Executive Compensation Criteria

Executive Compensation criteria- Besides the basic factors provided by job description and job evaluation, there are some other criteria that need to be followed for a properly planned executive compensation.

• Supply and Demand of Labor: The labor market conditions and the supply and demand force, play an important role in determining executive compensation. If the demand for a certain skill is high but the supply is low, the result is a hike in the price to be paid for such skills. When the shortage of skill is prolonged and acute, most organizations are forced to reclassify such hard to fill jobs to a higher level. If the demand for certain labor is high the compensation will be high, but if demand is low the compensation will below.
• Prevailing Market Rate: This is the most widely used criterion. An organization’s compensation policies should generally match with the rates payable by similar industries and organizations. This is necessary because
• This is the demand of the competition.
• Uniform compensation rates are proposed by various government laws
• This is encouraged by trade unions so that their members can have equal pay.
• Related firms in the same industry need same kind of skills and same quality of employees. So uniformity of wages is essential.
• If uniform rates are not there then it would be difficult to attract and retain the employees in the organization.
• Cost of Living: This compensation criterion is considered the minimum equity pay criterion. This criterion requires an adjustment in the compensation depending upon the changes in the cost of living index.
• Living Wage: This criterion suggests that the compensation paid to an employee should be enough to maintain himself and his family at a reasonable level of existence. But, generally, employers do not believe in this criterion as they prefer to fix compensation based on performance rather than need. 
• Productivity: Technological improvements, better organization, better management, better methods of production all result in increased productivity. This could also be an important criterion in executive compensation but is not widely used because of operational problems.
• Job Requirement: The tougher the job, the higher the compensation. The measure of job difficulty is generally used for determining executive compensation when the relative value of one job to another has to be ascertained in an organization.
• Managerial Attitude: This has a major influence on executive compensation determination as judgment is exercised in many areas like whether the organization should pay below average or above average rates, what factors should be considered to reflect job worth, what weightage should be given to performance, and length of service, etc.
• Psychological and Social Factors: These determine how hard a person will work for the compensation received and what pressures he will exert to get the compensation increased. 

Skill Levels available in the Market: With the rapid growth of businesses, there is a scarcity of skilled resources in the market. Thus the compensation levels of the employees are constantly changing and it is important for an organization to match up to the market needs.

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