Factors Influencing Remuneration Policy

A number of factors influence the remuneration payable to employees. They can be categorized into: External and Internal factors.

External Factors are those beyond the control of the organization and include: labour market; cost of living; labor unions; government legislations; the society; and the economy.

Internal factors are those that the organization can control and include: ability to pay; employee related factors like Performance, Experience, Seniority and Potential; Job requirement; job evaluation and organization’s strategy.

a) External Factors

The external factors that may affect remunerations include:

  • Labour market:

Demand for and supply of labor influence wage and salary fixation. A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to be paid when the demand exceeds supply, as in the case of skilled labour.

Going rate of pay is another labour-related factor influencing employee remuneration. 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 wage in the initial stages of plant operations. Subsequently, a comparison of going rates would be highly useful in resolving wage-related disputes.

Technological changes also influence the fixation of wage levels. Due to the advancements in the technology there may be shortage of skilled manpower in that area. So, the organisation will provide high wages for skilled personnel. For example, information technology (IT) is suffering from the shortage of IT experts and is therefore paying them higher wages.

  • Cost of Living

Next in importance to labour market is the cost of living. This criterion matters during periods of rising prices, and is forgotten when prices are stable or falling.

The justification for cost of living as a criterion for wage fixation is that the real wages of workers should not be allowed to be whittled down by price increases. Increase in the prices of commodities and decrease in value of the money is called inflation also affects wage rates. The causes of inflation are many which are raising costs; fall in the currency value in international markets, raising taxes by government and stagnation in the development of economy, etc.

  • Labour Unions

The labour unions attempt to work and influence the wages primarily by regulating or affecting the supply of labour. The unions exert their influence for a higher wage and allowances through collective bargaining with the representatives of the management. If they fail in their attempt to raise the wage and other allowances through collective bargaining, they resort to strike and other methods where by the supply of labour is restricted. This exerts a kind of influence on the employees to concerned test partially the demands of the labour unions. The employers of strongly unionized employees therefore have no freedom in wage and salary fixation due to pressure of labour representatives in determining and revising pay scales. Employers in non-unionized factories enjoy the freedom to fix wages and salaries as they please. Because of large-scale unemployment, these employers hire workers at little or even less than legal minimum wages.

  • Government Legislations – laws and regulations

The laws passed and the labour policies formed by the Government have an important influence on wages and salaries paid by the employees. Wages and salaries can’t be fixed below the level prescribed by the government. The 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.

  • Society & Social Factors

Society also affects remuneration in that remuneration paid to employees is reflected in the prices fixed by an organization for its goods and services. For this reason, the consuming public is interested in remuneration decisions. In addition, whether the wage is adequate and equitable depends not only upon the amount that is paid but also upon the perceptions and the views of the recipients of the wage. Even though the wage is above the going wage rate in the community if it is lower than that of fellow worker it may be deemed inferior, it will be regarded as inequitable in the eyes of the recipients of the wage. A man’s perception of the equity of his wage will undoubtedly affect his behaviour in joining and continuing in the organisation.

  • Economy – Economic Factors

The last external factor that has its impact on wage and salary fixation is the state of the economy. While it is possible for some organisations to thrive in a recession, there is no question that the economy affects remuneration decisions. For example, a depressed economy will probably increase the labour supply. This, in turn, should serve to lower the going wage rate.

b) Internal Factors

Internal factors are those that the organization can control and include: ability to pay; employee related factors like Performance, Experience, Seniority and Potential; Job requirement; job evaluation and organization’s strategy.

The internal factors that may affect remuneration policy and wage determination are:

  • Ability to Pay

Ability to pay is one of the most significant internal factors influencing employee compensation. Generally, a firm, which is prosperous and successful, has the ability to pay more than the competitive rate. This way it can attract a superior caliber of personnel. Often the labour unions also demand an increase in compensation on the grounds that the organisation is prosperous and is able to pay more.

  • Employee-Related Factors

Numerous employees related factors also influence his or her compensation. These include performance, experience, seniority and potential. High performance is always rewarded with pay increase and as a result it motivates the workers to do better in future. Experience makes a person perfect by providing valuable insights and thus rewarded also. Employers presume that experienced candidate posses’ leadership skills which influence the other behavior and performance. Generally experience candidate perform the job without need of training which is time consuming and deals with matter of cost to company. Hence the experience candidates demand more pay than an inexperienced candidate.

  • Seniority and Potential of Employees

In today’s environment seniority of employees also influences remuneration. Naturally senior employees demands for more salary than fresher because of their hold on related job and its functions. Today many companies are demanding senior employees for key positions by offering high pay and even sometimes offering retired employees handsome salary for key positions. Firms also pay their employees, especially young ones on the basis of their potential. Software companies are very good example for this, IT graduate just who completed his education having potential in the subject can gain a good job with high payment anywhere in the world.

  • Job Requirements

Wages are also influenced by the requirements of a job such as physical and mental requirement. Jobs, which demand more skill, responsibility, efforts and are of hazardous in nature, will carry high wage tag with them. Job evaluation establishes a consistent and systematic relationship among base compensation rates for all jobs. In other words, it establishes the satisfactory wage differentials.

  • Organisation’s Strategy

The organization’s strategy regarding wages also influences employee compensation. For example, an organization, which wants rapid growth, will set higher wages than competitors. On the other hand, organizations that want smooth going and just maintain the current earning will pay average or below average.

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