Article: How companies decide salary for roles and levels

Compensation & Benefits

How companies decide salary for roles and levels

While the HR community continues to debate with jargons like price index and inflation, the unanimous consensus is on effectively engaging and optimizing the human capital in order to build an army of enthused employees within the organisation.
How companies decide salary for roles and levels

Often the topic of a hushed conversation when high level executives jump companies, and the most motivating factor for middle and junior level executives to switch jobs, ‘pay package’ continues to be the governing factor for human resource movement. As an HR manager, I am often asked how candidates are selected and salaries are fixed for employees at different levels (including the CEO!).

The compensation philosophy differs from organization to organization and it’s not safe for us to zero in on any formulated theory. When these bibles for compensation fitment are designed, many factors come into play including the performance and current market position of the company, its future plans, the importance of the position to be filled, availability of talent, geography etc. Furthermore, India being a diverse and large economy with uneven compensation, the challenge of recruiting and affirming to industry ranges can be difficult. However, when we start benchmarking into sectors one will be surprised to see the parity. This is primarily because organizations care about the human capital and cannot afford to lose trained resources as every trained resource exiting is a cost to the company. 

Like any competitive industry governed by the forces of demand and supply, recruitment is no exception. When there is a vacancy, the subsequent issue in hand for the head hunter would be the supply and demand of the particular talent. Out here, a particular degree or skill set plays a critical role. For instance, a city might have an exploding number of engineers, thereby reducing their bargaining power and no premium being attached to their core skill. The talent is easily available and since supply is more than the demand, the salary ranges could be very wide. The opposite holds true too for a position that is high on demand but on low supply. 

Needless to say, education and experience is revered. Organizations invest in talent with the objective of earning returns. With a high degree of unpredictability involved with human resource, organizations rely on premium education and stellar performances. This guarantees them (perceived) that such an investment is going to pay back in terms of great pedigree and a strong DNA. There are also cases where institutional tags are waged more than mainstream experience with the assumption that quality delivered will be exceptionally good. When not executed under the right circumstances, the chances of being over-qualified cannot be ruled out.  

Most HR heads study how the market is paying for similar roles and create a salary band with scope for negotiation and increment, keeping in mind the financial goals of the organization. If an organization intends to remain lean and small, it may not want to hire individuals at a high pay scale. Alternatively, if the role is directly or indirectly proportional to its growth, it may be willing to pay a premium for the right talent. Benefits and variable pay are other components that organisations work with to lure candidates. 

Sometimes the services of HR consultancy firms that provide salary leveling advisory are taken. While most packages are determined to get the right talent, some organizations do it to raise their corporate image. For those who have invested in building a brand name, the need for offering attractive packages and above market standards becomes inevitable, so as not to reflect negatively on their reputation. However, there is a flip side to it. The bigger brands tend to attract talent even at a lower pay range while the not-so famous ones may find it difficult to attract or retain talent irrespective of dangling a fancy carrot.

Having said, there are perpetual cost dynamics that play in the economy which in turn influence the pay scales. Organisations are conscious about these changes and the impact it has on the business & stakeholders. When compensation-related costs escalate, an organization must find a way to offset them. In the past, companies passed along these increases in costs to the customer in the form of higher prices.  

Organisations are driven by a coherent identity. As companies grow, acquire and diversify, the business mix changes frequently and job roles vary across countries. Purpose and values make the core of an organisation’s identity, and they can guide people in their efforts to find new ideas that serve society.

Globalization brings in mixed cultures and exposes in-house employees to different cultures and work styles. However, it’s the leaders who ensure that the institutional grounding is done & the parity of education, experience, skillset is mapped to retain talents. Companies using institutional logic are often willing to invest in the human side of the organisation—investments that cannot be justified by immediate financial returns but that help create sustainable foundations. Often during Merger & Acquisitions, the acquired company is taken care of as it’s the perceived threat to their seniority, salary scale, roles etc. Successful mergers are noteworthy for their emphasis on values and culture. Institutional grounding can separate the survivors from those subsumed by global change. A sense of purpose infuses meaning into an organisation, institutionalizing the company as a fixture in society and providing continuity between the past and the future. Business houses like TATA, Reliance Industries, Aditya Birla, Mahindra etc. operate in various countries with diversified & varied cultures. These organisation have one thing in common- creating a culture based on common purpose providing coherence in diversified environment. 

Compensation & benefits are extremely important to both new applicants and existing employees. Compensation not only provides a means of sustenance and allows people to satisfy their materialistic and recreational needs, it also serves their ego or self-actualization needs. The compensation pattern & practices influences recruitment across organisations. The more we innovate & research on the subject, the better is the results with respect to retaining or attracting people.

The trends have been changing drastically and study on the philosophy of compensation and benefits have kept many economists & human resource professionals on their toes. While the HR community continues to debate with jargons like price index and inflation, the unanimous consensus is on effectively engaging and optimizing the human capital in order to build an army of enthused employees within the organisation.

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Topics: Compensation & Benefits, #HR Ready

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