UNIT 5:WAGES AND SALARY

ADMINISTRATION

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Sadique Nayeem

Asst. Professor

Dept. of CSE

Sitamarhi Institute of Technology, Sitamarhi

Wage

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Wages means reward for the labourer for his services rendered to the industry.

These can be paid on per unit, per hour, daily, fortnightly, weekly, or monthly

basis. Labourers render services of both types i.e. mental and physical.

According to Prof. Straitoff, “Wages is the reward of that labour which creates

utility.”

As per the Indian Labour Organisation (ILO), “Wages refer to the payment

which is made by the employer to the labourer for his services hired on the

conditions of payment per hour, per day, per week, or per fortnight.”

In the words of Jaod, “Wages are the income that an employee gets for his

services.”

According to Benham, “Wages are a sum of money paid under contract by an

employer to a worker for services rendered.”

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The development of rules of wage administration has to be done, after the rate

ranges have been determined. Rules have to be developed to determine to

What degree advancement will be based on length of service rather than

merit;

With what frequency pay increases will be awarded;

How controls over wage and salary costs can be maintained;

What rules will govern promotion from one pay grade to another, etc.

Basic Concepts of Wage and Salary

Administration4

Compensation may be defined as money received in the performance of work,

plus the many kinds of benefits and services that organizations provide to their

employees. ‘Money’ is included under direct compensation (popularly known as

wages, i.e., gross pay); while benefits come under indirect compensation, and may

consist of accident and health insurance, the employer’s contribution to retirement,

pay for vacation or illness, and employer’s required payments for employee

welfare as social security.

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A ‘wage’ (or pay) is the remuneration paid, for the service of labour in production,

periodically to an employee/worker. “Wages” usually refer to the hourly rate or

daily rate paid to such groups as production and maintenance employees (“blue-

collar workers”).

‘Salary’ normally refers to the weekly or monthly rates paid to clerical,

administrative and professional employees (“white-collar workers”).

Earnings are the total amount of remuneration received by an employee during a

given period. This includes salary, dearness allowance; house rent allowance, city

compensation allowance, other allowance, overtime payments, etc.

Nominal Wage- It is the wage paid or received in monetary terms. It is also known

as money wage.

Real Wage- It is the amount of wage arrived after discounting nominal wage by

the living cost. It represents the purchasing power of money wage.

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Take Home Salary- It is the amount of salary left to the employee after making

authorized deductions like contribution to the provident fund, life insurance

premium, income tax and other charges.

Cost to the Company (CTC)- The concept ‘cost to the company’ includes payment

made to the employee including pensions, health insurance, death in service,

gratuity, company car or own the car scheme, child care provisions, subsidized

meals, etc. The CTC includes all the investments made by the employer to the

employee including the monetary and non-monetary benefits.

The ‘wage levels’ represent the money an average worker makes in a geographic

area or in his organisation.

Wage Rate- It is the amount of remuneration to a unit of time excluding incentives,

overtime pay, etc.

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❑ The term ‘Wage Structure’ is used to describe wage/salary relationships within a

particular grouping. The grouping can be according to occupation, or organisation,

such as wage structure of craftsman (carpenters, mechanics, bricklayers, etc.) The

Wage Structure or ‘Grade’ is comprised of jobs of approximately equal difficulty

or importance as determined by job evaluation.

Factors Affecting Wage and Salary

Administration8

The wage policies differ from organization to organization. Marginal units pay the

minimum necessary to attract the required number and kind of labour. Often, these

units pay only the minimum wage rates required by labour legislation, and recruit

marginal labour.

At the other extreme, some units pay well above the going rates in the labour

market. They do so to attract and retain the highest caliber of the force. Some

managers believe in the economy of higher wages. They feel that, by paying high

wages, they would attract better workers who will produce more than the average

worker in the industry.

Most units give greater weight to two wage criteria, viz., job requirements and the

prevailing rates of wages in the labour market. Other factors, such as changes in

the cost of living, the supply and demand of labour, and the ability to pay are

accorded a secondary importance.

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The main factors influencing wage or salary levels are:

1. Job Needs – Different types of jobs require different levels of both physical

and mental skills. Some require high skills so pay is high on the other hand simple,

routine jobs where skill requirement is low are paid low.

2. Ability to pay – Ability to pay depends upon the profit earning capacity of the

organization MNCs pay relatively higher salaries due to their higher paying

capacity.

3. Cost of living – Due to inflation, the real wages decline affecting the

purchasing power of workers. Therefore, dearness allowance is given according to

change in consumer price index.

