Salary Factors: Here’s How Your Employer Decides How Much You Get Paid
What goes into determining how much money you make? In most organizations, salaries are determined by mapping roles and job descriptions with similar organizations (competitors) through a third-party compensation and benchmarking service. A typical job is broken down into its responsibilities, criticality, complexity, and market availability to name a few crucial factors. Based on these factors, the range for a job is arrived upon.
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Every organization has its compensation philosophy – how it wants to position itself in the market with reference to pay, the companies that it considers its competitors, the talent that it considers critical and therefore be more flexible with pay, etc. So let’s say the market rate for a sales representative is $40,000 – $60,000. A company can choose to pay its own sales representative anywhere within, higher, or lower than the range.
In deciding the compensation philosophy, many factors come into play, including the performance of the organization, its future plans, the availability of talent, the importance of the role, the reputation of the organization, geography, etc. For example, if an organization is not planning to grow, it may not want to pay at the higher end of the pay range for a role, however if the organization needs to hire a role that is critical in its stage of growth/decline, it may be willing to pay a premium for the right talent. Benefits and variable pay are other components that organizations work with to get the total compensation to the desired level. These are over and above the base pay.
Here are a few other factors that determine your pay.
Organization’s Reputation: An organization with a great reputation may be able to attract the right talent even at the lower end of the range. Similarly, an organization that’s not respected in the market may not be able to attract the right talent even beyond the range.
Supply and Demand of Talent: If a particular city has an exploding number of engineers, then the role does not need to be hired at a premium. The talent is easily available and since the supply is more than the demand, the salary ranges could be very wide. The opposite is true too for a position that is on high demand but on low supply.
Experience and Education: Although this may not be explicitly stated, the number of years of experience and education, especially if you have graduated from an elite institution, can have an influence on your starting salary. However, these could also make you overqualified for a job. You only need to exceed the requirements a tad!
Performance: (Yours and the company’s.) “Pay for performance” is probably the most commonly heard term, when salary is discussed. If you are an exceptional performer, your increment will take that into consideration and get you closer to the higher end of the range, while a low performer may not see any increment. Similarly, if the company is doing well and has a profit sharing model, employees may reap benefits from the company’s performance.
Cost of Living: This has nothing to do with you, your performance or the company’s performance – this is just how the market has moved. This kind of salary adjustment is called the cost of living adjustment or COLA. The increments are to be in line with the growing inflation and compensating you to maintain your current lifestyle.
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