Wage Policey

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WAGE/SALARY COMPONENTS

Introduction:

Wage and salary administration affect levels of employee commitment to the

organization. However, fascinating the individuals job assignment is, the employee must be

paid. Pay affects the way people work-how much and how well. A large part of the

compensation that people receive from work is monetary. Although managers are expected

to conserve money and distribute it wisely, many employees feel that they should get more

of it for what they do. Wages, salaries and many employee benefits and services are form of

compensation. Contemporary employment reward systems attach great prominence to

wages and salaries. In the evolution of economics, the role of financial rewards has grown.

The sophistication of wage and salary administration has increased as industrialized

economies have become more complex. New suggestions for managing compensation

systems are constantly emerging.

Meaning of Wage and Salary

Wage and Salary administration, also known as Compensation management,

remuneration management, or reward management, is concerned with designing and

implementing total compensation package. The traditional concept of wage and salary

administration emphasized on only determination of wage and salary structures in

organizational settings. However, entered the business field which necessitated to take

wage and salary administration in comprehensive way with a suitable change in its

nomenclature. Beach has defined wage and salary administration as follows:

"Wage and salary administration refers to the establishment and implementation of

sound policies and practices of employee compensation. It includes such areas as job

evolutional, surveys of wages and salaries, analysis of relevant organizational problems,

development and maintenance of wage structure, establishing rules for administering

wages. Wage payments, incentives, profit sharing, wage changes and adjustments,

supplementary payments, control of compensation costs and other related items"

Concept of Wage and Salary

Wage and salary are the most important component of compensation and these are

essential irrespective of the type of organization. Wage is referred to as remuneration toworkers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-

collar employees including managerial personnel. Wages and salary are paid on the basis of

fixed period of time and normally not associated with productivity of an employee at a

particular time.


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Wage Policy

Wage Policy is principles acting as guidelines for determining a wage structure. Initially as

an economic issue it was mainly the concern of the employer while state was adopting

laissez faire policy. But, with the industrial progress and subsequent industrial balance

between employers, employees, wage bargain has become a matter for three fold concern

of the employer, employee, and the state

In India it is built around certain cardinal principles:

Equal pay for equal work Living wages for all workers so that they lead a decent life Payment of wages on appointed dates without unauthorized deductions Resolving wage related issues through collective bargaining Payment of statutory bonus at 8.33 percent as per legal provisions Ensuring a fair, equitable wage plan for various employees without significant wage

differences.

The capacity to pay(according to supreme court ruling-an employer who cannot payminimum wages has no right to exist

Determining fair wages over and above minimum wages with due regards to (i) theproductivity of labour (ii) the prevailing level of wages (iii) the level of national

income and distribution (iv) the place of industry in the economy of the company.

To compensate for the rise in cost of livingEconomic Objectives of Wage Policy:

Full employment and optimum allocation of all resources The highest degree of economic stability consistent with an optimum rate of

economic progress

Maximum income security for all sections of the communitySocial Objectives of Wage Policy:

The elimination of exceptionally low wages The establishment of fair labour standards The protection of wage earners from the effects of rising prices

The incentive for workers to improve their productive performanceWage Policy is a democratic set up so it cannot be enforced by the Govt alone. Its

implementation has to be secured through employers and employees organizations at

bargaining table i.e. by consensus


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Limitations of Wage Policy:

Socio-economic setup of our society Enforcement in unorganized sector Lack of unity among unions Prices rise almost beyond Govts regulatory capabilities Wages lag far behind labour productivity Lesser number of workers in organized sector take away bulk of wages than

unorganized

Wage incomes are consumption oriented rather than savings oriented so increasedwages would mean increased consumption. Therefore economic growth may not be

affected positively as it depends upon rate of investment possible through savings.

