Factors Affecting Compensation System

Variables/ Factors affecting compensation system are discussed below in detail:

Factors affecting compensation

A) External Environmental Variables

When developing and designing a compensation system, organizations must take into consideration the external environment in which they do business.

Many external environmental factors impact an organization, but only a few have a direct effect on an organization’s reward system.

1. Nature of the competition: When an organization has many product competitors, cost control assumes greater significance. Price pressures generally are downward and increased costs due to salary increases cannot be passed on to customers without risking the loss of market share.

In this situation, non-economic rewards (such as promotion, job enrichment, and training and development programs) may assume greater importance in the pay scheme.

Few competitors, on the other hand, increase flexibility in the design of the compensation system because wage increases are absorbed into the cost of the product or service.

2. Nature of the labor market: A discussion of the impact of the nature of the labor market on designing reward systems focuses on two issues: labor supply and demand and the wage levels that competitors are paying to their employees.

When the demand for labor is greater up the cost of labor Applicants can afford to “shop around” for a company that pays a higher salary when labor is in demand.

When the supply of labor is greater than the demand, the competition among job applicants for a limited number of positions permits companies to pay lower salaries.

3. Government Regulations: Government legislation affects almost every aspect of the compensation plan. It places a lower limit on wages that can be paid, it affects raise and incentive decisions, it proscribes wage discrimination, and it requires that certain benefits be paid to all employees.

Factors affecting compensation system
Factors affecting compensation system

B) Internal Environmental Variables

There are some important internal environmental variables, which play a vital role in developing the compensation system.

1. Corporate Strategy: Direction for an organization is provided by corporate strategy. It’s mainly focused on the long term and the payment system should be supportive of this focus.

2. Management Philosophy: This value is reflected in the relationship between management and employees. As management is a powerful decision-making authority, it can take major initiative for wage structure. Central to the company’s mission is that it attempts to share values, ideals, and goals, and have respect for each person.

3. Type of job: Jobs differ in many ways. These differences include the variety of tasks performed, the amount of physical or mental effort, the pleasantness of the working conditions, the degree of autonomy (control over how, when, and what to do the responsibility for labor, materials, and equipment and the amount of interaction with others)

4. Productivity: Productivity is simple the ratio of outputs (product or service provided by the company) to inputs (for example, costs in terms of labor, capital, energy, materials, and machinery).

Any increase in labor costs decreases productivity unless output increases or other costs decrease. How to minimize the impact of these salary increases on productivity requires careful consideration.

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