Skills, Experience and Performance

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.