Compensation against effort determines the motivation level of employees. So while setting a pay rate or compensation, management should meticulously analyze different variables or determinants affecting compensation.

Following are the methods to set pay rates:

1. The salary survey:

It is a method of collecting factual information on pay practices within specific communities and among firms in their industry for comparison purpose. It can be formal (i.e. structural questionnaire is used to collect the data) or informal (i.e. telephone or internet queries.)

2. Job evaluation:

It is a systematic comparison done in order to determine the worth of one job relative to another. The fundamental compensable elements of a job, such as skills, efforts, working conditions and responsibility are compared to one another and set pay for each Different methods like, ranking method, classification method, factor comparison method and point method can be used to evaluate the job.

3. Wage curve fitting:

When management arrives at point totals from job evaluation and obtains survey data on what comparable organizations are paying for similar job, then wage curve can be fitted to the Wage curve shows the relationship between the value of the job and the average wage paid for this job.(Fig from book)

4. Wage structure:

Finally, the jobs that are similar in terms of classes, grades or points are grouped together and are plotted in a graph to develop an organization’s wage structure. The wage structure shows the pay ranges in each grade at stated time period. (Fig from book)