Economic Influences on Pay

Decisions about the economic forces of product markets and labor markets limit an organization’s choices about pay structure. The organization’s product market includes organizations that offer competing goods and services. In other words, the organizations in a product market are competing to serve the same customers. To succeed in their product markets, organizations must be able to sell their goods and services at a quantity and price that will bring them a sufficient profit. An important influence on price is the cost to produce the goods and services for sale.
Besides competing to sell their products, organizations must compete to obtain human resources in labor markets. In general, workers prefer higher-paying jobs and avoid employers that offer less money for the same type of job. Another influence on labor markets is the cost of living-the cost of a household’s typical expenses, such as house payments, groceries, medical care, and gasoline. In some parts of the country, the cost of living is higher than in others, so the local labor markets there will likely demand higher pay. Also, over time, the cost of living tends to rise.
To compete for talent, organizations use benchmarking, a procedure in which an organization compares its own practices against those of successful competitors. In terms of compensation, benchmarking involves the use of pay surveys. These provide information about the going rates of pay at competitors in the organization’s product and labor markets. For jobs with skills that can be transferred to companies in other industries, surveys of job classifications will be relevant.