by Though a considerable amount of care is taken while designing a compensation plan, but still there are various factors which influence the compensation and pay policies. These factors could be classified into external factors and internal factors. External factors are those factors which are outside the organisation and have uncontrollable factors. While internal factors are the factors which are inside the organization and are controllable, they can be changed as and when the external factors change.
External Factors Influencing Compensation
- Demand and supply: A wage or a salary is the price paid for the services performed by the people. The firm deserves these services and therefore, it is desirable that they must pay the price which will help to attract, retain and satisfy an individual working for the organisation. The compensation is regulated by the forces such as demand and supply. Pay may be higher if few skilled employees are available. Not only this, but the demand for highly skilled and qualified employee will attract high salaries. While in reverse situation, it could be lower.
- Economic conditions and compensation: The industry economic condition also affects the compensation. More the competitive industry, the less able the organisation is to pay higher wages. The productivity could also help in higher wages. Productivity can be increased through various means like using advanced technology, training, efficient operating methods, etc.
- Government influences and compensation: The government affects the compensation plans directly. Any changes in wage guidelines could affect the compensation plan. At different levels, government have very specific things to say about wages and salaries. Equal pay wages, hourly wage regulations, minimum wage, overtime pay, child labour, etc. are amended time and again to do justice to the services given by the employee. And at the same time, employer’s objective is also considered when policies related to wages and salaries are designed.
- Union influences and compensation: Unions have influenced compensation plans of the organisation many a times in the past. Unions have an effect whether or not the organisation’s employees are unionised. The union demands for a higher wage when they are aware of the ability of the organisation to pay.
Internal Factors Influencing Compensation
- Labour budget: It mainly identifies the amount of money available for annual employee compensation. A firm’s budget generally reflects the entire amount allocated to a particular division or a unit. It is dependent on the external influence. Any change could lead to change in labour budget.
- Motivation and compensation: A well designed compensation plan will motivate employees to contribute to the best of their abilities. Motivation is the inner state that energises human goal oriented behaviour. Since different things motivate different individuals, this makes designing of compensation plan complicated and difficult. It is, therefore, important to analyse the employee satisfaction and productivity while deciding on the compensation plan.
