Factors Affecting Pay

Levels
Prepared by Nelicia Adams
Economic Theories

Labour Theory
Classic Economic Theory
Human Capital Theory
Efficiency Wages Theory
Agency Theory
Labour Theory

Karl Marx – It is not the market place that sets prices. The value of goods
and services are determined by the amount of labour that goes into them.
Labour market consists of buyers and sellers, employers and employees.
The price of labour is determined by the rate of pay required to attract and
retain employees to an organisation.
Influences the process by providing a rationale for job content evaluation
which determines the amount of labour going into a process.
 Classical Economic Theory

Pay prices are prices in the labour market that are determined by supply and demand, all
other things being equal or a perfect market exists. If supply is more than demand, wages
will be low, if demand is higher than supply wages will be high.
Justifies market surveys concentrating on external competitiveness rather than internal
consistency.
 Human Capital Theory

Workers posses skills that can be rented out by employers. Rates of pay are not only
determined by supply and demand but the productive capital that workers bring.
Competency or Skills Based pay systems
Efficiency Wages Theory
Organisations will pay more than market rate if they believe that higher wages will lead to
increased productivity by motivating superior employees, attracting better candidates
and reducing labour turnover.
Influences Market Leader compensation strategies
Agency Theory
In most firms there is a separation between principles (owners) and agents
(managers). Agents do not always do what the principles want of in the
best interest of the principles. Principles therefore need to put things in
place to monitor and evaluate agents. If incentives schemes are designed
properly Managers will monitor performance throughout organisations.
The link between performance and pay and the reward systems
 Factors may inter-relate

External e
ic
Job ct
pra
Value y
Pa e
lin

Internal Job Value

Factors Affecting Pay Levels

Intrinsic Value of Job – Levels of responsibility, skill, impact on org results.

Internal Relativities – Perceptions of worth of job compared to others.
Equal work > Equal Pay
External Relativities – Market Rates for Similar jobs
Value of the person – Contribution made, Skills and Competencies,
Experience, Potential, their perception of their own value.
Financial Circumstance of the organisation
Pay Stance – Policy Position on salaries
Trade Union pressures
Minimum Wage Legislation
The End