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Compensation to Be Defined by Economic Concepts


Compensation to Be Defined by Economic Concepts

Human resources are allocated to certain uses that contribute to production. This is the reason why a company pays the employee a certain price for the provided labor. This relationship is based on economics and implies that the said price is governed by the logic that you are making a purchase. As any purchase, one looks for value for money. A company will seek to benefit from the largest quantity of labor at its optimum best. Similarly, the service provider or the employee will seek the highest rate that he can get; after all, it is his hard work and skill. In sort, this is about buying and selling in order to improve production or profit. However, there is a huge difference in the way the market prices labor and other products. Labor has a short shelf life; that is, labor has a sense of immediacy as it may not be available on the following day. This does not mean human beings are not going to be available; but that the particular service that is required may not be available. Another factor is that the labor cannot have a fixed value. It varies according to the labor force itself – from person to person. It also varies with the ability or skill levels. Since, we are talking about human beings, it is not possible to expect or receive the same level of skill or ability from minute to minute. This can either be advantageous or disadvantageous for the employer.

The advantage is that one can work on improving the quality of the labor as it is a variable. This can also enable the employer to vary his own demands as per the need of the hour. The disadvantage is that the employer cannot fix a particular price and remain inflexible about it. As much as there is a variability of his demands and the labor’s supply, the price also becomes a variable. Moreover, it cannot be fixed in advance. The best an employer can do is make a estimate of how much value he places on the potential labor he will receive. This also affects how the labor supplier rates himself. It is not possible that everyone with similar qualifications or experience is paid the same price. He can only ask for the market rate at that time and should be flexible. Thus, the labor supplier can go with a general range for his level of expertise.

This aspect of variability is reason enough to accept that compensation decisions must consider the economic concept seriously.