Ever increasing addition to workforce yet dearth of skilled labour High wages may force employer to shift towards capital intensive methods High wages reduce capital for growth

Wage Policy in India

First Five Year Plan (1951-56) suggested:

Pre-war levels of real wages be restored as a first step towards living wagesthrough increased productivity

Reduction of disparities in income Reduction of gap between existing and living wages Standardization and maintenance of wage differentials to provide incentives

Second Five Year Plan (1956-61) stressed:

Improvement in wages through increased productivity Improved layout of plants, working conditions Application of system of payment by result Improvement in management practices Recommended settlement of industry wise wage disputes through tripartite

wage boards

Third Five Year Plan (1961-66) reinforced:

Wage policy of preceding two plans

Rationalization of work load/ work methods and functions of managementThree Annual plans (1966-69) aims at framing Wage Policy after taking considering:

Price level Employment level Social Justice


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Capital required by firm for future growthFourth Five Year Plan (1969-74) emphasized:

Price stability Extension of system of payment by results

Fifth Five Year Plan (1974-79) recommended:

That the reward system in terms of wages andNon-wage benefits must be related to performance records

A wage structure to narrow down disparities within the organized sector itself. Govt. to intervene in setting up of wages & prices

Sixth Five Year Plan (1980-85) stressed on:

The need for bringing about a greater rationalization of wage structure andlinking of wages at least in some measure to labour productivity.

Modernization in industry Evolve wage structure without restrictions on negotiations

Seventh Five Year Plan (1985-90) asserted that:

There is a need for improvement in capacity utilization, efficiency andproductivity

Rise in levels of real income Reduction in disparities Sectoral shifts in desired directions

Eighth Five Year Plan (1992-97) focused on:

Formulation of wage policy relating to child labour, bonded labour, rurallabour, women labour and inter-state migrant labour.

Objectives Of Wage And Salary Administration

A sound plan of wage and salary administration seeks to achieve the following

objectives:

1. To establish a fair and equitable compensation offering similar pay for similar work.2. To attract competent and qualified personnel.3. To retain the present employees by keeping wage levels in tune with competitive

units.4. To keep labour and administrative costs in line with the ability of the organisation to

pay.

5. To improve motivation and morale of employees and to improve union managementrelations.


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6. To project a good image of the company and to comply with legal needs relating towages and salaries.

7. To establish job sequences and lines of promotion wherever applicable.8. To minimize the chances of favoritisms while assigning the wage rates.

According to D.S. Beach, was and salary administration has four main purposes.

1. To recruit persons for a firm2. To control payroll costs3. The satisfy people, to reduce the incidence of quitting, grievances and fractions over

pay and

4. To motivate people to perform better.Principles of Wage and Salary Administration:

The following principles should be followed for an effective wage and salary administration;

1. Wage policy should be developed keeping in view the interests of all concerned parties

viz., employer, employees, the consumers and the society.

2. Wage and salary plans should be sufficiently flexible or responsive to changes in internal

and external conditions of the organization.

3. Efforts should be made to ensure that differences in pay for jobs are based on variations

in job requirements such as skill, responsibility, efforts and mental and physical

requirements.

4. Wage and salary administration plans must always be consistent with overall

organizational plans and programmes.

5. Wage and Salary administration plans must always be in conformity with the social and

economic objectives of the country like attainment of equality in income distribution and

controlling inflation, etc.

6. These plans and programmes should be responsive to the changing local and national

conditions.

7. Wage and salary plans should expedite and simplify administrative process.

8. Workers should be associated, as far as possible, in formulation and implementation of

wage policy.9. An adequate data base and a proper organizational set up should be developed for

compensation determination and administration.

10. The general level of wages and salaries should be reasonably in line with that prevailing

in the labor market.


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11. There should be a clearly established procedure for hearing and adjusting wage

complaints. This may be integrated with the regular grievance procedure, if it exists.

12. The workers should receive a guaranteed minimum wage to protect them against

conditions beyond their control.

13. Prompt and correct payments to the employees should be ensured and arrears of

payment should not accumulate.

14. The wage and salary payments must fulfill a wide variety of human needs including the

need for self-actualization.

15. Wage policy and programme should be reviewed and revised periodically in conformity

with changing needs. For revision of wages, a wage committee should also be preferred to

the individual judgment however unbiased of a manager.

