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Monday, October 19, 2009

Factors influencing wage and salary structure and administration

Introduction
The first and the most important problem in wage and salary administration is the establishment of base compensation for the job. This problem is enormously complicated by such factors as Supply and Demand, Labor organization, the firm’s ability to pay, Variations in productivity and Cost of living, Government legislation, Including CIVICS RIGHTS ACT.
In order to attract and retain needed personnel for the organization, employees must perceive that compensation offered is equitable in relation to their inputs and relative contributions. The most likely to be used method to solve this problem at present would be job evaluation, a systematic and orderly process for establishing the worth of job.
The importance of a pay system to an event of major importance to employees and its effects upon them cannot be ignored. It is a valid system if it results in a structure acceptable to both employee and employer. In general, structures that are internally and externally consistent have the greatest chances of affecting overall satisfaction. Under reward, Over-reward and inconsistency of reward not only tend to lead to lower satisfaction but encourage behaviour that often proves dysfunctional to organizational objectives. A sound, systematic, consistent system of compensation determination will do much to promote equity and satisfaction, provided that such a system is understood and accepted by most employees.

Factors influencing wage and salary structure and administration
The wage policies of different organization vary some what. Marginal units pay the minimum necessary to attract the required number of kind of labour. Often, these units pay minimum wage rates required by labour legislation, and recruit marginal labour. At the other extreme, some units pay well about going rates in the labour market. They do so to attract and retain the highest caliber of labour 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 average worker in the industry. This greater production per employee means greater output per man hour. Hence, labour costs may turn those existing in firms using marginal labour. Some units pay high wages because of a combination of a favourable product market demand, higher ability to pay and the bargaining power of trade union. But a large number of them seek to be competitive in their wage programme, i.e., they aim at paying somewhere near the going rate in the labour they employ. 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 ability to pay are accorded a secondary importance.
A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Beside the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
• The organizations ability to pay;
• Supply and demand of labour;
• The prevailing market rate;
• The cost of living;
• Living wage;
• Productivity;
• Trade unions bargaining power;
• Job requirements;
• Managerial attitudes; and
• Psychological and sociological factors.
• Levels of skills available in the market.

(1) The organizations ability to pay: Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher those which running at a loss or earning low profits because of higher cost of production or low sales. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need to pay no more if they wish to attract and keep workers. In the long run, the ability to pay is important. During the time of prosperity, pay high wages to carry on profitable operations and because of their increased ability to pay. But during the period of depression, wages are cut because the funds are not available. Marginal firms and non profit organization (like hospitals and educational institutions) pay relatively wages because of low or non profits.

(2) Supply and demand of labour: The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level.
If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills. When prolonged and acuter, these labour market pressures probably force most organizations to reclassify hard to fill jobs at a higher level” that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is a great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on going wage concepts since; in essence, all of these remuneration standards are determined by immediate market forces and factors.

(3) Prevailing market rate: This is known as the ‘comparable wage’ or ‘going wage rate’, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons. First, competition demand that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade union encourages this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, functionally related firms in the same industry requires essentially the same quality of employees, with same skill and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organizations competitors, it will not be able to attract and maintain the sufficient quantity and quality of manpower. Some companies pay on a high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organizations pay lower wages because economically they have to or because by lowering hiring requirements they can keep jobs adequately manned.

(4) The cost of living: The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living.” escalator clauses” are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions.

(5) The living wage: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favor using the concepts of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a workers budge is open to argument since it is based on subjective opinion.

(6) Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not be overlooked by the management in establishing wage rate. Sociologically and ethically, people feel that “equal work should carry equal wages”that“wages should be commensurate with their efforts,”that“they are not exploited, and that no distinction is made on the basis of caste, colour, sex or religion.” To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration.

(7) Skill Levels Available in the Market: With the rapid growth of industries business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs.

ADMINISTRATION OF WAGES AND SALARIES
Wage and salary administration should be controlled by some proper agency. This responsibility may be entrusted to the personnel department or to some job executive. Since the problem of wages and salary is very delicate and complicated, it is usually entrusted to a Committee composed of high-ranking executives representing major line organizations. The major functions of such Committee are:
a) Approval and/or recommendation to management on job evaluation methods and findings;
b) Review and recommendation of basic wage and salary structure;
c) Help in the formulation of wage policies from time to time;
d) Co-ordination and review of relative departmental rates to ensure conformity; and
e) Review of budget estimates for wage and salary adjustments and increases.

This Committee should be supported by the advice of the technical staff. Such staff committees may be for job evolution. Job description, merit rating, wage and salary surveys in an industry, and for a review of present wage rates procedure and policies.

Alternatively, the over all plan is first prepared by the Personnel Manager in consultation and discussions with senior members of other departments. It is then submitted for final approval of the top executive. Once he has given his approval, for the wage and salary structure and the rules for administration, its implementation becomes a joint effort of all heads of the departments. The actual appraisal of the performance of subordinates is carried out by the various managers, who in turn submit their recommendations to higher authority and the latter, in turn, to the personnel department. The personnel department ordinarily reviews recommendations to ensure compliance with established rules of administration. In unusual cases of serious disagreement, the president makes the final decision.

