UNIT-IV

Lesson 10
WAGE AND SALARY ADMINISTRATION
Concept

‘Wage and salary Administration’ relates to the establishment and implementation of

sound policies and practices of employee compensation. It include areas like job
evaluation surveys of wage and salaries, analysis or 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.

The basic purpose of wage and salary administration is to establish and maintain an
equitable wage and salary structure. Its secondary objective is the establishment and
maintenance of an equitable labour cost structure, i.e., an optimal balancing of
conflicting personnel interests so that the satisfaction of employees and employers is
maximized and conflicts minimized. The wage and salary administration is concerned
with the financial aspects of needs motivation and rewards, where Manager analyse
and interpret the needs of their employees so that reward can be individually designed
to satisfy these needs. The concept expressed that “people do what they do to satisfy
some need, before they do anything, they look for a reward or pay-off”. A sound wage
and salary administration tries to achieve these objectives:

From the management point of view two main types of reward are frequently
distinguished

A. The economic or monetary or financial rewards.

B. Non economic or non monetary non financial rewards.
The non economic consideration involves the job itself as well as the climate of work,
Job enrichment, privileges, participation, status, recognition and opportunities for
employee satisfaction.
The economic consideration is basic element or device by which individuals are
attracted to an organization and this maximum effort, co-operation and loyalty may be
secured. The primary economic reward is pay in the form of wages or salaries as
compensation or remuneration.
The main purpose of developing different types of economic or monetary or financial
payment programme for employees is to introduce an input output mediator that serves
to maximum motivation to contribute to company goals.” or Payment programmes are
instituted “to provide inducements to individual that they may be encouraged to make
the best of their existing capacities.

Wage & Salary administration is concerned with the monetary or financial

aspects of needs. In wage & Salary administration managers translate selected
policy into a wide range of compensation programme from the simplest hourly
wage or monthly salary and combinations of wages and employee benefits &
services.

Wage and salary administration, “involves the selection, development and direction of
programmes designed to implement compensation or incentivation policy through
financial rewards. In wage and salary administration, managers translate selected
policy into a wide range of compensation programmes, from the simplest hourly wage or
monthly salary to much more complex incentive wage plans and combinations of wages
and employee benefits and services”.

Wage and salary administration relates to “the establishment and implementation of

sound policies and practices of employee compensation. It includes the areas as job
evaluation development and maintenance of wage structures, wage surveys, wage
incentives, wage changes and adjustments, supplementary payments, control of
compensation costs and other related pay items”.

For sound wage and salary administration, company wage level and wage structure and
wage or pay policies, procedures and systems etc., are considered.

Relevant Terms

(a) Wage
Wage includes all monetary payments based on time worked as an hourly rate.
“Wages are payments to hourly-rated production workers” and may be defined as
“the remuneration paid by the employer for the services of a worker who is
engaged by the hour, days, week or fortnight”.
(b) Salary
Salary designate monetary payments to clerical, supervisory, managerial or
professional employees. Salary relates to compensation usually paid or
calculated on a monthly or annual basis. ‘Hourly-rated’ payments as ‘wages’
have been the tradition in factory employment whereas monthly ‘salary’ has been
characteristic in the office situation.

(c) Earnings
Earnings are not the same as ‘wages’. Earnings represent the total amount of
pay the employee receives for his work in a given period of time and thus these
includes overtime payments, dearness and other allowances etc.

(d) Nominal and Real Wages

‘Nominal Wages’ are wages paid or received in terms of money. ‘Real Wages’
represent the purchasing power of money payments and these may be
calculated by dividing the money amounts (in terms of rupees or dollars etc.) by
an appropriate cost of living or consumer price index. In determining the real
wages, workers or employees also take into consideration various fringe benefits
like money value of food concessions, free housing accommodation and factors
like regularity of employment etc.

(e) Fringe benefits

Fringe benefits represent supplemental forms of payments beyond stated wage
or salary rates, either in money or financial rights, e.g., payment of bonus, profit-
sharing, pensions or insurance etc. that form part of the organization’s manpower
costs. Some fringe benefits relates mainly to employee security.

(f) Take-home pay

Take-home pay represent the amount of money left to the employee after
authorized deductions like those for social security, income tax and other its
changes.

(g) Incentive Wages or Wage Incentives

Incentive wages or wage incentives relate earnings to productivity and thus
include monetary payments which are connected to or linked with some
measurement of an individual’s output with the objectives of motivating the
employee for superior performance. The ‘piece rate’ is the simplest from of the
payment.

