Wednesday, February 17, 2010

How is Salary Calculated ?


Negotiating one’s salary successfully is a tricky thing. Simply because while the job seeker is generally interested in getting more, the job provider is usually keen on paying as less as possible. It is only for some job providers that salary is not an issue so long as the marginal contribution the employee is going to make is higher than the salary he or she takes. But how is one’s salary determined?

“Ordinary companies follow the 3,2,1 principle, which means hire three people, pay them the salary of two persons and get the work of one person. In contrast, extraordinary companies follow the 1,2,3 principle, whereby they employ one person, pay them double the salary and get the output of three persons,” says Dr C S Venkata Ratnam, director of the International Management Institute, Delhi.

According to Dr Ratnam, employees are interested in higher salary and good employers do not mind paying it so long as wage costs are lower through higher productivity or contribution that the person is willing and is able to make.

It is, however, difficult to put a price on one’s head. Similarly, it is equally difficult for one to estimate one’s own worth. A director of an IIT institute once said, “For some what I am paying is more than they deserve, for a few others, no matter how much more I pay, that is still not an adequate consideration because intrinsically they are so good.”

Thus, “while on the issue of salary, three types of equities become important. One is personal equity, i.e., what a person thinks about one’s worth. Here the expectancy theory says that a person can be unhappy not only when one gets less, but also when one gets more. For, the person may feel that if the company is paying him 10 per cent more than what he deserves, what is the guarantee that it is not paying someone 15 per cent more?” informs Dr Ratnam.

Some people also suffer by what is known as theory of relative deprivation. Here one’s happiness or otherwise is dependent on not how much one is getting, but in relation to someone else with whom one is making the comparison. Companies, therefore, try to figure out personal equity based on pay satisfaction surveys.

The second is internal equity which is about the relative worth of different jobs based on considerations of skill, effort, responsibility and working conditions or as the Hay System measures in respect of professionals, know how, responsibility and problem solving skills.

“Job evaluation is the best method to systematically determine the relative worth of jobs. Proper job evaluation will help compare a nurse’s job with that of a police constable. Also, relative worth of different jobs can often be subjective,” says Dr Ratnam.

Thus, whether a gas cutter should get more or a grass cutter depends on the nature of industry and importance of the job. In an engineering assembly industry, welding being a highly rated technical job, gas cutters get more. But in a horticulture department, a welder may get less and a gardener more.

The third is external equity which is assessed through the survey of compensation practices across firms in the same or similar industries and region. Usually the comparison is based on the types of industries where similar skills are sought after.

Determination of pay

Thus, employers use three sets of instruments -- pay satisfaction, job evaluation and compensation surveys -- to provide the basis for equity and fairness in their compensation policies and practices. But ultimately pay is determined by different employers based on their policies (being the best pay master in the industry/region, for instance) and the dynamic equilibrium between demand and supply for the skill sets concerned.

The problem from the individual concerned is that if one gets what one wants, one wonders whether one should have asked more. Therefore, “if one is in the market, one should do some home work on the most recent/current trends in the market as far as compensation is concerned and accordingly pitch for it -- neither too low, nor too high,” suggests Dr Ratnam.

“At times, the candidate is hesitant on talking about the salary expectations. There is nothing wrong in expressing your expectations but of course, it must match the industry trend. 25–30% is the typical salary expectation one has, while contemplating a job change,” says Shrikant Dikhale, VP-HR, Kansai Nerolac Paints Ltd.

However, if you have adequate skill set for a job and are also very confident that very few can match your skills, you can even ask for more.

Source ET

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