FACTORS INFLUENCING

EMPLOYEE
COMPENSATION & HOW
TO DEVISE A
COMPENSATION PLAN?
 Factors influencing employee
compensation
EXTERNAL INTERNAL
FACTORS FACTORS

 Labour market
 Cost of living
 Business strategy
 Labour unions
 Job evaluation and
performance appraisal
 Labour laws
 The employee
 The economy
EXTERNAL FACTORS
LABOUR MARKET
Demand for and supply of labour influence wage and salary fixation. A Low
wage may be fixed when the supply of labour exceeds the demand for it and vice
versa, as in case of skilled labour.
GOING RATE
Going rates are those that are paid by different units of an industry in a locality
and by comparable units of the same industry located elsewhere. This is the only way
of fixing salary and wages in the initial stages of plant operation.
COST OF LIVING
This criterion matters during the periods of rising prices. The justification for
cost of living as a criterion for wage fixation is that the real wages of the workers
should not be allowed to whittled down by price increases.
A rise in the cost of living is sought to be compensated by payment of dearness
allowance, basic pay to remain undisturbed.
LABOUR UNOINS
The presence or absence of labour unions often determine the quantum of wages paid
to employees. Employers in non-unionized factories enjoy the freedom to fix the wages
and salaries as they please whereas employees of strongly unionized companies have no
freedom in wage or salary fixation.
They are forced to yield to the pressure of labour unions in determing and revising pay
scales.
LABOUR LAWS
We have a plenty of labour laws at the central and state levels.Some of them are the
Payment of Wages Act,1936;the Minimum Wages Act,1946the Payment of Bonus
Act,1965; and equal Remuneration Act,1976.
THE ECONOMY
The last external factor that has its impact on wage fixation is the state of the
economy. A depressed economy will probably increase the labour supply. This in turn,
should serve to lower the going wage rate.
 INTERNAL
FACTORS
BUSINESS STRATEGY
The overall strategy which a company pursues should determine the compensation to
its employees. Where the strategy of the enterprise is to achieve rapid growth, remuneration
should be higher than what competitors pay. Where the strategy is to maintain and protect
current earning, remuneration levels needs to be average or even below average.
JOB EVALUATION & PERFORMANCE APPRAISAL
Job evaluation helps establish satisfactory wage differentials among jobs. Performance
appraisal helps award pay increases to employees who show improved performance.
THE EMPLOYEE
Several employee related factors interact to determine his or her compensation. These
include performance,seniority,experience,potential, and even sheer luck.
Devising a compensation plan
JOB DESCRIPTION

JOB EVALUATION

JOB HIERARCHY

PAY SURVEY

PRICING JOBS
JOB DESCRIPTIONS
Job descriptions are crucial in designing pay systems, for they help to identify important job
characteristics. They also help determine, define and weigh compensable factors(factors for
which an organization is willing to pay – skill,experience,effort and working environment).
JOB EVALUATION
The relative value of every job is determined through job evaluation. The relative value is
then converted into money value so as to fix basic wage for job. For e.g : in point ranking
method points are assigned to each compensable factors.
JOB HIERARCHY
The points assigned to all compensable factors are aggregated. The total points scored will
help establish the hierarchy of job worth, starting from the highest point total to the lowest
point total.
PAY SURVEY
Before fixing wage differentials, prevailing wage rates in the labour market need to be
ascertained. One way of collecting pay details is to conduct a survey. This requires a
sample of key jobs and a sample of companies need to be selected. Questionnaires could be
mailed to the select companies.
PRICING JOB
In pricing jobs, the job evaluation worth is matched with the labour market worth. Two
activities need to be performed.
1. Establishing the appropriate pay level for each job : In order to set a pay level, the
points assigned and the survey wage rates are combined through the use of a graph
called scattergram.
2. Grouping the different pay levels into pay grades: A pay grade comprises jobs of
approximately equal difficulty or importance. A job valued at 105 points receives the
same pay as a job with 145 points.
THANK YOU