(h) Wage Rate

Wage rate represents the amount of money the employer pays for a unit of time
worked or for a unit of output produced. So two main widely prevalent types of
wage rates may be distinguished as ‘Time Rates’ and ‘Piece Rates’.
 (i) Wage Level and Wage Surveys
‘Wage-level’ of a company is usually expressed either as an average figure for
all jobs or through a gross comparison of job rates for different key jobs with
rates for comparable jobs in other companies. A company’s wage-level is
generally determined by the information obtained from ‘wage-surveys’ conducted
within the industry or in the geographical locality.

Wage and salary surveys may be conducted by individual companies or by

groups of companies (with an inter-company committee formed specifically for
this purpose, i.e. to plan and conduct the survey).

Concept of wages

The fair wage committee has recommended three concept of wage payment as-

1.) Minimum wages – maintain the living standard of workers

2) Fair wages – equal work equal pay

3) Living wages – maintain the standard of living of workers

Minimum wages

Minimum wage is that wage which must be paid irrespective of the extent of profit, the
financial condition of the establishment or the availability of workman on lower wages.
This wage is independent of the industry and applies to all big or small. It sets the
lowest limit beyond which it can not be allowed to sink in all humanity.

Fair wages

This wage is above the minimum wages but below the living wages. Fair wage is
determined on –

(j) Productivity of labor

(ii) Prevailing rate of wages in the same or similar occupation in the same or
neighbouring localities

(iii) Level of national income

Living wages

This wage is the highest among all the wages. Living wage is provided to workers for
prevention of his efficiency. Fair wages in one country may be treated as a living wages
in another, similarly a living wage in one country may be regarded as fair wages in
another country.
Wage and salary administrators often conduct periodic ‘wage and salary surveys’
ranging from simple and informal checks with their counterparts in other companies to
elaborate questionnaires based on exchange wage/salary information with each other
through ‘wage and salary surveys’. Wage and salary surveys may be conducted by
individual companies or by groups of companies by trade/employer associations
created primarily for collective bargaining firms or professional survey
committee/companies or by government.

Principles governing ‘wage and salary surveys

(i) Careful selection of key jobs for which date are desired

(ii) Appropriate selection of the number of particular companies so as to provide

a representative and adequate sample as required

(iii) Proper determination of the specific information as ‘base rates’ or hiring rates
‘earnings’ ‘rate ranges’ minimum and maximum amounts paid to
employees/workers on the particular jobs; ‘wage changes’ ‘policies and
practices’ related to fringe benefits.

Wage Structure:
Wage structure signifies “the relationship of wage rates for all the jobs within the
company, industry or labor market area’. The internal wage structure of an organization
or company is established by the relative grading or positioning of jobs in terms of pay.

Purpose or Objectives of Wage & Salary Administrative

1) The main or primary objective of wage and salary administration is to establish

and maintain a fair and equitable wage structure.

(i.e. changes of favoritism in respect of compensation to workers or employees should

be eliminated and efforts should be made to provide individuals in accordance with
requirement of their job. level of the company or organization should be so evolved
that it provides better motivation to employees and raises their morale.

2) The secondary objective of wage and salary administration is to establish and

maintain an equitable labor-cost-structure.

Alert wage and salary administrators recognize the importance of the close connection
of the organization’s total compensation system with labor costs, output and employee
productivity. Wage and salary administration aims at planning and controlling the labor
costs so as to secure “an optimal balancing of conflicting personnel interests in order
that the satisfactions of both the employees and management/employers are maximized
and the chances of conflicts or grievances over wage inequities are minimized”.
Principles for Wage & Salary Administration

The wage or compensation policy in all organizations is a complex and sensitive area of
personnel management as the relative status of workers/employees in the society, their
commitment to work and attitude towards management as well as their morale and
motivation towards productivity etc. are conditioned by the wages or salaries. Other
Circumstances for determination wage and salary are

1. Demand for and supply of labor, Labor market conditions and prevailing
market rates:
A ‘Labor Market’ as “a process by which supplies of particular type of labor
balance or seek to obtain a balance’. The labor market is the place for the
operation of this process. It is only device for sorting out workers with varying
skills and interests among the multitude of different jobs in the economy.

2 Union pressures:
Union pressures exert considerable influence upon the wage and salary rates.
Generally, the more powerful union is or the stronger is its bargaining power
often measured in terms of its membership, financial strength and nature of its
leadership, the greater will be the possibility of higher wages and salaries.

3. Company size and ability to pay:

The large is the company, the better are the chances of good sales and
therefore, high profits earned by it. Large companies or organizations tend to
pay higher wages and salaries relatively to smaller organizations that may be
earning low profits or at times may even be running at a loss. Financial problems
are more likely the develop in small organizations or firms, wage levels tend to be
consistently higher among the large companies or corporations.

