Calculating Employee Compensation Using An Economic Principle

Abstract

Although methods for determining the compensation of a new employee are standardized, those for adjusting an employee’s compensation over a period of time are not well established. This paper develops an intuitive method for calculating the minimum amount by which an employee’s compensation must be adjusted taking into account changes in economic conditions since the start of employment. It then translates this result into a worksheet that computes compensation using employee specific information–starting salary, length of employment, and frequency of compensation adjustments.