HRM 611: Compensation Policies

Factors Considered in
Deciding Compensation

By
Prof. Nazrul Islam, PhD
Canadian University of
Bangladesh
 Learning Objectives
❑ External Factors
❑ Internal Factors
❑ Employee Related Factors
❑ Organizational Politics
❑ Evaluation of Compensation
❑ Case Study
❑ Questions

Prof. Nazrul Islam, PhD 9–2

 Factors Considered in
Deciding
Employers decideCompensation
on what is the right compensation
after taking into account the following points. The Job
Description of the employee that specifies how much
should be paid and the parts of the compensation
package. The Job Description is further made up of
responsibilities, functions, duties, location of the job and
the other factors like environment etc. These elements of
the job description are taken individually to arrive at the
basic compensation along with the other components like
benefits, variable pay and bonus. It needs to be
remembered that the HRA or the House Rental Allowance
is determined by a mix of factors that includes the
location of the employee and governmental policies along
with the grade of the employee. Hence, it is common to
find a minimum level of HRA that is common to all the
employees and which increases in proportion to the
factors mentioned above.
Prof. Nazrul Islam, PhD 9–3
 Factors Considered in
Deciding
Compensation
The Job Evaluation that is a system for arriving at the net
worth of employees based on comparison with
appropriate compensation levels for comparable jobs
across the industry as well as within the company.
Factors like Experience, Qualifications, Expertise and
Need of the company determine how much the employer
is willing to pay for the employee. It is often the case that
employers compare the jobs across the industry and
arrive at a particular compensation after taking into
account the specific needs of their firm and in this
respect salary surveys and research results done by
market research firms as to how much different
companies in the same industry are paying for similar
roles. The components of compensation that have been
discussed above are the base requirements for any HR
Manager who is in charge of fixing the compensation for
potential employees. Hence, all HR professionals and
managers must take this following aspect into account
Prof. Nazrul Islam, PhD 9–4
 Factors Considered in
Deciding
Compensation
The Job Evaluation that is a system for arriving at the net
worth of employees based on comparison with
appropriate compensation levels for comparable jobs
across the industry as well as within the company.
Factors like Experience, Qualifications, Expertise and
Need of the company determine how much the employer
is willing to pay for the employee. It is often the case that
employers compare the jobs across the industry and
arrive at a particular compensation after taking into
account the specific needs of their firm and in this
respect salary surveys and research results done by
market research firms as to how much different
companies in the same industry are paying for similar
roles. The components of compensation that have been
discussed above are the base requirements for any HR
Manager who is in charge of fixing the compensation for
potential employees. Hence, all HR professionals and
managers must take this following aspect into account
Prof. Nazrul Islam, PhD 9–5
 Factors Considered in
Deciding
Compensation
1. External Factors
2. Internal Factors

Prof. Nazrul Islam, PhD 9–6

Prof. Nazrul Islam, PhD 9–7
 External Factors
Demand and Supply of Labour

Wage is a price or compensation for the services

rendered by a worker. The firm requires these
services, and it must pay a price that will bring
forth the supply which is controlled by the
individual worker or by a group of workers
acting together through their unions. The
primary result of the operation of the law of
supply and demand is the creation of the going
wage rate. It is not practicable to draw demand
and supply curves for each job in an
organization even though, theoretically, a
separate curve exists for each job.
Prof. Nazrul Islam, PhD 9–8
 External Factors, Contd.,
Cost of Living

Another important factor affecting the wage is

the cost of living adjustments of wages. This
tends to vary money wage depending upon the
variations in the cost of living index following
rise or fall in the general price level and
consumer price index. It is an essential
ingredient of long-term labour contract unless
provision is made to reopen the wage clause
periodically.

Prof. Nazrul Islam, PhD 9–9

 External Factors, Contd.,
Labour Union

Organized labor is able to ensure better wages

than the unorganized one. Higher wages may
have to be paid by the firm to its workers under
the pressure or trade union. 13 If the trade
union fails in their attempt to raise the wage and
other allowances through collective bargaining,
they resort to strike and other methods hereby
the supply of labour is restricted. This exerts a
kind of influence on the employer to concede at
least partially the demands of the labour unions.

Prof. Nazrul Islam, PhD 9–10

 External Factors, Contd.,
Government

To protect the working class from the

exploitations of powerful employers, the
government has enacted several laws. Laws on
minimum wages, hours of work, equal pay for
equal work, payment of dearness and other
allowances, payment of bonus, etc., have been
enacted and enforced to bring about a measure
of fairness in compensating the working class.
Thus, the laws enacted and the labour policies
framed by the government have an important
influence on wages and salaries paid by the
employers. Wages and salaries can’t be fixed
below
Prof. Nazrul Islam, PhD the level prescribed by the government. 9–11
 External Factors, Contd.,
Prevailing Wage Rates

