Please explain the contextual influences on compensation practices

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kipling2448 | (Level 3) Educator Emeritus

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The phrase “contextual influences” is one of those classic examples of academia making life more complicated than necessary.  “Contextual influences” is just another way of saying “factors that influence a decision.”  In the case of executive compensation packages, contextual influences include prevailing wage practices within the specific industry in question and within a specific geographic locale, different regions of the country historically having higher wages commensurate with the higher cost of living in that particular region.  When determining appropriate compensatory tables for an organization, the folks in human resources are likely to look around town and gauge the level of competition.  The more competition, the more valuable quality personnel and the greater the compensation package necessary to recruit and retain those workers.  Human resource managers, then, need to be able to ascertain to the best of their abilities the prevailing wages both for specific positions and for specific industries.  A well-qualified candidate for a position may have his or her choice of companies from which to choose, and be able to command a top salary; candidates in less-intensive environments, on the other hand, may have little to no leverage when negotiating compensation packages, as their options are limited.  Constructing wage scales and executive compensation packages is a science that requires research into the scale and caliber of competition and a careful assessment of the pool of talent available to fill openings.  The basic variables are universal in a free market system characterized by supply and demand.  Maintaining corporate policies with respect to compensation that reflect current economic realities is one of the responsibilities of human resource departments.  Failure to retain quality personnel for lack of attention to these factors means the H.R. department is not doing its job, or the corporation’s balance sheets simply do not allow for competitive salaries, in which case the company in question could be entering a death spiral.

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