A Business Encyclopedia

Factors Affecting Employee Compensation

The Compensation is the monetary and non-monetary rewards given to the employees in return for their work done for the organization. Basically, the compensation is in the form of salaries and wages. There are several internal and external factors affecting employee compensation, which are discussed in detail below.

Factors Affecting Employee Compensation

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Internal factors: The internal factors exist within the organization and influences the pay structure of the company. These are as follows:

  1. Ability to Pay: The prosperous or big companies can pay higher compensation as compared to the competing firms whereas the smaller companies can afford to maintain their pay scale up to the level of competing firm or sometimes even below the industry standards.
  2. Business Strategy: The organization’s strategy also influences the employee compensation. In case the company wants the skilled workers, so as to outshine the competitor, will offer more pay as compared to the others.Whereas, if the company wants to go smooth and is managing with the available workers, will give relatively less pay or equivalent to what others are paying.
  3. Job Evaluation and Performance Appraisal: The job evaluation helps to have a satisfactory differential pays for the different jobs.The performance Appraisal helps an employee to earn extra on the basis of his performance.
  4. Employee: The employee or a worker himself influences the compensation in one of the following ways.
    Performance: The better performance fetches more pay to the employee, and thus with the increased compensation, they get motivated and perform their job more efficiently.
    Experience: As the employee devote his years in the organization, expects to get an increased pay for his experience.
    Potential: The potential is worthless if it gets unnoticed. Therefore, companies do pay extra to the employees having better potential as compared to others.

External Factors: The factors that exist out of the organization but do affect the employee compensation in one or the other way. These factors are as follows:

  1. Labor Market: The demand for and supply of labor also influences the employee compensation. The low wage is given, in case, the demand is less than the supply of labor. On the other hand, high pay is fixed, in case, the demand is more than the supply of labor.
  2. Going Rate: The compensation is decided on the basis of the rate that is prevailing in the industry, i.e. the amount the other firms are paying for the same kind of work.
  3. Productivity: The compensation increases with the increase in the production. Thus, to earn more, the workers need to work on their efficiencies, that can be improved by way of factors which are beyond their control.The introduction of new technology, new methods, better management techniques are some of the factors that may result in the better employee performance, thereby resulting in the enhanced productivity.
  4. Cost of Living: The cost of living index also influences the employee compensation, in a way, that with the increase or fall in the general price level and the consumer price index, the wage or salary is to be varied accordingly.
  5. Labor Unions: The powerful labor unions influence the compensation plan of the company. The labor unions are generally formed in the case, where the demand is more, and the labor supply is less or are involved in the dangerous work and, therefore, demands more money for endangering their lives.The non-unionized companies or factories enjoy more freedom with respect to the fixation of the compensation plan.
  6. Labor laws: There are several laws passed by the Government to safeguard the workers from the exploitation of employers.The payment of wages Act 1936, The Minimum wages act 1948, The payment of Bonus Act 1965, Equal Remuneration Act 1976, Payment of Gratuity Act 1972 are some of the acts passed in the welfare of the labor, and all the employers must abide by these.

Thus, there are several internal and external factors that decide the amount of compensation to be given to the workers for the amount of work done by them.


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