Internal & External Factors for Salary Differences

Established and start-up companies alike periodically review their organization’s factors that influence internal pay structures. The most comprehensive analyses include looking at internal as well as external factors that create salary differences. It is helpful to understand external factors such as unemployment rates and market competition, and internal factors such as job analyses, influx of new talent and business conditions, in order to determine the appropriate levels of compensation.

Labor Market Considerations

The labor market is an external factor that can have a significant impact on salary differences. When unemployment rates are high, there are many more people looking for work than there are jobs. In this case, employers might lower their starting wages because they anticipate job seekers may settle for lower wages.

Conversely, when unemployment is low, it can be difficult for employers to recruit suitably qualified candidates. Offering more competitive salaries to recruit talent, and providing intermediate salary increases and cash incentives account for salary differences between newly hired employees and current employees.

Gateways to Profitability

Internal factors affecting compensation may include company’s profitability. When an employer is safely operating in the black, it may revisit its compensation structure and modify salaries so they are more competitive with other employers in the industry. Raising salaries according to job analyses that identify key employees most valuable for achieving financial goals can account for salary differences between certain job groups. This may also account for salary differences among external candidates beginning at the newly revised starting salaries.

Required Qualifications

Salary differences are also attributed to internal factors such as revisions to job descriptions or job analyses that justify salary modifications, according to SHRM. Employers revise job descriptions and conduct job analyses according to business needs that call for improved skill sets and qualifications. Business needs also may dictate changes to salaries when the company needs to hire employees with qualifications and skill sets the company didn’t recruit for in the past.

Business Strategy

Although employers generally try to keep their salary structures competitive, there are companies with salaries slightly lower or higher than the market rate. There are a variety of factors influencing compensation policy, including the company’s strategy for appealing to a certain segment of the applicant pool.

For example, companies that do a lot of college recruiting might develop a reputation for grooming new graduates for roles within their companies. These companies may be operating on a strategy that involves paying slightly lower salaries to recent graduates in exchange for providing them with extensive training and professional development. The companies that don’t source recent graduates through college job fairs might offer higher pay to attract applicants who have some work experience but are still relatively new professionals. According to Gusto, this may be a highly effective tactic, as people tend to respond more to their perceived compensation rather than their actual compensation.

Watching the Competition

An organization’s industry presence, standing and business reputation are a mix of both internal and external factors that affect salary differences. Companies that have a stronger presence, and thus, higher profits, may be inclined to raise salaries to a level where they can more effectively reach the best and the brightest talent. Competition can also have the opposite effect on salary differences where the employer is losing its ranking in the industry or is falling down the market share scale. Companies on the decline may have to adjust their salaries to keep the company afloat when another company gains a better, more competitive presence in the market.