Wage Structure

According to economic theory, wages are defined broadly as any economic

compensation paid by the employer to his laborers under some contract for the services

rendered by them. In its actual sense which is prevalent in the practice, wages are paid to

workers which include basic wages and other allowances which are linked with the wages

like dearness allowances, etc. Traditionally, in the absence of any bargaining power

possessed by laborers, they did not have any say in the determination of wages paid to

them. This has led to the development of several theories of wages such as subsistence

theory by Ricardo, wage fund theory by Adam Smith, surplus value theory by Karl Marx,

residual claimant theory by Frascis Walker, marginal productivity theory by Philip Wickstted

and John Clark, bargaining theory by John Davidson. And behavioral theory by James March

and Herbert Simon. Each theory tries to explain how wages are determined. In the Indian

context, soon after the independence, Government of India set up a Committee on Fair

Wages in 1948 which has defined various concepts of wages which govern the wage

structure in the country specially in those sectors which can be termed as underpaid and

where workers do not have bargaining power through unions. These concepts are: i)

minimum wage,

ii) Living wage, and

iii) Fair wage.Later, the concept of need-based minimum wage was added. Let us have a brief look at

these concepts.

Minimum Wage

A minimum wage is one which has to be paid by an employer to his workers

irrespective of his ability to pay. According to the above committee,


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"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. "

Subsequent to the committee's report, Government enacted legal provisions regarding

minimum wages under the Minimum Wages Act. 1948. This Act does not define the concept

of minimum wages but empowers the Central Government as well as State Governments to

fix minimum wages from time to time. Wherever this Act applies, the payment of minimum

wages is mandatory. In 1957, Indian Labour Conference elaborated the concept of fixation

of minimum wars which were termed as need-based minimum wages.

For the calculation of wages, the Conference suggested the following guidelines:

1. The standard working class family should be taken to consist of three consumption units

for the earner; the earnings of women, children and adolescents should be disregarded.

2. The minimum food requirements should be calculated on the basis of the net intake

of2.700 calories per adult.

3. The clothing requirements should be estimated at a per capita consumption of 18 yards

per annum per person.

4. In respect of housing. the norms should be the minimum rent charged by the

Government in any area for houses provided under subsidized housing scheme for low-

income groups.

5. Fuel. Lighting and other miscellaneous items of expenditure should constitute 20 per cent

of the total minimum wage.

Living Wage

Along with the minimum wage the Committee on Fair Wages has given the concept

of living wage which has been defined as follows:

"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. "

Living wage is more than the concept of minimum wage. Such a wage is determinedkeeping in view the national income and paying capacity of industrial sector. The Committee

also observed that since the national income did not support the payment of living wage. it

should be implemented in three phases. In the initial stage the wages to be paid to the

entire working class were to be established and stabilised. In the second phase fair wages


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were to be established in the community and industry. In the final phase the working class

was to be paid the living wage.

Fair Wage

The concept of fair wage is linked with the capacity of the industry to pay. The

Committee has defined fair wage as follows:

"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. "

Thus, fair wage depends on different variables affecting wage determination. Such

factors are labour productivity prevailing wage rates, the level of national income and its

distribution and the capacity of industry to pay. At present, the concept of fair wages is

followed by the most business organizations.

Components of Wage and Salary:

An average employee in the organized sector is entitled to several benefits-both financial

as well as non-financial. To be specific, typical remuneration of an employee comprises:

Wages and Salary:

Wages represent hourly rates of pay, and salary refers to the monthly rate of pay,

irrespective of the number of hours put in by an employee. Wages and salaries are subject

to annual increments. They also differ from employee to employee, and depend upon nature

of job, seniority, and merit.

Incentives:

Also called payments by results, incentives are paid in addition to wages and salaries.

Incentives depend upon productivity, sales, profit or cost reduction efforts .There are:

i) Individual incentive schemes andii) Group incentive programmes.

Individual incentives are applicable to specific employeeperformance.Where a, given task

demands group effort for completion, incentives are paid to the group as a whole. The

amount is later divided among group members on an equitable basis.

Fringe Benefits:

These include such motley crowd of employee benefits as provident fund, gratuity,medical care, hospitalization, accident relief, health and group insurance, canteen, uniform,

recreation and the like.

