requirements they can keep jobs adequately manned.
The cost of living: The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living.” escalator clauses” are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions.
The living wage: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favor using the concepts of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a workers budge is open to argument since it is based on subjective opinion.
Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not be overlooked by the management in establishing wage rate. Sociologically and ethically, people feel that “equal work should carry equal that wages should be commensurate with their efforts, that they are not exploited, and that no distinction is made on the basis of caste, color, sex or religion.” To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration.
Skill Levels Available in the Market: With the rapid growth of industries business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs
Human Resource Concepts