4. Prevailing wage rates – Prevailing wage rates in competing firms with in an

industry are taken into account while fixing wages & company that does not pay

comparable wages may find it difficult to attract and retain talent.

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5. Union – Highly unionized sectors generally have higher wages because well-

organised unions can exert pressure on management and obtain all sorts of

benefits and concession to workers.

6. Productivity – In many organizations, pay is linked to productivity or

performance of workers.

7. Demand and supply of labour – The demand for and the supply of certain

skills determine prevailing wage rates. E.g. – High demand for IT Professionals

ensure higher pay for them.

8. State Regulations – Wage policy and laws of the government exercise a

significant influence on wage levels. Government has enacted laws to protect the

interests of the working class. No organization can violate laws relating to

minimum wages, payment of bonus, dearness allowance and other allowance etc.

Classification of Wages

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Wages can be classified as:

1. Living wages

2. Minimum wages

3. Fair Wage

1. Living Wages: This has been defined in different ways in different countries. The

most suitable definition is given by Justice Higgin, “Living wages should be

sufficient to ensure the workman’s food, shelter and clothing; frugal comfort

provision, evil days, etc., as the skill of an artisan, if he is one.”

According to the fair wages committee report, the living wages must be a le to

make the male earner to provide himself and his family not only basic necessities,

viz.- food, clothing and shelter but also education for the children and protection

against ill-health and essential social needs. The living wages means provision for

the bare necessities with certain amenities considered necessary for the well-being

of a worker in terms of his social status. This provision has the reference to Article

43 of Indian Constitution.

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2. Minimum Wages: This is the lowest wage. With this wage a worker and his

family can just pull on the life; in other words, it can provide a minimum level of

subsistence. This includes food, shelter and clothing. Minimum Wage in a country is

fixed by the Government in consultation with business organisations and Trade

Unions. When minimum wages are fixed, it is the duty of the government that

employers are not exploiting the work force.

The law for minimum wages is fixed from time to time by Administrative

Commission of the Government with variation in the wage rates. The very purpose

of fixation of wages from time to time has become necessary due to variation in

the price level as a sequel to varying economic conditions.

Government of India passed the Minimum Wage Act in 1948. According to the

Act, wage should include such factors as local economic conditions, transportation

cost and the size of units in the industry in fixing Minimum Wages. Minimum wage

act is supposed to have the following benefits:

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This law prevents exploitation of employees, undue advantage of employing

individuals who possess very little bargaining power.

The law abolishes the competition in lower strata of workers with the upper grades

and tend to prevent depressing the wages.

The productivity of industry is increased by foreign employees to use the most

efficient production methods and ultramodern equipment in order to enable

employees earn their living /wages and at the same time the worker is stimulated

to increase his efficiency so as to help him hold his position.

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3. Fair Wage: Fair wage, according to the committee on 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 set by the capacity of

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

of the industry to pay.

The fair wage depends on considerations of such factors as:

(i) The productivity of labor,

(ii) The prevailing rates of wages in the same or neighboring localities,

(iii) The level of the national income and its distribution, and

(iv) The place of the industry in the economy of the country.

Difference between Money Wages and Real

Wages15

Economists have differentiated between money wages and real wages. Money

wages are the wages received by a worker in the form of money.

Therefore, money wages are also called nominal wages. For example, a worker

gets Rs. 200 from his/her organization in exchange of services rendered by

him/her.

In this case, the amount of Rs. 200 is regarded as a money wage. On the other

hand, real wages can be defined as the amount of goods and services that a

worker purchases from his/her money wages. Therefore, real wages are the

purchasing power of money wages.

According to classical theories, the supply of labor is determined by the real

wages. However, according to Keynes, the supply of labor depends on the wages

received in terms of money or nominal wages. Let us understand the difference

between nominal wages and real wages with the help of an example. Suppose a

worker earns Rs. 100 per day and his/her wages are increased to Rs. 120. In such

a case, it is not necessary that his/her economic condition or purchasing power will

increase.

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The economic condition of a worker depends on the amount of goods and services

he/she can purchase with money wages. In case, the prices of goods and services

are doubled, the worker would need the double amount of his/her money wages

what he/she is getting at present to purchase goods and services. Therefore, the

economic condition of an individual is determined by his/her real wages.

The following is the formula for determining real wages:

W= (MW/P) * 100

Where,

W= Real wages

MW= Money Wages

P= Level of price.

