Many factors go into how to best determine employee pay for doing a particular job.
Some of these are system factors that result in identifying a range of pay of how much a job is worth to that company, and some are individual factors that result in the actual pay of a person within that range.
The material in this blog is extracted from Davis, John H., Statistics for Compensation: A Practical Guide to Compensation Analysis.
These factors all influence an organization’s ability to attract, retain, motivate, and align the kinds and numbers of employees needed to achieve the organization’s goals. These are shown here.
System factors affecting employee pay
There are typically five major system factors that apply in general to all jobs in the organization.
1. Internal value of the job
In every organization there is a formal or informal value order of the jobs. The president’s job is of higher value than the engineer’s job, which in turn is of higher value than the clerk’s job. No matter who are in the jobs, there is a value hierarchy. This is because different jobs require different levels of knowledge, skills, and abilities, and have different levels of responsibility.
Included in this factor is how critical the job is to achieving company goals. The more critical the job, the more value that is placed on it.
2. Market pay for similar jobs/skills
What other organizations pay for similar jobs and skills is an important external perspective. This information usually is obtained from salary surveys. You want your pay to be in the same range as the “market” for those jobs. You don’t have to pay exactly at the market, but your pay should be in the ballpark so that it is not a dissatisfier.
3. Pay philosophy
There are two aspects to the pay philosophy. The first is where the company wants to pay with respect to the market. Does it want the pay for its jobs to be at the average pay or median of the market? Does it want to target its pay to a certain percentile of the market? Does it want to target its pay a certain percent above or below the market? Included in this aspect is how the company defines its market.
The second aspect is what the company wants to pay for. What does it want to reward and reinforce? This may be performance, education, experience, teaming behavior, customer service, innovation, etc., or some combination of these.
4. What the company can afford
A key factor is the affordability of labor costs. A company must be profitable to be able to afford high salaries for its employees. But a company cannot afford to pay excessively for a long time, for it will soon go out of business. Indeed, some companies have had to have pay cuts when the only alternative was bankruptcy and subsequent loss of all jobs. And in the extreme, if it cannot afford even the minimum at which people will work, then the business may not be viable at that point and must close its doors.
5. Balance with other factors
Pay is not the only factor that a company offers its employees.
Some of the other factors include incentives, benefits, growth opportunities, working environment, challenging work, up-to-date equipment, discounts on the company products, and so on. A start-up organization may offer low pay with high growth opportunities. Another organization may offer higher pay with low benefits. One airline has lower pay but nice flight benefits along with an exciting work environment.
These five factors constitute system factors that influence the pay of all jobs, regardless of the people in the jobs. The system factors typically will result in the salary range for a job. The company will pay at least the minimum of the range and no more than the maximum of the range for a job. Within the range, that part of the pay philosophy that defines what the company wants to reward and reinforce identifies the individual factors that influence the pay for an individual. The remaining three factors that influence pay are based on the individual performing the job.
Individual factors affecting employee pay
The three factors described here are all interrelated. For example, higher education and skills along with more experience may result in higher performance levels, all other things being equal.
1. Performance
Performance is the most predominant factor that companies say they want to reward and reinforce. It is a topic for another discussion as to what performance is, how it is observed and measured, and how it is rewarded. But in the usual case, performance is defined as the degree to which job expectations are met. Sometimes both individual and team performance are factors.
2. Education and skills
Education includes both formal education, such as at a college or a training institute, and informal training programs that many companies offer. Along with this are skills that are often recognized by a certification, such as certain computer programming languages. Sometimes a company will give a pay raise upon achieving an advanced college degree.
3. Experience
Usually, the more experience a person has, the better the decisions that he or she will make. There is a maturity of judgment that often comes with experience. In the beginning of a job, a person moves up rapidly on the learning curve, where the impact of experience is most obvious in performance improvement. After several years, the learning curve tapers off, and the additional experience does not translate into improved performance.
It is obvious that there is a great deal of balancing of these factors in determining a person’s pay and no one factor is more important than another.
There is no single “right” combination of factors as each company is different, just as individual human beings are different.
Pay Isn’t Everything
It is important to note the context of pay, namely, that it is just one of the items involved in the exchange between an employer and an employee.
The major challenge of an organization is to attract, retain, motivate, and align the kinds and numbers of people it needs to achieve its goals. It does this through a value exchange.
A value exchange is where the company and the employee each gives value to the other in exchange for value received in order to achieve their respective self-interests. This notion can be summarized by the phrase:
The following two pie charts highlight some of the items involved in the exchange.
The Employee Gives and the Employer Receives
Many of the items are not quantitatively measurable, but we know they are present and they are very important to the company.
The Employer Gives and the Employee Receives
The items on this pie chart may differ in importance from one employee to the next as far as what is of value. Indeed, even the relative sizes of the pieces differ between employees and for individuals over time. For example, a relatively new employee may value growth opportunities more than one who is near retirement. Likewise, an individual might feel pay is very important today, but tomorrow when a new baby joins the family, benefits become more important.
A Fair Value Exchange Is a Good Deal
A fair exchange is a good deal for all parties involved. Conceptually the employer and the employee are traders in a peer relationship, each giving value to receive value to further their respective self-interests.
Often there are trade-offs for both parties, for example balancing short-term interests and goals with long-term ones. And most of the time the values involved in the exchange are not explicit—they are “just there,” such as an open management climate, or a culture that encourages entrepreneurship, or the enthusiasm a person brings to the job. They are part of the subconscious valuations an employer and an employee make when considering all aspects of the relationship.
If the exchange is fair, the employer achieves its business goals and strategies, and at the same time, the employee achieves his or her own business-related personal goals.
A fair value exchange engenders a high degree of employee engagement and is a win-win situation for all concerned.
Reference
- Davis, John H., Statistics for Compensation: A Practical Guide to Compensation Analysis, John Wiley & Sons, Inc. 2011, Appendices A.1 and A.2.
Photo/Image Credits
- Holding cash in hand: Alexander Mils from Pexels
- Factors Determining a Person’s Pay: John Davis
- Value Given for Value Received: John Davis
- Pie Chart of The Employee Gives and the Employer Receives: John Davis
- Pie Chart of The Employer Gives and the Employee Receives: John Davis