4. Product market competition and prospects for profits:

If competition for the company’s sales and profits is extremely sharp, the
organization tends to keep its labor costs to a bare minimum by the devices as
the assignment of apprentices to full-time work. If the prospects for profits are
good, the wage level in the organization is likely to rise even without the advent
of union pressures.

5. Psychological and sociological / ethical factors:

These factors exert a considerable influence on the company wage level
because if the employees are dissatisfied either with their wage/pay or with other
job-related factors, a sizeable pressure for wage/salary increases would develop
frequently which may at times not be justified on purely economic grounds.

6. Government impact on policy and action in wage determination:

Like the pressures from unions, there are pressures from government also upon
the company wage or compensation policies and practices. Acting in public
interest, governments pass legislation, issue executive orders and establish
 statutory boards and commissions with a view to regulated
compensation/remuneration policies and practices for the purpose of attaining
specific objectives of social and economic policy.

7. The ‘Cost of Living or consumer price index’

Criterion is often regarded as automatic minimum equity pay criterion. Its

significance has increased in the U.S.A. particularly because many companies
through the use of ‘escalator clauses’ in labor contracts have agreed to tie wage
increases to changes in the cost of living according to the consumer price index
numbers.

Firstly, wages are usually tied to cost of living during periods of rising prices when a
company or its management may not be reluctant to grant wage increases but during
deflationary periods when cost of living goes down, the workers or employees may be
irritated by periodic readjustments of wages, howsoever small these may be.

Secondly, if all companies or managements follow this practice, a vicious circle – a price
rise calling for wage increases which, in turn, would increase costs leading to a further
increase in prices and so on-may be created that may bring about an inflationary spiral
detrimental to all.

Lastly, there may be controversies regarding the computation of cost of living or

consumer price index numbers, i.e., there may be a difference of opinions about the
percentage rise in costs.

Ideal ‘Family Budgets’ that may serve to specify the ‘minimum’ wage required to
maintain standard of living just to be adequate. An example of this is provided by ‘The
City Workers’ Family Budget prepared by the federal government in the U.S.A.
Enquiries pertaining to ‘Family Budgets’ of workers in various industries have been
conducted in India as well, though a number of difficulties have been experienced here
in conducting such enquiries or surveys for the preparation of ‘Family Budgets’ because
of the general illiteracy of workers, problem of determining the size of the family and
number of dependants due to the peculiar composition of an India family.

The concept of ‘Living Wage’ was first defined in Austral a as the lowest wage which
could be paid to unskilled labour based on “the normal needs of an average employee,
regarded as a human being, living in a civilized community. Practically, a ‘Living Wage’
is “a wage which provides the worker with a standard of life furnishing him with
necessaries of life plus certain amenities considered necessary for the well-being of the
worker determined in terms of the position of the worker in a particular denomination.
Compensation Plans: Payment Systems
The actual Payment of wage and salaries is paid by cash or cheque or credit to the
employee’s bank account from the accountant or controller of accounts.
The total pay or compensation of employee consists of two basic elements:
(i) Money wages or salaries
(ii) Supplementary payment plans as bonus, profit sharing, deferred, extended
or delayed compensation plans or payments and fringe benefits of
economic value. Fringe benefits in form of vacations, insurance, pension
and similar other provisions mainly relates to employee security.

Hourly or Rank and file employees counts as largest percentage of workers in

organization, draw wages rather than salaries generally on the basis of some job
evaluation systems. In India, workers are not paid consolidated wages and their money
earning are divided into basic wages, dearness allowance and profit bonus. Generally a
large component of the wages based on cost of living index.

SELF CHECK QUESTION

Long answer type questions

1. Examine the efficiency of various techniques or methods of Executive

Developments.

2. Discuss the merits and limitations of time wage payment system. What
improvements would you suggest in this system?

Short answer type questions

1. Define the following

a) Consumer price index

b) Objective of wage and salary administration

c) Minimum wages

d) Fair wages

e) Living wages
2. Discuss the principles of wage and salary administration

Objective type questions

1. When employer pays money for a unit of time worked as time rate and piece rate
System is called as _________________________

(a) wage incentive (b) real wage (c) wage rate (d) earning (e) all of these

(f) none of these

Ans. (c)

2. Compensation of employer generally consist of ______________________

(a) wages (b) salary (c) supplementary payment plan (d) all of these

(e) none of these

Ans. (d)

3. When standard output is based upon some standard time, the situation comes

under____________________________________

(a) time wage system (b) guarantee wage system (c) piece wage system

(d) all of these (e) none of these

Ans. (c)

4. Living wages generally provides workers for prevention of their ______________

(a) efficiency (b) effectiveness (c) motivation (d) all of these (e) none of these

Ans. (a)

5. Piece wage system always provides main advantage as______________________

(a) increase production (b) increase productivity

(c) increase production and productivity (d) none of these

Ans. (c)