Factors affecting wages or compensation or determinants of wages or compensation:

1) Productivity of workers: to get the best results from the employees and to increase the productivity compensation has to be productivity based.

2) Ability to pay: it depends upon the employer’s ability to pay wages to the workers. This depends upon the profitability of the firm. If the firm is marginal and can’t afford to pay higher than the competitors then the employees will go to other firms while if the company is successful then they can easily pay their employees as they wish.

3) Government: government has also fixed the rules for protecting the interest of the employees. The organizations are liable to pay as per the government instructions. Wages can not be fixed below the level prescribed by the government.

4) Labor union: labor union also helps in paying better wages to the workers. Higher wages have to be paid by the firm to its workers under the pressure of the trade unions.

5) Cost of living: wages depends upon the cost of living if it is high wages will also hike.

6) Demand and supply of labor: it is one of the important factors affecting wages. If the demand of labor is more they will be paid high wages otherwise vice versa. If the supply of the employees is more than they will be paid less and vice versa.

7) Prevailing wage rate: wages also depends upon the prevailing wage rate as the organizations have to pay accordingly to keep the employees with them.

These are the 7 factors affecting compensation.