Perquisites:These are allowed to executive and include company car, club membership,

paid holidays, furnished house, stock option scheme and the like. Perquisites are offered to

retain competent executives.


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Non-monetary Benefits:

These include challenging job, responsibilities, recognition of merit, growth

prospects, competent supervision, comfortable working conditions, and job sharing and flexi

time.

Factors Influencing Wages And Salaries

A number of factors, thus, influence the remuneration payable to the employees. These

factors can be categorized into

(i) External Factors and(ii) Internal Factors.

External Factors

External factors influencing wages and salaries are as discussed below:

1. Demand and Supply:The labour market conditions or demand and supply forcesoperate at the national and local levels and determine organizational wage

structure. When the demand of a particular type of labour is more and supply is less

than the wages will be more. On the other hand, if supply of labour is more demand

on the other hand, is less then persons will be available at lower wage rates also. In

the words of Mescon, the supply and demand compensation criterion is very closely

related to the prevailing pay, comparable wage and ongoing wage concepts since, in

essence all of these remuneration standards are determined by immediate market

forces and factors.

2. Cost of Living: The wage rates are directly influenced by cost of living of aplace. The workers will accept a wage which may ensure them a minimum standard

of living. Wages will also be adjusted according to price index number. The increase

in price index will erode the purchasing power of workers and they will demand

higher wages. When the prices are stable then frequent wage increases may not be

undertaken.

3. Trade UnionsBargaining Power: The wage rates are also influenced by thebargaining power of trade unions. Stronger the trade union higher well be the wage

rates. The strength of a trade union is judged by its membership, financial positionand type of leadership. Unions last weapon is strike which may also be us ed

for getting wage increases. If the workers are disorganized and disunited then

employers will be successful in offering low wages.

4. Government Legislation: To improve the working conditions of workers,government may pass legislation for fixing minimum wages of workers. This may


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ensure them a minimum level of living. In under developed countries

bargaining power of labour is weak and employers try to exploit workers by paying

them low wages. In India, Minimum Wages Act, 1948 was passed to empower

government to fix minimum wages of workers.

5. Psychological and Social Factors: Psychological the level of compensation isperceived as a measure of success in life. Management should take into

consideration the psychological needs of the employees while fixing the wage rates

so that the employees take pride in their work. Sociologically and ethically,

the employees want that the wage system should be equitable, just and fair. These

factors should also be taken into consideration while devising a wage programme.

6. Economy:Economy also has its impact on wage and salary fixation. While it may bepossible for some organizations to thrive in a recession, there is no doubt that

economy affects remuneration decisions. Depressed economies will probably increase

the labour supply. This, in turn, should lower the going wage rate.

7. Technological Development: With the rapid growth of industries, there is ashortage of skilled resources. The technological developments have been affecting

skills levels at faster rates. Thus, the wage rates of skilled employees constantly

change and an organization has to keep its level upto the mark to suit the market

needs.

8. Prevailing Market Rates:No enterprise can ignore prevailing or comparative wagerates. The wage rates paid in the industry or other concerns at the same place will

form a base for fixing wage rates. If a concern pays low rates then workers leave

their jobs whenever they get a job somewhere else. It will not be possible to

retain good workers for long.

B. Internal Factors

The important internal factors affecting wage and salary decisions are as follows:

1. Ability to Pay: The ability to pay of an enterprise will influence wage rates tobe paid. If the concern is running into losses then it may not be able to pay higher

wage rate. A profitable concern may pay more to attract good workers. During

the period of prosperity, workers are paid higher wages because management wantsto share the profits with labour.

2. Job Requirements:Basic wages depend largely on the difficulty level, and physicaland mental effort required in a particular job. The relative worth of a job can be

estimated through job evaluation. Simple, routine tasks that can be done by many

people with minimum skills receive relatively low pay. On the other hand, complex,


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challenging tasks that can be done by few people with high skill levels generally

receive high pay.

