What factors would you consider when setting a pay level for a particular job?

This is the basic determinant of the pay that is given to an employee. This is the entry-level criterion wherein the skills of the employee are first determined and the pay fixed accordingly. Next, the performance of the employee during the appraisal period forms the basis for the salary hike and the bonus given to him or her. The point here is that when a person is hired, there is no way to determine whether he or she would fit within the company or would perform according to or exceed expectations. Hence, the skills and experience are used to determine the pay and subsequently the performance is used to hike the salary.

Position in the Hierarchy

We have discussed how the skills and performance of an employee is one of the determinants of pay. Apart from that, the position in the hierarchy is another key determinant of pay. For instance, in many companies, it is routine to raise the compensation by a quantum jump as soon as the employee is promoted to the managerial level.

Further, there is a jump when the managerial level employee is promoted to upper middle management and senior management. What the companies are doing here is to reward these employees for making the successful transition from followers to leaders and from managers to executive positions. Hence, the position in the hierarchy is an important determinant of the level of pay that an employee receives.

Alignment of Attributes and Role

Perhaps the most important determinant of the pay given to an employee is the alignment between the individual’s skills and attributes and the role that he or she is assigned. For instance, in many companies, a periodical evaluation of the match between the attributes and the role is carried out to determine whether the employee is doing justice to the role and whether the organization is doing justice to the employee by placing him or her in an appropriate role. After all, one cannot have the right person for the wrong job and the wrong person for the right job.

In some companies, it is common for employees during the appraisal time to demand that they must be placed in another role and it is also common for the managers to move the employees into other roles. Indeed, as discussed in pervious articles, the match between the employee and the role is of crucial importance as the level of pay that an individual is getting depends on the role that he or she is playing. There is no point in rewarding nonperformers at a certain level when they are not delivering according to expectations. Similarly, there is no point in devaluing a performer by keeping him or her in a role, which is significantly lower than their skills and performance.

Closing Thoughts

We have discussed the factors that determine the level of pay. As can be seen from the preceding discussion, both qualitative and quantitative parameters are used to determine the level of the pay that is paid to the employee. A separate topic is executive compensation, which in recent years has been driven by market sentiment rather than these determinants alone. The topic of executive compensation has been discussed in other articles.

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Well, it is not decided arbitrarily. Companies go through a comprehensive decision-making process to set their salaries, not just at time of foundation, but every few years to keep up with the times.

Numerous elements are taken into consideration when employers decide how much they should be paying their employees. These include the industry, job roles, business profitability, availability of talent, labour laws and unions, economic conditions, living costs, rank/grade at the company, years of experience, education level and more.

While the process might seem overwhelming, there are several tools and strategies that companies employ to determine their salaries.

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Most established companies have a specific pay scale that they, in most cases, adhere to. The pay scale usually plots the salary ranges for different positions in each department. It also indicates the salary progression as the employee accumulates more years of experience and tenure with the same employer.

Pay scales are typically a function of HR but are determined with the input and approval of management. The point is, pay scales should recognise the level of knowledge, skills, education, years of experience, and any other competencies that are essential for a particular job. These elements come together to determine an appropriate salary at each career level.

Without doubt, managers and HR professionals do not arbitrarily pick their salary ranges and pay rates. Even when constructing their own pay scale, they often need to look at labour laws, market averages and industry benchmarks. This is to make sure that they are making the most informed salary decisions.

Every few years, companies will take the decision to adjust their pay scale to better suit the current market and adjust for varying living costs. In these cases companies can resort to market salaries data and reports generated by market experts,  covering location, industry, years of experience, and education level, to name a few. Such reports can help companies to determine where they stand compared to the market.

Another tool that employers often rely on to determine their pay rates is knowing the employees’ previous salaries. On a job application or during the interview, an employer may ask the job candidate how much they were paid in their previous position(s). The number given by the job seeker would be used as the benchmark and would help the employer determine how much to offer.

One thing to keep in mind is that salaries are not set in stone. More often than not, job candidates and employers engage in a negotiation phase. This could start during the job interview. Employers often ask about salary expectations, which would let them know if the job candidate will fit or break their hiring budget. Although not recommended, job seekers sometimes bring up the salary question during their interview.

Once a job offer is extended, negotiation often takes place in order to arrive at the most reasonable compensation. Many candidates fail to succeed at getting what they want during this phase due to the lack of negotiations skills. This is why job seekers are encouraged to read more on the basics of salary negotiations.

Some companies, however, are inflexible and do not negotiate their offers.

Another thing to remember is that compensation includes more than just the salary. Without doubt, this could vary hugely. Some companies offer a fixed pay structure. Some offer a commission-based compensation. While others offer benefits that take care of the employee’s living costs.

Benefits, such as housing, transportation or a company car, tuition subsidies for children’s education, health insurance and so forth, can take care of some of the biggest living costs, hence taking a huge a financial load off the employee’s back.

It is important to look at the value of the compensation package as a whole.

Finally, keep in mind that salary decisions can also be circumstantial. If a company is interviewing an amazing candidate, who has a very impressive experience and skills, yet an expensive salary expectation, it is not unwise to bend the salary ranges a little bit.

When employers are truly interested in hiring the best of the best, the chances are they will need to offer more in return.

As a result, hiring managers need to evaluate the “added value” of a new hire in order to determine how much they should be compensated. Ask yourself questions like, “How much is their experience worth?”, “Are their skills in demand?”, "What about their education? Their potential?"  These questions are often answered on a case-by-case basis to determine the right compensation package.

In conclusion, salaries are an important part of any company’s structure and the answer to the question “How much should I pay them?” can never be decided on the spot or randomly. HR professionals and business owners, for the most part, put in a lot of effort to come to a fair and satisfactory answer.

What factors are typically used to determine base pay?

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