INTRODUCTION

In the context of employment, compensation symbolizes the mutual exchange between

employees and organizations, where both parties offer something in return for something else.
Traditionally, compensation matters were kept confidential and primarily dictated by employers'
preferences. However, in today's highly competitive landscape, there is a greater emphasis on
transparency in compensation policies, allowing employees to make informed decisions based on
the offered compensation packages. (Bhattacharyya, 2009).

DEFINITION

Compensation refers to the monetary and non-monetary benefits provided to employees in

exchange for their work contributions to an organization. Primarily, compensation is composed
of salaries and wages, but it also includes various other forms of benefits and incentives.

FACTORS THAT IMPACT COMPENSATION

According to Jain, several factors impact the determination of employee remuneration. These
factors can be classified into two main categories: (i) external and (ii) internal factors
(managementstudyhq, 2014; managementparadise, 2014). Both of these categories play a
significant role in deciding the compensation structure for employees.

INTERNAL FACTORS

Job Evaluation and Performance Appraisal: Performance-oriented compensation systems are

vital in encouraging employees and boosting overall organizational performance. These systems
aim to incentivize employees based on their individual, team, or organizational achievements,
thereby aligning their contributions with the organization's objectives.

A research article by Barry Gerhart and Maria Fang, published in the Journal of Business and
Psychology (2015), explored the impact of performance-based pay on employee motivation and
performance. The study, which examined data from a large multinational organization, revealed
that performance-based pay had a positive effect on both employee performance and motivation.

Furthermore, It helps in establishing a fair and differentiated pay structure for various job roles
within an organization which enable employees to earn additional compensation based on their
individual performance and contributions to the organization. Both of these practices contribute
to a more equitable and motivating compensation system.

Ability to pay: An organization's financial capacity is one of the most significant determinants
of its compensation structure. Organizations may struggle to offer competitive compensation to
their employees due to financial constraints, despite their best intentions. When businesses face
successive failures, the organization's sustainability is challenged, sometimes leading to reduced
compensation levels. These organizations often face difficulties in retaining top talent.

Conversely, financially stable organizations can provide competitive compensation packages to

their employees. Some organizations even exceed industry standards by benchmarking their
executive compensation against top-paying, world-class companies, in addition to their direct
competitors. For instance, Microsoft and Apple have been known to benchmark their executive
compensation not only against peer companies but also against other world-class organizations to
attract and retain high-performing individuals.

Business Strategy: An organization's business strategy can have a significant impact on its
employee compensation structures. If a company's strategic focus is on attracting highly skilled
workers to outperform competitors, it may choose to offer higher compensation packages than
other organizations in the same industry. This approach can help the company secure top talent
and gain a competitive advantage in the market.

On the other hand, if a company's strategy is to maintain stability with its current workforce, it
may offer compensation that is either similar to or slightly lower than industry standards. This
approach may be suitable for organizations that are not actively seeking rapid growth or
expansion but rather aim to maintain their existing market position.

Job role and responsibility : When determining appropriate compensation levels, organizations
must pay close attention to several critical factors, including the level of responsibility, required
skills, and job complexity. Ensuring that these elements are adequately considered is crucial for
attracting and retaining highly skilled employees. Compensation structures within organizations
are often shaped by the unique requirements and expectations associated with each job position.
Roles that demand specialized expertise, carry significant responsibility, or involve overseeing
crucial functions tend to receive higher compensation. Examples of such positions may include
software developers, project leaders, or executives. The Society for Human Resource
Management (SHRM) frequently conducts studies and shares data on compensation trends,
assisting organizations in understanding the market value of various job roles and making
informed decisions about their own compensation strategies.

The employee: Employees themselves can have a direct impact on their compensation in various
ways, such as:

Competency Level: When an employee's competencies align with the organization's

requirements for a specific job position, they are likely to receive higher compensation.
Conversely, employees whose competencies do not match the job requirements may receive
lower compensation.

Seniority and Job Experience: Experienced employees with a deeper understanding of their job
roles are expected to perform better and are often highly valued by organizations. As a result,
these employees may receive higher compensation as they accumulate seniority and experience.

Employee Potential: Organizations often assess employees' potential for future leadership
positions as part of their succession planning efforts. Upon identifying high-potential employees,
organizations may differentiate compensation levels by offering them higher pay, ensuring the
retention and development of future leaders.

EXTERNAL FACTORS INCLUDES;

Labour Market: Labor market dynamics, specifically the interplay between the demand for and
supply of labor, can impact employee compensation. When the labor supply exceeds the demand,
employers may offer lower wages due to the abundance of available workers. Conversely, when
the demand for labor outpaces the supply, organizations may need to offer higher compensation
to attract and retain talent in a competitive job market.

Labour Union: Labor unions can significantly influence employee compensation, as their
presence or absence often determines the wages paid to workers. In non-unionized organizations,
employers generally have more flexibility to set wages and salaries according to their
preferences, which may result in lower compensation due to factors such as high unemployment
rates. Occasionally, non-unionized companies may choose to offer higher compensation to
discourage employees from forming a union.

Conversely, strongly unionized companies have less freedom in determining pay scales due to
the negotiating power of labor representatives. These organizations are often compelled to revise
and set compensation levels in response to union demands, ensuring that employees receive fair
wages and benefits. In summary, labor unions play a crucial role in advocating for employee
rights and influencing compensation structures within organizations.

The Cost of Living: Rising living costs can significantly influence employee compensation.
Organizations often need to adjust salaries and provide additional allowances to offset the impact
of inflation and maintain employees' purchasing power.

Legal Regulation; Legal regulations play a critical role in shaping employee compensation, as
governments establish minimum wage standards that employers must adhere to when
compensating their employees. This helps ensure a baseline standard of living for workers and
reduces the likelihood of exploitative pay practices. Furthermore, they can enforce pay equity
laws promoting pay equity inorder to eliminate discriminatory practices in compensation based
on factors such as gender, race, or age. These measures contribute to a more fair and inclusive
work environment.

Finally, the government may also enforce regulations surrounding employee benefits, such as
healthcare coverage, paid time off, and retirement plans. Compliance with these regulations is
essential for organizations to provide adequate support and protection for their workforce.
Reference:

Gomez-Mejia, L. R., & Balkin, D. B. (1992). Compensation, Organizational Strategy,

and Firm Performance. South-Western Publishing Co.

Gerhart, B., & Fang, M. (2015). Pay, intrinsic motivation, extrinsic motivation,
performance, and creativity in the workplace: Revisiting long-held beliefs. Annual Review of
Organizational Psychology and Organizational Behavior, 2, 489-521.

Milkovich, G. T., Newman, J. M., & Gerhart, B. (2022). Compensation. McGraw-Hill

Education.

SHRM Compensation Data Center."

https://www.shrm.org/hr-today/news/hr-magazine/pages/compensation-data-center.aspx