3. Management Strategy: The overall strategy which a company pursues shoulddetermine to remuneration to its employees. Where the strategy of the organization

is to achieve rapid growth, remuneration should be higher than what competitors

pay. Where the strategy is to maintain and protect current earnings, because of the

declining fortunes of the company, remuneration level needs to be average or even

below average.

4. Employee: Several employees related factors interact to determine hisremuneration.

(i) Performance or productivity is always rewarded with a pay increase.Rewarding performance motivates the employees to do better in future.

(ii) Seniority. Unions view seniority as the most objective criteria for payincreases whereas management prefers performance to effect pay increases.

(iii) Experience. Makes an employee gain valuable insights and is generallyrewarded.

(iv) Potential. Organization does pay some employees based on their potential.Young managers are paid more because of their potential to perform even if

they are short of experience.

(v) Luck. Some people are rewarded because of their sheer luck. They have theluck to be at the right place at the right time.


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JOB EVALUATIONDEFINITION:

According to Edwin b. Flippo, Job evaluation is a systematic and orderly process of

determining the worth of job in relation to other jobs.

Job evaluation means determining the relative worth of a job in an organization by

comparing it with other jobs within an organization and with job market outside jobs are

evaluated on the basis of their content and are placed in the order of their importance. In

this way, job evaluation helps in establishing job hierarchy. It is a process by which jobs in

an organization are appraised. It suggests comparative importance of different jobs. A wage

structure hierarchy is based on such job evaluation.

In job evaluation the jobs are ranked on the basis of their relative importance and not the

job holders. They are rated through performance appraisal. Job evaluation is the output

provided through job analysis.

Features:

1. It determines the relative worth of jobs in an organization. Jobs are evaluated as per

their content and place in the order of their importance.

2. It is based on the analysis of the facts about the job collected through job analysis.

3. It helps to bring a balanced wage structure in an organization. This is possible as job

hierarchy is established. The purpose is fixation of satisfactory wage differentials among

various jobs.

Objectives:

1. To establish by impartial judgment the logical and accurate relationship of each jobto other jobs within the firm.

2. To establish satisfactory wage and salary differentials.3. To select employees more accurately and train, promote or transfer them within the

firm objectively and impartially.

4. To provide them information for work organization, employees selection, placementand other similar problems.

5. To promote employee goodwill, strengthen and maintain morale and loyalty andprovide an incentive for efficiency.

6. To determine the rate of pay for each job that is fair and equitable in relation toother jobs in the plant.

Advantages / Importance:

1. Job evaluation clearly indicates the relative worth of different jobs in theorganization.


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2. It establishes a hierarchy of jobs and evolves a graduated wage scale for employees.3. It is useful for introducing a satisfactory, rational and balanced wage structure in an

organization. It is also useful for simplifying wage administration.

4. It promotes employees goodwill, strengthens and maintains high morale and loyaltyof workers and also provides incentives for raising efficiency.

5. It provides a scientific base for promotions and transfers of workers in anorganization.

6. It avoids injustice to workers as regards wage payment, promotions and transfers.7. It simplifies wage administration and facilitates merit rating and training

programmes for employees.

8. It removes grievances and disputes among employees over relative wages andmakes the wage system acceptable to all employees.

Methods of job evaluation:

1. The Ranking or grading method:This method is considered to be the simplest and the last formal of all the job

evaluation methods. Here the aim is to judge the job as a whole and determine its relative

value by ranking one whole job as against another whole job. Under this method, the jobs

are arranged in order to their importance with the most important job at the highest end

and the least important job at the lowest end. The remaining jobs are arranged as per their

relative importance through suitable evaluation techniques. The ranking is conducted

through a committee of experts job raters. The committee is supplied with the necessary

information (job description and job specification) for the ranking of available jobs. The

ranking is done at the departmental level and for every department, the jobs are ranked I

order of importance. This creates a hierarchy of jobs within the department. In this method

which is non analytical, the ranking of jobs is based on the nature and importance of the

job, responsibilities involved, qualities and qualifications required and the working

conditions connected with the job.