PRINCIPLES OF WAGES AND SALARY ADMINISTRATION
The generally accepted principles governing the fixation of wages and salary are:
a) There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements, such as skill effort, responsibility or job or working conditions and mental and physical requirements.
b) The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. The labour market criterion is most commonly used.
c) The plan should carefully distinguish between jobs and employees. A job carries a certain wage rate, and a person is assigned to fill it that rate. Exceptions sometimes occur in very high level jobs in which the job holder may make the job large or small, depending upon his ability and contributions.
d) Equal pay for equal work, i.e., if two jobs have equal difficulty requirements, the pay should be the same, regardless of who fills them.
e) An equitable practice should be adopted for the recognition of individual differences in ability and contribution. For some units, this may take the from of rate ranges, with in grade increases; in others, it may be a wage incentive plan; in still others, it may take the from of closely integrated sequences of job promotion.
f) 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.
g) The employees and the trade union, if there is one, should be informed about the procedure used to establish wage rates. Every employee should be informed of his own position, and of the wage and salary structure. Secrecy in wage matters should not be used as a cover up for haphazard and unreasonable wage programme.
h) The wage should be sufficient to ensure for the worker and his family reasonable standard of living. Workers should receive a guaranteed minimum wage to protect them against conditions beyond their control.
i) The wage and salary structure should be flexible so that changing conditions can be easily met.
j) Prompt and correct payments of the dues of the employees must be ensured and arrears of payment should not accumulate.
k) For revision of wages, a Wage Committee should always be preferred to the individual judgement, however unbiased, or a manager.
l) The wage and salary payment must fulfill a wide variety of human needs, including the need for self-actualisation. It has been recognized that “money is the only form of incentive which is wholly negotiable, appealing to the widest possible range of seekers. Monetary payment often acts as motivation and satisfies interdependently of other job factors.

Desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high caliber employees, to reduced turnover, and to provide a high living standard for employees as possible also appear to be factors in management’s wage policy decisions.

(10) Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not be overlooked by the management in establishing wage rate. Sociologically and ethically, people feel that “equal work should carry equal wages”that“wages should be commensurate with their efforts,”that“they are not exploited, and that no distinction is made on the basis of caste, colour, sex or religion.” To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration.

(11) Skill Levels Available in the Market: With the rapid growth of industries business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at a faster rate. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs.

CASE STUDY:
MTB PRIVATE LIMITED

It was established in the year 1961. It is a manufacturing company which is mainly into weaving cloth, bleaching, dying & finishing. The total employee strength of the company is around 400. It is the 2nd largest cloth manufacturing company in Nashik. There are mainly 2 types of labour-force:
a) Contractual
b) Permanent
• The workers on contractual basis are paid a fixed wage of 120 rupees per day, which is also the minimum wage applicable as per the MINIMUM WAGES ACT.
• They are paid 60% for over-time. On the other hand the workers on permanent basis are paid a piece rate basis (i.e. production basis). However the salary of the engineers and all the other employees but the labour is fixed.
• The contractual workers are not entitled to festive bonuses, but there is a drawback for the company in employing permanent labour against contractual labour which is that the permanent labour force has to be paid 40% of their average wages even when they are not on work that is strike or ideal. Also the permanent labours are entitled to wage increment every 6-8 months.
• Talking about the skills of the labours special emphasis is laid. Whenever a labour acquires the necessary skills and become competent enough he is promoted.
• Since the labours easily available in the surrounding areas of Nashik the labours have don’t much say in their wages. Mostly due to the huge supply of labours also the trade unions are hesitant to ask for a wage implement for the above mentioned reason.
• The wages to the labours are ample for them to sustain themselves. Also the labours are fully content with their wage rates.
• The medical expenses and educational expenses of the labourer’s childrens are borne by the company. This acts as in incentives for the labourers.
• The production technique in the company where labour intensive. However recently (before 6 months) the entire manufacturing process in the company has undergone a drastic change. They have automated most of the manufacturing process which resulted in a major retrenchment of the labour force. However it was off-set by the increasing salary of the remaining labours as the production increased and since they were paid on piece-rate bases. Their salaries proportionality increases

HORROR STORIES IN INDIA
1.BHARAT OPTHALMIC GLASSES – Where employee benefits exceed turn-over…!
During the period 1984-85 to 1990-91, the gross benefits per annum to 521 employers of Bharat Opthalmic Glass (BOG) exceeded turnover of the company – every year. The employees have successfully brought down capacity utilization to just 27% of the achievable capacity. When the government released 76 Lac to buy plant and machinery, BOG generously diverted 50% of the money to pay salaries and wages.

2. National Textile Corporation
NTC has 120 mills and 1.7 lacs workers. The accumulated losses are over 3000 crores; the yearly increase in losses being over Rs.400 crore; 40 Mills are totally useless, 40 likely to become useless very soon and the balance 40 are terminally sick. During the last 20 years the government spent nearly Rs.2000 crore on protecting jobs.