Methods of Wage Payment

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Definition: A Wage is a monetary compensation given by the employer to the

employee (labor) for the amount of work done on an hourly, weekly or monthly

basis. The following points highlight the top three methods of wage payments. The

methods are:

1. Time Rate System

2. Piece Rate System

3. Incentive Wage System

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1. Time Rate System: Under this method of wage payment, the workers are paid the

wages on the basis of time. In this system of wage payment, the workers are paid

the wages on the basis of time as, per hour, per day, per week, per fortnight or per

month etc. This system does not consider the production of the employees during this

time. The amount of wages under this system is calculated as under:

Wages = Time spent by the worker × Rate of wages according to time.

Suitability of Time Rate System: This system of Wage Payment is particularly suitable

in the following circumstances:

1. When it is not possible to measure the production in terms of units or in any other

terms.

2. When the work is of high standard.

3. When it is not possible to divide the production into units.

4. When the production is of the nature that it requires efficiency more than the speed.

5. When the worker is undertraining.

Merits of Time Rate System

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Simplicity: It is very easy to calculate the amount of wage under this system.

Certainty of the Amount of the Remuneration: This system of wage payment

provides certainty of the amount of wage payment to the employee. It develops

the feeling of confidence and certainty among them.

High Quality of Production: As this system of wage payment has no concern with

quantity of production, quality of production produced by the workers under this

system is very high.

Proper Utilisation of the Factors of Production: As this system is not related with

speed, the workers perform their work in very confident manner. They make the

best Utilisation of the factors of production.

Co-Operation between Labour and Capital: This system of wage payment brings

the industrial peace because it satisfies the workers and the industrialists. Thus, it

develops harmony and cooperation between labour and capital.

Demerits of Time Rate System

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Need of Intensive Supervision: This system requires intensive supervision over

workers. It increases the cost of supervision.

Lack of Incentive: This system of wage payment makes equal payment to both the

efficient and inefficient workers. Therefore, efficient workers do not get any

incentive for more production.

Encouragement of Labour Unions: This system encourages labour unions.

Sometimes, these labour unions misuse their powers.

Misuse of Time by Workers: Under this system of wage payment, the workers do

not make proper Utilisation by their time.

Fall in the Quantity of Production: Under this system of wage payment, the

quantity of production decreases because the workers do not get any incentive for

increasing the production.

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2. Piece Rate System: Under this system of wage payment, the workers are paid the

wages on the basis of quantity and quality of work performed by them. Under this

system, the rates of wages are determined according to quantity and quality of

work and the workers are paid according to these rates. The amount of wages to

be paid to a worker under this system is calculated as under:

Wages = Units of production × Rate per unit.

Suitability of Piece Rate System: This system of wage payment is very suitable in the

following conditions:

1. When the work is of standard nature.

2. When the work can be measured easily.

3. When there is a great need of increase in the production.

Merits of Piece Rate System

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Incentive to More Work: This system encourages the workers to do more and more

work because they get their wages according to their work.

Proper Utilisation of Machines: Under this system, the workers use their machines

and equipment with proper care because they feel that if their machine is out of

order, their work will be held up and their wages will be low.

Increase in the Quantity of Production: The system of wage payment gets more

production because all the workers make their best efforts to increase the

production.

Best Utilization of Time: As the workers are paid according to their work, they

make the best possible utilisation of their time. They do not want to waste their

time.

Decrease in the Cost of Production: This system decreases the cost of production

because the maximum production is done by the workers in the minimum time. It

decreases the cost per unit of production also.

Demerits of Piece Rate System

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Lack of Unity among Workers: This system lacks the unity and mutual co-operation

among workers. They feel themselves competitor to each other.

Loss of Workers on the Failure of Machines etc.: It because of any reason, the

machines fail or the power fails, the work of workers is held up and they lose their

wages.

Misuse of the Factors of Production: The workers do not pay proper attention

towards the factors of production. They only want to increase the speed of

production.

Adverse Effect on the Health of Workers: This system motivates the workers to do

more and more work. It affects the health of workers adversely.

Low Quality of Production: This system of wage payment does not pay any

attention on the quality of production. As a result of it the quality of production

falls down.

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3. Incentive Wage System: There are two basic systems of wage payment—time

rate system and piece rate system. Both the systems have their merits and

demerits. No system can be considered suitable for all times and under all

circumstances. To maintain the merits of both the systems and to overcome the

demerits of these systems, some experts have developed the systems of incentives

wage. These systems are also known as incentive wage systems, progressive wage

system and bonus schemes etc. Under these systems, both the time and speed are

considered as the basis of wage payment.

These systems provide incentives to the workers to produce more and more

maintaining the quality as well. The workers are paid bonus or premium for the

additional work. It is important to note that almost all the systems incentive wages

provide for minimum guaranteed wages to the workers.

