Organization Salary Determinations

ECONOMIC FORCES

The most obvious criteria used to set salaries are economic in nature.

These include:

• what the local labor market pays
• supply of and demand for labor
• company profitability

Here are some examples....

Higher salaries	Lower salaries
More profitable organizations tend to pay higher salaries than less profitable organizations for the same occupations. Capital-intensive organizations tend to be more profitable because additional capital increases productivity.	Small organizations tend to pay lower salaries often because those salaries are all they can afford. Service industries that tend to be labor-intensive, low-profit, and low-salary are often composed of small organizations.

Local Labor Markets

Local labor markets vary in salary levels, depending on industrial composition.

High-salary communities	Low-salary communities
Communities in which a large proportion of organizations are in high-profit industries tend to be high-salary communities.	Communities with a high proportion of organizations in low-profit industries tend to be low-salary communities.

Sometimes communities experience short-run increases in salary levels because labor demand increases compared to labor supply.

Example: As more services moved online, the demand for SQL database administrators and .NET and Java developers led to increases in the total compensation for these positions in communities across the United States.

On the other hand, there may be a decrease in salary levels because of an increase in labor supply without a proportional increase in demand.

Example: Following the sub-prime mortgage crisis and recession of 2008, the demand for construction workers declined sharply, leading to a spike in unemployment in this sector as well as decreases in compensation levels.

Mobility

Differentials among local labor markets are limited by a tendency for:

• workers to leave low-salary communities

• AND

• organizations to locate new facilities in low-salary areas.

Let the good times roll

An organization's salary-paying ability tends to be increased by:

• good financial results
• high profits
• increasing productivity

Salary levels tend to increase faster in good times because:

• profits increase

• AND

• workers tend to become more demanding and more mobile.

But organizations may or may not be willing to pay higher salaries. Some of them do pay higher salaries to simplify recruiting problems and to forestall turnover. Others do so because above-average profits spark the interest of workers and their unions.

Even in good times, less efficient organizations survive by paying less and lowering standards of employability.

What does it all mean?

Economic forces affect salary decisions through the actions of decision makers. If decision makers believe that adjustments in salaries are necessary or desirable on economic or other grounds, they make them. If they believe that the organization's present salary-paying position is prudent and acceptable, they don't.

Salary–Level Determinants

In the remainder of the course, we classify salary-level determinants on the basis of the following:

• Employer ability to pay
• Employer willingness to pay
• Employee acceptance

Some of these determinants have been used by arbitrators and wage boards, but little is known about how they're actually used by employers or unions. We therefore emphasize how and when these determinants could be used by organizations.