3. Hindustan Fertilizer Corporation Ltd. Haldia
The plant was shut down in August, 1986 but the 1500 strong employees continue to receive all their salaries and wages totaling to Rs 150-175 lacs per month. The company seems to run on the principle “No work but Full pay”. Even additional installments of DA are payable to them.
The accumulated losses up to 1992 were over Rs. 1400 crore.

4. Heavy Engineering Corporation
It is a company producing nothing. It has been established just to employ labour (over 17000 employees with annual losses running to over Rs.100 crore) established in collaboration with Soviet Union and Czechoslovakia (both these countries of course managed to vanish from the world map by 1992 it)

Wage Policy in India
Minimum wage, Fair wage and Living wage

Minimum Wage: Minimum wage is that which must invariably be paid whether the company, big or small, makes profits and not. It is the bare minimum that a worker can expect to get for services rendered by him. The 15th Indian labour conference (1957) formally quantified the term ‘minimum wages’ thus:
Uncalculating the minimum wage, the standard working class family should be taken to comprise three consumption units for one earner, the earning of women, children and adolescents being disregarded;
Minimum food requirements should be calculated on the basis of a set intake of calories as recommended by Dr Aykroyd for an average Indian adult of moderate activity;
Clothing requirements should be estimated on the basis of per capita consumption of 18 yards per annum which give for the average worker’s family of four a total of 74 yards;
In respect of housing, the rent corresponding to the minimum area provided for under government industrial housing scheme should be taken into consideration in fixing the minimum wage.
Fair wage: it is that wage which is above the minimum wage but below the living wage. According to the committee on fair wages, 1948, fair wage should be determined taking the following factors into account:
• The productivity of labour;
• The prevailing rates of wages in the same or similar occupations in the same region or neighbouring regions;
• The level of national income and its distribution;
• The place of industry in the economy of the country; and
• The employer’s capacity to pay.
Living wage: according to the committee on fair wages, the living wage is the highest among the three. It must provide (1) basic amenities of life,(2) efficiency of worker and (3) satisfy social needs of workers such as medical ,education, retirement, etc. ’living wage’ is a dynamic concept, which grows in line with the growth of the national economy.

State regulation of wages:
Minimum wages act, 1948
The Act prescribes minimum rate of wages certain sweated and unorganized sectors covered under this Act. The minimum wages can be fixed by hour, day, month or any other time period. The Act provides for setting up a tripartite body consisting of employees, unions and the government, to advise and assist in fixing and revising minimum wage rates. The rates could be subjected to revision at intervals not exceeding 5 years.

Payment of Wages Act, 1936
The main objective of the act is to provide for regular payment of wages without any unauthorized reductions to persons who are employed in any industrial establishment or factory. The Act prescribes all the permissible deductions to be made from the employees salary, for example fines, deductions for absence, deductions for loss of goods entrusted to worker, Provident fund, insurance premium, etc.

Wage Boards
This is one of the important institutions set up by the government of India for fixation and revision of wages. Separate wage boards are set up for separate industries. Government of India started instituting wage boards in accordance with the recommendations of the Second Five Year plan. Wage boards are not governed by any legislation but are appointed on an ad hoc basis by the government.
The wage boards take the following factors into consideration for fixing and revising the wages in various industries apart from the normal ones:
a) job evaluation
b) wage rates for similar jobs in comparable industries
c) existing levels of wage differentials and their desirability
d) Government’s objective regarding social justice, social equality, economic justice and economic equality.
e) Need for incentives, improvements in productivity, etc

The wage boards fix and revise the various components of wages like Basic Pay, DA, incentive earning, overtime pay, house rent allowance, and all other allowances.

Pay Commissions
Wages and allowances of Central and State government employees are determined through the pay commissions appointed by the appropriate government. So far the Central Government has appointed five pay commissions. The disputes arising out of pay commission awards and their implementation are decided by commissions of inquiry, adjudication machinery and the joint consultative machinery.

Where differentials perform important economic functions like labour productivity, attracting the people to different jobs. Since most of the workers are mobile with a view to maximizing their earnings, wage differentials reflect the variations in productivity, efficiency of management, maximum utilization of human force, etc. Attracting efficient workers, maximization of employee’s commitment, and development of skills. Knowledge, utilization of human resources, maximization of productivity can be fulfilled through wage differentials as the latter determines the direct allocation of manpower among different units, occupations and regions so that the overall production can be maximized. Thus, wage differentials provide an incentive for better allocation of human force – labour mobility among different regions and the like.
Wage differentials play a pivotal role in a planned economy in the regulation of wages and development of national wage policy by allocating the skilled human force on priority basis. Development of new skills, knowledge, etc. is an essential parts of human resource development. Shortage of technical and skilled personnel is not only a problem for industries but it creates bottlenecks in the attainment of planned goals. Thus, wage differentials, to a certain extent, are desirable from the viewpoint of national interest. As such, they probably become an essential part of the national wage policy. Complete uniform national wage policy is impracticable and undesirable.

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Factors influencing wage and salary structure and administration

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