Wage and salary administration.pdf csjmu

Wage and Salary
Administration

Compensation
• Compensation is the process of providing
adequate, equitable and fair remuneration
to the employees. It includes job
evaluation, wage and salary
administration, incentives, bonus, fringe
benefits, social security measures etc.

Objectives of WASA:
• 1. To establish a fair and equitable
remuneration
• 2. To attract competent personnel
• 3. To retain the present employees
• 4. To improve productivity
• 5. To control Costs
• 6. To improve union management
relations
• 7. To improve the public image of the
company

Need of Compensation
Management

Essentials of sound wage
and Salary structure
• 1. Internal Equity
• 2.External Competitiveness
• 3. Built in incentive
• 4. Link with productivity
• 5. Maintain Real Wages
• 6. Increments

Equity approach
• Equity approach recognises that individuals are concerned not only
with the absolute amount of money they are paid for their efforts but
also with the relationship of this amount to what others are paid.
• If a person's ration and that of others are perceived to be equal a
state of equity is said to exist. If they are unequal, inequity exists i.e.,
the individual considers himself as 'under rewarded' or 'over-
rewarded' when an employee envisions an equity, he may choose
anyone or more of five alternatives:
• (i) distort either his own or other inputs or outputs;
• (ii) behave in the same way as to induce others to his
own inputs or outputs;
• (iii) behave in some way as to change his own inputs or
outputs;
• (iv) choose a different comparison referent; and
• (v) leave the job.

General and Individual
Factors affecting Wages
• General Factors
• 1. Demand for and
Supply of labour
• 2. Ability to pay of the
Organization
• 3. Labour Unions
• 4. Cost of Living
• 5. Prevailing wage rates
• 6. Job Requirements
• 7. Productivity
• 8. State Regulation
• Individual Factors
• 1. Employee’s Age and
work Experience
• 2. Educational
Qualification
• 3. Promotion possibilities
• 4.Hazards involved in the
job
• 5. Stability of Employment
• 6.Demand for the product
• 7.Industry’s role in the
economy
• 8.Potentials of an employee

Factors That Influence Compensation
Unionization
Level of
Compensation
and
Benefits
Employee’s
tenure and
performance
Kind of job
performed
Size of
company
Management
philosophy
Kind of
business
Geographical
location
Labour- or
capital-intensive
Company
profitability
Source: Management, Seventh Canadian Edition, by Stephen P. Robbins, Mary Coulter,
and Robin Stuart-Kotze, page 274. Copyright © 2003. Reprinted by permission of
Pearson Education Canada Inc.

Methods of Wage Payment
• 1. Time Wage system
• 2. Piece Wage system

METHODS OF WAGE PAYMENT
• Time Wage Method
In time wage method, the wage is determined on
the basis of time worked which may be hourly,
daily, weekly, monthly or any other time base. A
worker is paid wage for the time worked
irrespective of his output during that time.
• Piece Wage Method
In piece wage method workers are paid wages
according to the quantity of output during a
specified period. This may be calculated on the
basis of number of units produced or the
completion of a job where output is not
measurable in terms of individual units.

Principles of Wage and Salary
Administration
• (a) Wage and salary plans and policies should be
sufficiently flexible.
• (b) Job evaluation must be done scientifically.
• (c) Wage and salary administration plans must always be
consistent with overall organizational plans and
programs.
• (d) Wage and salary administration plans and programs
should be in conformity with the social and economic
objectives of the country like attainment of equality in
income distribution and controlling inflationary trends.
• (e) Wage and salary administration plans and programs
should be responsive to the changing local and national
conditions.
• (f) These plans should simplify and expedite other
administrative processes.

THE COMPENSATION
PROGRAM
• (1) base wages and salaries;
• (2) wage and salary add-ons;
• (3) incentive payments, both short and
long term; and
• (4) employee benefits and services.

Wage Structure
• Minimum Wage
• "Minimum wage is the wage which must provide not only for the
bare sustenance of life, but for the preservation of the efficiency of
the workers. For this purpose, minimum wage must provide some
measure of education, medical requirements and amenities. “
• Living Wage
• "A living wage is one which should enable the earner to provide for
himself and his family not only the bare essentials of food, clothing
and shelter but a measure of frugal comfort including education for
his children, protection against ill-health, requirements of essential
social needs and a measure of insurance against the more
important misfortunes including old age. “
• Fair Wage
• "Fair wage is the wage which is above the minimum wage but below
the living wage. The lower limit of the fair wage is obviously the
minimum wage: the upper limit is to be set by the capacity of the
industry to pay. "

Pay-Structures
• Pay structure refers to the process of
setting up the pay for a job in an
organization. The process deals with
internal and external analysis to estimate
the compensation package for a job
profile. Internal equity, External equity and
Individual equity are the most popular pay
structures.

Salary-Surveys
• To gather information regarding the
industry standards
• To know more about the market rate i.e.
compensation offered by the competitors
• To design a fair compensation system
• To design and implement most
competitive reward strategies
• To benchmark the compensation
strategies

Steps Involved in Determination
of Wage Rate

Wage Differentials
• The word differential means relating to, or
showing a difference, or making use of a
specific difference or distinction. Wages
differ in different employments or
occupations, industries and localities, and
between persons in the same employment
or grade.

