Organization Salary Determinations

Disadvantages of using ability to pay

Although employing organizations and unions may cite ability to pay as a primary reason for salary decisions, no one suggests that it be used as the sole determinant.

Such a strict application of ability to pay could lead to undesirable results:

#1 Disorganization. Using ability or inability to pay as the sole determinant of salary decisions would completely disorganize salary relationships.

• Salary levels would bear no relationship to the going rate in the labor market.
• Organizations in the same industry could have vastly different salary levels.
• Salaries would fluctuate widely along with profits.
• Any semblance of industry salary uniformity would disappear.
• Low-profit firms employing a high proportion of highly skilled people could have lower salary levels than high-profit firms employing only unskilled labor. In this way, unskilled labor could receive higher salaries than highly skilled labor.

#2 Economic limitations. Strong limits would be placed on economic efficiency:

• Under a system where increases in profits are absorbed by salaries, shareholders (including management) would have nothing to gain from increased effort.
• Incentives for management to improve efficiency would be seriously impaired.
• Possibilities of expansion would be limited. Expansion of output and employment in efficient firms would be forestalled by paying out increased profits in salaries to current employees.

For these reasons, a single salary determinant, ability to pay, is likely to hold little attraction for all parties in the employment exchange.

When setting salaries, your organization must also consider the general economic environment of the:

• economy
• industry
• organization