Compensation theory has never been able to provide a completely satisfactory answer to what an individual is worth for performing jobs. 1. The Job 2. The Labor Market, 3. The Organization, and 4. The Employee These all have an impact on job pricing and the ultimate determination of an individual’s financial Compensation.

1. Determinants of individual
financial compensation

2. Determinants of individual financial
compensation:
Compensation theory has never been able to provide a
completely satisfactory answer to what an individual is
worth for performing jobs.
1. The Organization,
2. The Labor Market,
3. The Job, and
4. The Employee
These all have an impact on job pricing and the ultimate
determination of an individual’s financial compensation.

3. 1. The Organization as a Determinant of
Financial Compensation:
Compensation Policies: An organization often
establishes (formally or informally) compensation policies
that determine whether it will be a pay leader, a pay
follower, or strive for an average position in the labor
market.
a. Pay Leaders: Those organizations that pay higher
wages and salaries than competing firms.
b. Market Rate or Going Rate: The average pay that
most employers provide for the same job in a particular
area or industry.

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c. Pay Followers: Companies that choose to pay below
the market rate because of poor financial condition or a
belief that they simply do not require highly capable
employees.
d. Organizational Politics: Political considerations may
also enter into the equation. A sound, objective
compensation system can be destroyed by organizational
politics. Managers should become aware of this possibility
and take appropriate action.
e. Ability to Pay:An organization’s assessment of its
ability to pay is also an important factor in determining
pay levels. Financially successful firms tend to provide
higher-than-average compensation. However, an
organization’s financial strength establishes only the
upper limit of what it will pay.

5. 2. The labor market as a determinant of
financial compensation:
Compensation Surveys:Large organizations routinely
conduct compensation surveys to determine prevailing pay
rates within labor markets.
Compensation surveys: Provide information for
establishing both direct and indirect compensation.
Benchmark job: A job that is well known in the company and
industry, one that represents the entire job structure, and
one in which a large percentage of the workforce is
employed.
Cost of Living:A pay increase must be roughly the
equivalent to the cost of living increase if a person is to
maintain a previous level of real wages.
COLA: Cost of living Allowance

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Society:Compensation paid to employees often
affects a firm’s pricing of its goods and/or
services.
Economy:In most cases, the cost of living will rise
in an expanding economy. Thus, the economy’s
health exerts a major impact on pay decisions.
Rate of inflation helps to determine the cola..
Legislation:The amount of compensation a person
receives can also be affected by certain federal
and state legislation.

7. 3. The job as a determinant of
financial compensation:
Organizations pay for the value they attach to certain duties,
responsibilities, and other job- related factors.
Techniques used to determine a job’s relative worth include job
analysis, job descriptions, and job evaluation.
Job Analysis and Job Descriptions—Before an organization can
determine the relative difficulty or value of its jobs, it must first
define their content, which it normally does by analyzing jobs. Job
analysis is the systematic process of determining the skills and
knowledge required for performing jobs. The job description is the
primary by-product of job analysis, consisting of a written document
that describes job duties and responsibilities. Job descriptions are
used for many different purposes, including job evaluation.
Job Evaluation—That part of a compensation system in which a
firm determines the relative value of one job compared with that of
another.

8. 4. The employee as a determinant of
financial compensation
In addition to the organization, the labor market, and the job,
factors related to the employee are also essential in determining
pay and employee equity.
Performance Based Pay: Performance Appraisal data provide the
input for such approaches as merit pay, variable pay, skill-based pay, and
competency-based pay.
Merit Pay: A pay increase given to employees based on their level
of performance as indicated in the appraisal.
Bonus: The most common type of variable pay for performance
and is a one-time award that is not added to employees’ base pay.
Skill-based Pay: A system that compensates employees on the
basis of job-related skills and knowledge they possess, not for their
job titles.
Competency-Based Pay: A compensation plan that rewards
employees for their demonstrated expertise.

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Experience:Regardless of the nature of the task,
very few factors has a more significant impact on
performance than experience.
Seniority:The length of time an employee has been
associated with the company, division, department,
or job is referred to as seniority.
Potential:Organizations do pay some individuals
based on their potential.

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Political Influence: Political influence is a
factor that obviously should not be used as a
determinant of financial compensation. However,
to deny that it exists would be unrealistic.
Luck: The expression has often been stated, “It
certainly helps to be in the right place at the
right time.” There is more than a little truth in
this statement as it relates to the determination
of a person’s compensation.
Special Employee Classes:These include pay
for executives, which are discussed in a later
section, and pay for professionals and sales
employees.