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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.

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.

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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. Please note that this is just an indicative list:

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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Padmaja Ganeshan Singh
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Bourbone
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Bourbone

Networking and contacts and then you get what you want.

Priscilla
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Priscilla

Employers today are looking for the ‘perfect’ employee – it’s no wonder they are hard to come by.
It used to be that perfect employees were ‘made’ and nurtured. Today’s young workers have already seen their loyal working parents come home discouraged after being downsized, replaced, et al. This new breed is smart, and will move on way before the boss gets bored with them.
Ya’acov, that’s a sterling statement: “inept and overpaid managers are out there living your life” (the life we wish we could be living)

Ya'acov
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Ya'acov

Three cheers to DLW We should all be like SpongeBob Square pants – just happy to have a job no matter how much or how little it pays and be sad on Sundays because the office is closed… Your pay, in most instances, are linked to your ability to sell yourself. If you accept a certain pay grade or level – that is your choice… if it later becomes inadequate it has nothing to do with your employer and maybe the time has come for you to move on. There are many employees and few employers, so they are spoilt… Read more »

Jenn
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Jenn

Industry is also another factor. There are industries that take nothing into consideration except what competitors are paying and call the pay competitive. There are no pay raises or bonuses regardless of increased education, experience, performance, and/or tenure. They will not negotiate regardless of how desperate they are and pay a woman significantly less. Best to be self-employed, appreciated and paid at the top of the payscale.

William Edwards
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William Edwards

I want to make a point of the pay. Various parts of the Country are different. An illustration of this. when I worked. Motorola In Schaumburg, Illinois.. I was earning at the middle. Of my Grade as an Electronics Engineering. Technician. when I transferred To Sunrise, Florida. South Florida.The Manager of the Department. Where I transferred in.Motorola Complained to The Hr Department.He Stated that my Pay was at the top of my.grade. He wanted my pay to be reduced. Since I was new in the Department and he was hiring people at a lower grade. However. Motorola Corporate declined his… Read more »

Josh
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Josh

I think you’re missing some points on the “Performance” bit. Assuming you’re not working on commission, If you have outstanding performance while working for a company, you will most likely get a predetermined percentage (3%-7% from my 20 years of IT experience) I’ve worked at several companies where “Exceeds expectations” resulted in a 4% raise, a clear indicator it’s time to move on. Mainly for me it was because the raise, less the cost of living increase for me at the time was about 1.5% The easier path is to move to another company who see’s your performance history and… Read more »

BrianW
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BrianW

One you missed is “diversity” which many companies factor quite heavily. I suppose that fits under Supply and Demand of Talent, but not quite in the same way it was described.

I’ve lost faith in the benchmarks that Staci mentioned where corporations compare themselves with their peers. If the peer companies collude with each other to suppress salaries, then they have that under control (see the “High Tech Employee Lawsuit” for an example where companies got caught), but they have been doing it much more indirectly for years.

fredd
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fredd

Shane said it all very clearly.

Staci
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Staci

I failed to mention that our company size is 30, and we pay according to the market and benchmark our positions annually so that we remain competitive.

Staci
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Staci

As an HR and Compensation Manager, your article captures exactly what I incorporate into calculating salaries. When I inquire about a candidate’s current rate of pay, their rate doesn’t influence how much we intend to pay them. It is used to determine if we can afford to hire them. Based upon the other comments, it appears these individuals aren’t working for the right employer.

Lorie
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Lorie

That’s if you are lucky to work for a big enough company. Small & midsize don’t really work like that. They say “Here is what we’re paying. (Take it or leave it.)”

Lkiing
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Lkiing

I’m not sure if this is “most” organizations unless organizations imply a fair size. I cannot imagine smaller firms doing this at all since most don’t even really have any HR.

Linda
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Linda

Really? I’m contacted by job recruiters all the time inquiring about my availability. If a job comes along that interests me I like to move forward with a submission. The first question recruiters and HR managers ask: “how much are you earning at your current job?”. This really annoys me because they base what they’ll pay you on what you’re making. If you don’t tell them how much you make, they won’t work with you! The mentality here is that if I’m making $85k or something, I should not expect more than say 86 or 87. What??!! In my situation,… Read more »

DLW
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DLW

Ha, none of this even remotely applies to my employer. In his mind everyone is so desperate for a job that they should be grateful that he even offers to pay them.

Shane
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Shane

70% How attractive you look physically.
20% Who you know
10% Other stuff you mentioned.

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