Factors which affect compensation are explained as follows:
Ratio of Demand and Supply: Demand and supply relationship are of different kinds and work at various levels. Levels can be regional, national or international level. Salary is less, if the workers are in surplus as there are more options for the employer. Similarly, if the employees are less and demand for workers is more. their wages are expected to be more. Thus, it can be said that demand and supply is a major determinant of compensation.
Ability to Bargain: Bargaining capacity of worker is another factor which influences the wage determination. If the trade unions are strong, then the wages paid to workers are high because trade unions pressurise the employers to meet demand of workers and give them higher wages.
Cost of Living: Cost of living is different in different places, regions and countries. In an underdeveloped nation, the cost Of living is poor hence wages are low, as they are expected to live With less facilities While on the other hand, a developed nation has higher wages.
Type of Market: Wages of the workers depend on the type of the where they are working in. If the market is competitive, the wages of the employees will be uniform in the market and will be good. But if the competition is low and poor, the wages will not be at par.
Comparative Wages: Wages also depend on the wages being paid by the other organisations. Pay rates must be compatible with the salaries paid by the Other organisations, which belong to same kind Of industry. If the wages are comparative, then employees will be satisfied.
Ability to Pay: Paying capacity of an organisation is a major factor which affects the employee compensation. Large organisations with high profitability can offer a good salary to its employees while small organisations with low profit cannot afford to pay high salary to its employees.