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Factors Affecting Compensation

Compensation is determined by the following factors:

1.    Worth of employees:

The ability, qualification, skill and experience of employees affects the wage structure of the company.

2.    Contribution by employees:

Employees should positively contribute to organizational goals. How much an employee contributes to organizational goals and how much he can contribute in future affects compensation plan of the firm.

3.    Bargaining power of trade union:

Companies whose trade unions are strong pay more to their workers than companies whose bargains capacity is low. Trade unions bargain for more wages if warders are skilled and efficient.

4.    Demand and supply of manpower:

Demand and supply o manpower also affects wages. If demand is more than supply, wages will be high and vice versa.

5.    Remuneration paid by competing firms:

Firms cannot pay less than what competitors are paying. Compensation has to be commensurate with what other firms in the same industry are paying.

6.    Firm’s ability to pay:

Wages depend upon firm’s ability to pay compensation. Firms which are economically and technically sound pat good compensation.

7.    Cost of living:

Reputed companies like Hindustan Lever, Ranbaxy etc. want their workers to maintain good standard o living. They pay compensation keeping in view the standard of living. Cost o living index determines third wage structure. Dearness allowance and city compensatory allowance are paid to meet the high cost of living in the city

8.    Government regulation :

Government regulations play a important role in fixing compensation. Minimum Wages Act, 1976, pay commissions etc. regulate compensation policies of companies.

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