Advantages:

1. Simplicity - it is easily understood to all the concerned and also to operate/administer.

2. It is inexpensive.3. It can be used conveniently in small establishments.Disadvantages:

1. It does not indicate the degree of difference between the jobs. It merely shows thatone job is more or less important than other job.


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2. In most cases, the rankings are not based on job description but on the ratersgeneral knowledge of the jobs.

3. It is complex for a large firm with a complex organization structure.2. The factor comparison or weight in money method:

It is an analytical method. The rating process consists of delineation of common

key factors of different jobs and assessment of monetary values thereto with a view to

assessing their relative worth on the basis of sum total of the monetary values. Job

description provides the data required for indicating the major job elements or factors

found in greater or lesser degree in the activities of the entire enterprise.

It is a qualitative method of job rating involving complicated procedure. As a

result, the services of experts are required for actual job rating.

This method begins by selecting the crucial or critical components or elements

characterizing the business operations of the firm. In other words, a schedule of job

factors is drawn up by careful analysis of the operations.

The factors under this method are:

1. Mental requirements2. Skill requirements3. Physical requirements4. Responsibility range5. Working conditions.

After the key elements are selected for analyzing the jobs, the weights are applied tot job

elements. Assessment of weights is done by an expert committee. As per such weights, the

jobs are ranked. A monetary value is assigned to each factor of all jobs. All these values of

individual jobs are weighted and then the total value of each job is arrived at or is readily

available.

Advantages:

1. It is more accurate and systematic than the simple ranking method. The dissimilarjobs can be rated on the basis of common factors.

2. The services of experts are used and this makes the system realistic and accurate.Disadvantages:

1. It is complicated, expensive, laborious and not easily explainable to employees.2. Application of weightages and monetary values may involve the bias of experts.3. This method is difficult to install and is not used extensively.

3. The point rating method: This method is one popular and extensively used

method of job evaluation. In this method, each job is evaluated separately, appraising each


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of the factors such as skill, effort, responsibility and working conditions and combining the

separate evaluations into a single point score for each job.

In this method a series of rating scales is constructed one for each of the factors which have

been selected as important in the work of the position. A certain number of points are

allowed for each scale. In this way, differences among jobs are reflected in the different

values which are assigned to the factors. By the use of point rating method, each job is

reduced to a numerical value so that similarity and differences in work and difficulty are

discovered.

The straight point system in which each factor has the same number of degrees

and corresponding points is indicated in the following chart:

FACTORS DEGREES

1 2 3 4 5

EDUCATION 10 20 30 40 50

EXPERIENCE 10 20 30 40 50

PHYSICAL DEMAND 10 20 30 40 50

RESPONSIBILITY FOR PROCESS 10 20 30 40 50

RESPONSIBILITY FOR SAFETY 10 20 30 40 50

RESPONSIBILITY FOR MATERIALS 10 20 30 40 50

WORKING CONDITIONS 10 20 30 40 50HAZARDS 10 20 30 40 50

The weighted point system the number of degrees is shown in the chart given below:

FACTORS DEGREES

1 2 3 4 5

EDUCATION 10 20 30 40 50

EXPERIENCE 30 60 90 120 150

PHYSICAL DEMAND 20 40 60 80 100

RESPONSIBILITY FOR PROCESS 10 20 30 40 60

RESPONSIBILITY FOR SAFETY 5 10 15 20 25

RESPONSIBILITY FOR MATERIALS 10 20 30 40 50

WORKING CONDITIONS 10 20 30 40 50

HAZARDS 5 10 15 20 25


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Advantages:

1. This method is analytical in its approach.2. It gives a quantitative value for each job. This makes it easy to explain to a worker

who has some doubt in his mind about the absolute and relative wages fixed for his

job.

3. The outstanding feature of this method is the use of a manual. Basis and guidelinesof valuation are standardized by experts and are codified in this manual.

Limitations:

1. This method may suffer from inequities if listing and weighting of points are defectivedue to indifference on the part of rater.

2. The manual used for ranking the jobs needs periodical revision. If not revised it maybecome outmoded and evaluation based thereon would be out of tune with the

changed trends.

3. It is difficult for application and may prove to be unintelligible to the workers.

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