Wages and salaries are more than just numbers on a paycheck; they represent the value that organizations place on their employees’ skills, experience, and contributions. For individuals, the amount they earn can influence their standard of living, career choices, and overall quality of life. But how are these figures determined? What factors do employers consider when setting wages and salaries? In Nigeria, just as in other parts of the world, a variety of elements come into play – from economic conditions and industry standards to employee qualifications and company policies.
In this article, we will explore the common determinants of wages and salaries, shedding light on the dynamics that influence compensation. We will use local Nigerian examples to illustrate these points, showing how these factors manifest in real-world scenarios.
1. Economic Conditions and Cost of Living
Economic conditions play a significant role in determining wages and salaries. Inflation rates, economic growth, and the overall financial health of a country influence how much employers are willing or able to pay. In Nigeria, for instance, the economic recession of 2016-2017 led to a significant downturn in many sectors, affecting salaries across the board. Companies were forced to implement salary cuts, freeze hiring, or even lay off workers to stay afloat.
Another critical factor is the cost of living, which varies significantly from one region to another. For example, the cost of living in Lagos, Nigeria’s commercial capital, is much higher than in cities like Ibadan or Enugu. This disparity means that salaries for similar roles can differ significantly between these locations. A software developer in Lagos might earn ₦500,000 per month, while the same role in Ibadan might attract a salary of ₦300,000. Employers adjust compensation to reflect the cost of living in different areas to attract and retain talent.
2. Industry and Sector Standards
The industry in which a company operates also heavily influence salary structures. Different industries have varying levels of profitability, market competition, and demand for specialized skills. For instance, the oil and gas sector in Nigeria is known for offering some of the highest salaries due to the industry’s profitability and the specialized skills required. A petroleum engineer at a company like Chevron or Shell can earn upwards of ₦1.5 million per month, whereas an engineer in the manufacturing sector might earn half that amount.
On the other hand, sectors like education and non-profit organizations generally offer lower salaries, reflecting their limited revenue streams. A lecturer at a public university may earn around ₦300,000 per month, while an entry-level employee at a non-governmental organization (NGO) might earn as little as ₦100,000. These differences highlight how industry standards set the benchmarks for what is considered a competitive salary.
3. Company Size and Financial Health
The size and financial health of a company are crucial determinants of wages and salaries. Larger organizations with robust financial stability can afford to offer higher salaries and better benefits compared to smaller companies or startups. In Nigeria, major banks like GTBank and Zenith Bank are known for their attractive compensation packages, which include not just salaries but also bonuses, healthcare, and pension plans. An entry-level banker at GTBank might start with a salary of around ₦250,000 per month, whereas a similar role at a smaller, regional bank might offer only ₦150,000.
Similarly, multinational corporations (MNCs) like Unilever and Nestlé tend to pay higher than local firms, as they have larger financial resources and are often competing in a global talent pool. Employees at these MNCs can expect competitive salaries, performance bonuses, and opportunities for international assignments, making them attractive employers in the Nigerian job market.
4. Employee Qualifications and Experience
The qualifications and experience of an employee are direct determinants of their earning potential. Higher qualifications, specialized skills, and extensive experience usually translate to higher salaries. For example, a fresh graduate with a Bachelor’s degree in Business Administration might start at an entry-level salary of ₦100,000 per month in a Lagos-based firm. However, an individual with a Master’s degree and five years of experience in the same field could command a salary of ₦300,000 or more.
In the tech industry, a skilled software developer with proficiency in cutting-edge programming languages like Python or expertise in artificial intelligence can command salaries upwards of ₦700,000 per month, even without formal education in the field. This reflects the growing trend of skills-based hiring, where practical expertise can outweigh traditional academic qualifications.
5. Job Role and Responsibilities
The nature of the job and its associated responsibilities also influence how much an employee is paid. Roles that require higher levels of responsibility, decision-making, and leadership are compensated more generously. For example, a Chief Financial Officer (CFO) at a multinational company in Nigeria can earn several million naira monthly, reflecting the critical nature of the role in steering the company’s financial health. In contrast, a mid-level accountant in the same company may earn around ₦500,000 per month.
High-risk roles, such as those in the oil and gas sector or the construction industry, also tend to offer higher wages. An offshore oil rig worker, for instance, can earn up to ₦1 million per month, which compensates for the physical risk and challenging working conditions associated with the job.
6. Labour Market Conditions and Demand for Skills
The laws of supply and demand significantly impact wage levels. When there is a high demand for specific skills but a limited supply of qualified candidates, wages tend to rise. This is evident in Nigeria’s tech sector, where the demand for skilled IT professionals far exceeds the supply. Companies are willing to pay premium salaries to attract and retain talent in areas like software development, data science, and cybersecurity.
Conversely, when the supply of labour exceeds demand, wages can stagnate or even decline. For example, in the education sector, there is an over-supply of graduates looking for teaching positions. This abundance of qualified candidates allows employers to offer lower wages, knowing that there will always be someone willing to take the job at the offered rate.
7. Union Influence and Collective Bargaining
In sectors with strong labour unions, such as the public sector, construction, and oil and gas, wages and salaries are often determined through collective bargaining agreements. These negotiations set the minimum pay standards, benefits, and working conditions for employees. For instance, the Nigeria Labour Congress (NLC) has been instrumental in pushing for a minimum wage increase, resulting in the current minimum wage of ₦70,000 per month for federal workers.
Similarly, in the oil and gas sector, unions like the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) negotiate favorable terms for their members, ensuring that even entry-level positions are well-compensated. These unions play a crucial role in protecting the interests of employees and ensuring fair wages in industries prone to exploitation.
Conclusion
Understanding the determinants of wages and salaries is crucial for both employers and employees. For employers, it is about attracting and retaining the right talent while remaining competitive and sustainable. For employees, knowledge of these factors can guide career decisions and salary negotiations. The landscape of compensation is complex and influenced by a myriad of factors, from economic conditions and industry standards to personal qualifications and market demand.
In Nigeria, these dynamics are particularly pronounced, given the country’s unique economic and social context. Companies must balance the need to offer competitive wages with the realities of operating in a volatile economic environment. Meanwhile, employees must explore a job market that often values experience and practical skills as much as, if not more than, formal qualifications.
Ultimately, a transparent and equitable approach to compensation benefits everyone. For organizations, it fosters a motivated and engaged workforce, and for employees, it provides fair recognition and reward for their contributions. Whether you are an employer or an employee, understanding the common determinants of wages and salaries is essential to thriving in the ever-evolving world of work.
Contributed by Agolo Eugene Uzorka, CEO/ Lead Consultant, Eugene + George Consulting Limited (www.eugenegeorgeconsulting.com)
