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The 8 Key Factors Affecting Compensation

About The Factors Affecting Compensation

Compensation is one of HR's most important responsibilities. It connects their role directly to the company's finances and the organization's performance. Compensation is also one of the biggest areas of dispute between employees and employers, and for a good reason. Both have much to gain or lose when it comes to compensation.

So how should companies approach the topic of compensation? Simple: by looking at the most critical factors regarding compensation.

8 Key Compensation Factors

Worker Productivity & Value To The Organization

The main reason that different jobs have different pay rates is that certain workers are more necessary than others to achieve the organization's goals. Productivity refers to how much additional value employees provide to the organization by doing their job. A more productive individual in a more productive role will have an overall higher pay rate.

Employer's Ability To Pay

One overlooked factor determining pay rates is how much an employer can actually pay! An employer can only spend what they can afford. If an employer cannot pay the employee what they can get elsewhere, the employee will work elsewhere.

Labor Union Requirements

Labor union representatives negotiate on behalf of their members to agree to a fair rate of pay. Employers that hire members of unions may be required to pay the rate set by the union. These rates may depend on many factors, such as seniority and location.

Prevailing Wage Rates

Prevailing wage refers to the going rate of labor for a given profession in a given geographical area. In some cases, prevailing wages are set by various pieces of legislation, such as the Davis-Bacon Act and Service Contract Act, to determine how much government contractors must pay their employees.

Cost of Living (COL)

Every location has a different cost of living. If a worker cannot sustain themselves working a job, they are likely not to work that job. Some areas have higher average wages simply because their living costs are so high. For example, an employee who might make $60,000 a year in Kansas City might expect to make $100,000 in San Francisco simply because of the disparity in the cost of living.

Labor Supply And Labor Demand

In 2022, the United States faces a labor shortage. Due to the COVID-19 pandemic and the shift toward work-from-home, many workers left jobs in specific industries for other jobs that paid better and offered better benefits. As a result, jobs in those industries have had to increase their compensation.

Government Controls

Several different pieces of legislation can affect how much a company must pay its employees. The most relevant for many companies is the minimum wage, however, some laws require additional pay for various reasons. This varies widely by state.


Globalization and the Internet have made it possible for companies to get work done in other countries where the cost of living and labor costs are much lower. Regardless of one's stance on the issue, globalization impacts compensation in many ways. First, it causes jobs that can easily be outsourced to be compensated at a lower rate locally. Second, it changes local labor demands, as some labor cannot be outsourced.

Want to dive deep into the subject of compensation and become a true expert?

Check out our online certification program: The Compensation Training & Certification Program

HR Certification Programs Online offers HR certification programs online for those looking to start or grow a career in human resources. Our programs include payroll, compensation, compliance, and more. See more: HR Compliance Training

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