Salary secrets: how companies determine what you are worth
How are salaries calculated? In most companies, payscales are benchmarked against what the competition is paying and what your organization can afford. Often, it’s a fine line between paying enough to attract (and retain) the best employees without breaking the bank. How valuable you are for the company can also determine your financial worth, along with other factors like education, experience, etc.
When it comes to determining salaries, employees who directly bring in revenue are the easiest to slot. For eg, a sales person has a fixed target of business he/she is expected to bring in so remuneration is based on achievement of these targets. Usually, they receive a percentage fee for money they make for the company. On the other hand, the contributions of departments like administration or HR cannot be calculated in the same manner.
So the salary of employees in these departments is calculated based on industry standards, the scale and scope of operation and the employee’s credentials.
The most common method of fixing the pay of a new recruit is taking into account his/her previous salary and offering a certain percentage hike on that amount. If an entirely new position has been created, one way of determining compensation is by finding out the prevailing market rate for the position and then trying to match that rate.
There are several ways a company can procure salary information. Apart from asking candidates themselves what they expect to be paid, this information can also be obtained by scanning print or online classified ads, networking within the industry or approaching relevant trade associations for help. Some agencies provide detailed and updated salary information to companies in exchange for a fee.
Once a salary range has been determined, several other factors come into play in deciding the exact figure. Location, years of experience, qualification, level and quality of education all influence employee remuneration. There are also individual cases -- for example, a sales professional who may already have a good rapport with some of your important clients. In such cases, the value the new hire may rise manifold, necessitating higher compensation or special remunerative arrangements.
Some other factors that employers consider while determining your salary are:
Your salary is directly proportional to how much skill you bring to the job. As a rule, positions that require skilled employees or people with specific qualifications will be paid more, while the more general positions, like administration, will attract lesser pay.
The location you are posted in makes a lot of difference to how much you are paid. Salaries for the same position will vary across different towns and cities because they take into account differences in the cost of living.
Pay packets are also influenced by years of experience in the industry. Job adverts typically specify how many years of experience they want for the post and offer a corresponding salary. Even within a pay band, your offer will depend on your experience level.
Your level of education and its quality (i.e. the institution you are from) also has an impact on your salary. Management graduates from the IIMs, for instance, will command a better price in the job market than MBAs from other institutions.
The number of people who report to you has a bearing on your salary. Those who have prior management experience are often hired at higher packages.
Companies must offer salaries on a par with industry standards. With inflation, the purchasing power of salaries is on a constant decline. In order to attract new employees, companies must ensure that salaries are adjusted for inflation so that purchasing power increases or at least remains the same.
Companies calculate compensation based on numerous factors including comparable salaries, experience, education, etc. But there are no numbers set in stone. Make sure you negotiate on an initial job offer to get the best possible deal. Before going for an interview, have a minimum salary in mind. Not sure how to come up with the right figure? Try using a salary calculator like Monster Salary Index to put the best price on your skills.