Wages in a firm are influenced by the general

wage level or the wages paid for similar
occupations in the industry, region and the
economy as a whole. External alignment of
wages is essential because if wages paid by a
firm are lower than those paid by other firms,
the firm will not be able to attract and retain
efficient employees. For instance, there is a wide
difference between the pay packages offered by
multinational and Indian companies. It is
because of this difference that the multinational
corporations are able to attract the most talented
workforce.
Prof. Nazrul Islam, PhD 9–12
 Internal Factors
Ability to Pay

Employer’s ability to pay is an important factor affecting

wages not only for the individual firm, but also for the
entire industry. This depends upon the financial position
and profitability of the firm. However, the fundamental
determinants of the wage rate for the individual firm
emanate from supply and demand of labour. If the firm is
marginal and cannot afford to pay competitive rates, its
employees will generally leave it for better paying jobs in
other organizations. But, this adjustment is neither
immediate nor perfect because of problems of labour
immobility and lack of perfect knowledge of alternatives.
If the firm is highly successful, there is little need to pay
more than the competitive rates to obtain personnel.
Ability to pay is an important factor affecting wages, not
only for the individual firm but also for the entire industry.
Prof. Nazrul Islam, PhD 9–13
 Internal Factors, Contd.,

Top Management Philosophy

Wage rates to be paid to the employees are also affected

by the top management’s philosophy, values and
attitudes. As wage and salary payments constitute a
major portion of costs and /or apportionment of profits
to the employees, top management may like to keep it to
the minimum. On the other hand, top management may
like to pay higher pay to attract top talent.

Prof. Nazrul Islam, PhD 9–14

 Internal Factors, Contd.,

Productivity of Workers

To achieve the best results from the workers and to

motivate him to increase his efficiency, wages have to be
productivity based. There has been a trend towards
gearing wage increase to productivity increases.
Productivity is the key factor in the operation of a
company. High wages and low costs are possible only
when productivity increases appreciably.

Prof. Nazrul Islam, PhD 9–15

 Internal Factors, Contd.,
Job Requirements

Job requirements indicating measures of job difficulty

provide a basis for determining the relative value of one
job against another in an enterprise. Explicitly, job may
be graded in terms of a relative degree of skill, effort and
responsibility needed and the adversity of working
conditions. The occupational wage differentials in terms
of

a) Hardship,
b) Difficulty of learning the job
c) Stability of employment
d) Responsibility of learning the job and
e) Change for success or failure in the work.

This reforms a basis for job evaluation plans and

thus, determines wage levels in an industry.
Prof. Nazrul Islam, PhD 9–16
 Employees Related Factors
Several employees related factors interact to determine
his remuneration. These include:

i) Performance: productivity is always rewarded with a

pay increase. Rewarding performance motivates the
employees to do better in future.
ii) Seniority: Unions view seniority as the most objective
criteria for pay increases whereas management prefer
performance to effect pay increases.
iii) Experience: Makes an employee gain valuable insights
and is generally rewarded
iv) Potential: organizations do pay some employees based
on their potential. Young managers are paid more
because of their potential to perform even if they are
short of experience.

Prof. Nazrul Islam, PhD 9–17

 Organizational Politics
Compensation surveys, job analysis, job evaluation and
employee performance are all involved in wage and salary
decisions. Political considerations may enter into the
equation in the following ways:

i) Determination of firms included in the compensation

survey: managers could make their firm appear to be a
wage leader by including in the survey those organizations
that are pay followers.
ii) Choice of compensable factors for the job evaluation plan:
Again, the job value determined by this process could be
manipulated
iii) Emphasis placed on either internal or external equity and
iv) Results of employee performance appraisal may be
intentionally disported by the supervisor
Thus, a sound and objective compensation system may
be destroyed by organizational politics.
Prof. Nazrul Islam, PhD 9–18
 Evaluation of Compensation
Today’s compensation systems have come from a long way.
With the changing organizational structures workers’ need
and compensation systems have also been changing. From
the bureaucratic organizations to the participative
organizations, employees have started asking for their
rights and appropriate compensations. The higher
education standards and higher skills required for the jobs
have made the organizations provide competitive
compensations to their employees.

Compensation strategy is derived from the business strategy.

The business goals and objectives are aligned with the HR
strategies. Then the compensation committee or the
concerned authority formulates the compensation strategy.
It depends on both internal and external factors as well as
the life cycle of an organization

Prof. Nazrul Islam, PhD 9–19

 Case Study
In 2007, the Indian subsidiary of a multinational refinery
became a Government of India company. The government
company had announced an ambitious expansion program
which meant doubling the work force in less than four
years. In 2007 at the time of wage revision, the union and
management agreed to a two-tier pay structure. Those
already employed will be eligible for a higher grade and
those who are (to be) recruited afresh will get a lower grade
though jobs are similar in skill, responsibility and effort.
Both the union and the management justified that this is an
innovative practice widely followed in deregulated
companies abroad, particularly the airlines in North
America.
Questions
a) Is it fair agreement
b) Would it contravene with the concept of equal pay for equal
work?.
Prof. Nazrul Islam, PhD 9–20
Prof. Nazrul Islam, PhD 9–21