Characteristics of an Ideal Incentive Wage

System25

It must be easy to calculate and to understand.

The standards of work must be determined on scientific basis.

It must establish direct relationship between efforts and remuneration.

It must give a guarantee of minimum wage to all the workers.

It must be in the interests of both the employers and the employees.

Advantages of Incentive Wage System

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There is increase in the prospect of workers to earn more. As shown by F. Herzberg

good salary is one of the hygiene factors in the absence of which people are

unhappy and dissatisfied. Wage incentive offers them the prospect of earning more.

The scientific work study which is done before introducing a wage incentive plan

brings about improvements in methods, workflow, and man-machine relationship and

so on.

There is effective reduction in the supervision costs Closer supervision of employees

becomes unnecessary because workers become more responsible. Rather than the

supervisor chasing the workers the workers themselves sometimes chase the supervisor

for materials, tools, etc.

Employees promptly expose all such problems before management which retard

their earnings. Management becomes more alert in areas such as flow of process

materials, adequate spares, etc.

Employees are encouraged to become “inventive”. They invent and adopt ways and

means to achieve their production targets with lesser exertion and lesser expense of

energy. They come forward with new ideas and suggestions.

Effects of Incentive Wage System

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Experience has shown that incentive compensation is not an unmixed blessing. It

may produce certain ill-effects unless precautionary steps are taken to check them

in advance. These ill-effects are as under:

There is tendency among the workers to sacrifice quality for the sake of quantity.

This calls for a very strict system of checking and inspection.

In the absence of adequate provisions incentive payment brings about certain

rigidity in the operations. This makes it difficult for the management to revise

norms and rates following changes in technology, methods, machines, materials etc.

Employees very often ask for compensation whenever production flow is disrupted

due to the fault of management.

Unless greater vigilance is exercised there is a danger of workers disregarding

safety regulations.

Unless a maximum ceiling on incentive earning is fixed some workers tend to

overwork and undermine their health.

Incentives Types

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The term incentive means an inducement which rouses or stimulates one to action in

a desired direction. An incentive has a motivational power; a large number of

incentives the modern organisations use to motivate their employees may be

broadly grouped into

Financial Incentives,

Non-Financial Incentives.

1. Financial Incentives: Money is an important motivator. Common uses of money as

incentive are in the form of wages and salaries, bonus, retirement benefits,

medical reimbursement, etc. Management needs to increase these financial

incentives making wages and salaries competitive between various organisations

so as to attract and hold force. Money plays a significant role in satisfying

physiological and security/social needs. As money is recognized as a basis of

status, respect and power, it also helps satisfy the social needs of the people. It is

important to mention that once the physiological and security needs are satisfied,

money ceases to be motivator. Money then becomes, what Herzberg termed,

hygiene and maintenance factor.

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2. Non-Financial Incentive: Man is a wanting animal. Once money satisfies his/her

physiological and security needs, it ceases to be a motivating force. Then, higher

order needs for status and recognition and ego in the society emerge. The

following non-financial incentives help management satisfy its employees’ these

needs:

➢ Appreciation of Work Done: Appreciation or praise for work done be it at home,

at school/ university or at work place, serves as an effective non-financial

incentive. Appreciation satisfies one’s ego needs. However, managers need to use

this incentive with great degree of caution because praising an incompetent

employee may create resentment among competent employees.

➢ Competition: If there exists, a healthy competition among the employees both at

individual and group levels, it will prompt them to exert more to achieve their

personnel or group goals. Thus, competition serves as a non-financial incentive for

employees to put in more efforts at their works.

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➢ Group Incentives: Sometimes, group incentives act as more effective than

individual incentives to motivate the employees. Particularly, when the prestige or

even existence of a group is at stake, the group members work with a team spirit.

This results in high morale and, in turn, increases in its productivity.

➢ Knowledge of the Results: Knowledge of the results of work done leads to

employee satisfaction. An employee derives satisfaction when his/her boss

appreciates the work he/she has done just as an MBA student gets satisfaction

when his/her Professor appreciates the seminar he/ she presented in the class.

➢ Worker’s Participation in Management: Inviting workers to participate in

management gives worker’s a psychological satisfaction that their voices are also

heard. This imbibes a sense of importance among the workers.

➢ Opportunity for Growth: Man is not only a wanting animal but an ambitious

creature also. People always need to grow in their career. So, if the employees

are provided proper opportunities for growth and career advancement and

chance to develop their personality, they feel much satisfied and become more

committed to the organizational goals.

The End

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