Though a considerable amount of guesswork and negotiation are involved in salary determination, certain factors have been extracted as having an important bearing upon the final dollar decision. Among these factors are the following:
(1) Supply and demand for employee skills,
(2) Labour organisations,
(3) The firm’s ability to pay,
(4) Productivity of the firm and the economy,
(5) Cost of living, and
Each of these will be discussed briefly in order to demonstrate the exceedingly complex nature of compensation. Perhaps a realisation of these complexities will lead to a greater appreciation and acceptance of job evaluation despite its arbitrariness and scientific failings.
Supply and demand through the commodity approach to labour, as discussed earlier, is not completely correct, it is nevertheless true that a wage is a price for the services of a human being. The firm desires these services, and it must pay a price that will bring forth the supply, which is controlled by the individual worker or by a group of workers acting in concert.
The primary practical result of the operation of this law of supply and demand is the creation of the “going wage rate.” It will be demonstrated later how the wage and salary survey of this going rate is incorporated into a job evaluation approach to wage determination. We shall discuss the charges of certain groups that the market going rate reflects fundamental biases towards female employees.
This simple statement of the effect that the demand and supply of labour have on wages belies its complexity. It is not practicable to draw demand-and-supply curves for each job in an organisation, even though, theoretically, a separate curve exists for each job.
But in general, if anything works to decrease the supply of labour, such as restriction by a particular labour union, there will be a tendency to increase the compensation, If anything works to increase the employer’s demand for labor, such as wartime prosperity, there will be a tendency to increase the compensation.
The reverse of each situation is likely to result in a decrease in employee compensation, provided other factors, such as those discussed below, do not intervene.