Organization Salary Determinations

Actual use of ability to pay

Employers profess to use ability to pay (or inability to pay) as a salary determinant, but little is known about how they measure it.

Some organizations estimate ability to pay by inserting a projected salary increase into the latest income statement.

Further, managers say they use union rates, labor markets, and salary surveys to evaluate their ability to pay which, using these determinants, could be better characterized as a willingness to pay what the market or unions require.

If properly used, ability to pay involves decisions on:

• how profits should be measured
• against what standard (net worth or sales)

• AND

• over what period

It also involves determining an appropriate rate of return and resolving the issues (such as product development, product mix, and pricing policy) that most affect profits.

Ability to pay is an expression of the economic forces that bear on salary determination. Although it's a determinant beset by measurement and forecasting problems, organizations are able to estimate it when a decision calls for it.

Unions are likely to point to ability to pay and request salary increases when:

• the demand for the product or service of an organization is strong
• potential employees are relatively scarce
• prices can be increased without reduction in sales

When economic conditions facing the country, the industry, or (especially) the organization are unfavorable, management estimates of inability to pay may set a low limit to salary increases.