Types of Wage Differentials
• (i) Occupational differentials or
differentials based on skill;
• (ii) Inter-firm differentials;
• (iii) Inter-area or regional differentials;
• (iv) Inter-industry differentials; and
• (v) Individual Differentials.

Occupational Differentials
• These indicate that since different
occupations require different
qualifications, different wages of skill
and carry different degrees of
responsibility, wages are usually fixed
on the basis of the differences in
occupations and various degrees of
skills.

Inter-occupational differentials
• Inter-occupational differentials may
comprise skilled, unskilled and manual
wage differentials; non-manual and
manual (white and blue-collar); and
general skill differentials. Occupational
wage differentials generally follow the
changes in the relative supplies of labour
to various occupations.

Inter-firm Differentials
• Inter-firm differentials reflect the relative wage
levels of workers in different plants in the same
area and occupation. The main causes of inter
firm wage differentials are:
• (a) Difference in the quality of labour employed
by different firms;
• (b) Imperfections in the labour market; and
• (c) Differences in the efficiency of equipment,
supervision and other non-labor factors.

Inter-area or Regional
Differentials
• Such differentials arise when workers in the
same industry and the same occupational group,
but living in different geographical areas, are
paid different wages.
• Such differentials are the result of living and
working conditions, such as unsatisfactory
climate, isolation, sub-standard housing,
disparities in the cost of living and the availability
of manpower. In some cases, regional
differentials are also used to encourage planned
mobility of labour.

Inter-industry Differentials
• These differentials arise when workers in the
same occupation and the same area but in
different industries are paid different wages.
Inter-industry differentials reflect skill
differentials.
• Other factors influencing inter-industry
differentials are the extent of unionization, the
structure of product markets, the ability to pay,
labour-capital ratio, and the stage of
development of an industry.

Personal Wage Differentials
• These arise because of differences in the
personal characteristics (age or sex) of
workers who work in the same plant and
the same occupation. "Equal pay for equal
work" has been recommended by the
I.L.O. Convention (No. 100), as also by
Industrial Courts, Labour Tribunals, the
Minimum Wages Committee and the Fair
Wage Committee.

Theory of Wages
• 1. Subsistence theory
• 2. Wages fund theory
• 3. The surplus value theory of wages
• 4. Residual claimant theory
• 5. Marginal productivity theory
• 6. The bargaining theory of wages
• 7. Behavioural theories

Subsistence Theory
• This theory, also known as ‘Iron Law of Wages,”
was propounded by David Ricardo (1772-1823).
This theory (1817) states that: “The laborers are
paid to enable them to subsist and perpetuate
the race without increase or diminution.”
• The theory was based on the assumption that if
the workers were paid more than subsistence
wage, their numbers would increase as they
would procreate more; and this would bring
down the rate of wages.

Wages Fund Theory
• This theory was developed by Adam Smith
(1723-1790). His basic assumption was that
wages are paid out of a predetermined fund of
wealth which lay surplus with wealthy persons -
as a result of savings. This fund could be utilized
for employing laborers for work.
• If the fund was large, wages would be high; if it
was small, wages would be reduced to the
subsistence level. The demand for labour and
the wages that could be paid them were
determined by the size of the fund.

The Surplus Value Theory of
Wages
• This theory owes its development to Karl Marx
(1818-1883).
• According to this theory, the labour was an
article of commerce, which could be purchased
on payment of ‘subsistence price.’
• The price of any product was determined by the
labour time needed for producing it. The
labourer was not paid in proportion to the time
spent on work, but much less, and the surplus
went over, to be utilized for paying other
expenses.

Residual Claimant Theory
• Francis A. Walker (1840-1897) propounded this
theory.
• According to him, there were four factors of
production/ business activity, viz., land, labour,
capital and entrepreneurship.
• Wages represent the amount of value created in
the production, which remains after payment has
been made for all these factors of production. In
other words, labour is the residual claimant.

Marginal Productivity Theory
• This theory was developed by Phillips Henry Wicksteed
(England) and John Bates Clark (USA).
• According to this theory, wages are based upon an
entrepreneur’s estimate of the value that will probably be
produced by the last or marginal worker. In other words,
it assumes that wages depend upon demand for, and
supply of, labour.
• As long as each additional worker contributes more to
the total value than the cost in wages, it pays the
employer to continue hiring; where this becomes
uneconomic, the employer may resort to superior
technology.

The Bargaining Theory of Wages
• John Davidson propounded this theory.
• Under this theory, wages are determined
by the relative bargaining power of
workers or trade unions and of employers.
• When a trade union is involved, basic
wages, fringe benefits, job differentials and
individual differences tend to be
determined by the relative strength of the
organization and the trade union.

Behavioural Theories
• Many behavioral scientists - notably industrial
psychologists and sociologists like Marsh and
Simon, Robert Dubin, Eliot Jacques have
presented their views or wages and salaries, on
the basis of research studies and action
programmes conducted by them.
• The Employee’s Acceptance of a Wage Level
• The Internal Wage Structure
• Wage and Salaries and Motivators

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