Wage and Salary Administration free essay sample

Wages and salaries play a very important role in determining the conditions of employment. The relationship between employers and employees depends mainly on wages. Wage and salary administration refers to the framing and implementation of policies and practices pertaining to employee compensation. Its includes development of wage structure ,wage surveys, wage incentives, profit sharing, wage adjustments and other related items concerning payment. Wages and salaries constitute a major part of the total cost in most of the organization. . What is Wage and Salary The wage is the remuneration paid by the employers to his employees. According to laissez faire policy, wage is the price paid to the worker for the services he has sold to the employer. It is a compensation paid to the worker in return for the contribution he makes for the achievement of the corporate objectives (Khanzode, 1992: 118). Wage may be defined as payment for the use of labor (Khanna, 1992: 30-1). The wage is the price for the use of human efforts (Ahuja, 1993: 927). Wages is the widest sense means any economic compensation paid by the employer under some contract to his workers for the services rendered by them. Wage therefore includes family allowance, relief pay, financial support and other benefits. But, in the narrower sense, wages are the price paid for the services of labour in the process of production and include only the performance wages or wages proper. They are composed of two parts the basic wage and other allowance. As salary is a compensation to an employees for the personal services rendered on weekly, monthly or annual basis. They differ from employee to employee, and depend upon the nature of job, seniority and merit. 2. 1 Difference between Wage and Salary Wage is compensation to the employees for services rendered to the organization. In case the quantum of services rendered is difficult to measure, then the payment is called salary. Normally the wage period is shorter than the salary period. Wage usually refers to an hourly rate, and salary to a weekly or semi-monthly rate. So if a wage earner works 40 hours one week and 45 the next week, he gets paid more for the second week. A salaried worker works long enough to get the job done and usually gets the same pay every payday. Salary workers tend to get better benefits. They also get paid time off, which is not always true for hourly workers. They don’t have to punch a time clock. And the salary is a fixed amount every pay period, which makes it easier to set a budget. Usually people checking credit prefers to see a salary, which provides a consistent pay without any fluctuations due to schedules changes and illness etc. On the plus side, hourly workers get paid. Wage is paid to the labor directly involved in production either receives money hourly, weekly or monthly . while salary is paid to the worker and staff related to administration and selling. Wages become part of the product cost, while the salary treated as selling and administrative expense. 3. 0 Wages and Salary Administration The term â€Å"wage and salary administration† has come to be accepted as the designation for that field of endeavour concerned with the establishment and implementation of sound policies and methods of employee compensation. It includes such areas as job evaluation, development and maintenances of wage structures, wage incentives, wage changes and adjustments, profit sharing, control of compensation costs and other related by items (Haq, 2000: 176). Wage administration is a systematic procedure for establishing a sound compensation structure. Wages and salary surveys are designed to determine the general pay level in the community and industry, thus giving a company a base for setting its own rates. Job evaluation establishes the relationships between wages on various jobs within the organization. Together, wage surveys and job evaluation set the base on minimum rates for each job (Strauss amp; Sayles, 1985: 123). Formerly wage rates in organization, whether in industry or in government organizations, tended to be established in a haphazard fashion, with little consideration given to consistency within the organization according to differentials in job requirements or to consistency with prevailing wages paid in other establishments. The movement in industry for the development and adoption of sound principles and practices of wage and salary administration had its infancy in the 1920’s and 1930’s and in the 1950’s became more mature with the general acceptance of the ideas and methods earlier. 3. 1 Nature and Purpose of Wage and salary Administration The basic purpose of wage and salary administration is to establish and maintain an equitable wage and salary structure. Its secondary objectives is the establishment and maintenance of an equitable labor-cost structure, i. e. an optional balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximized and conflict maximized. The wage and salary administration is concerned with financial aspects of needs, motivation and rewards. A sound wage and salary administration seeks to achieve the following objectives (Monappa amp; Saiyadain, 1997: 253-254): a. Cost control. b. To establish and maintain equitable wage and salary structure. c. Using wages and salaries as an incentive to greater employee productivity. d. To maintain a good public image; e. To attract talented personnel. 3. 2 Principles of Wage and Salary Administration The following are the Principles of wage and salary administration (Haq, 2000: 184-185). a. Wage should enable the workers to maintain the standard of living which they are accustomed. b. Wage system should envisage a scheme of incentives in the form of extra remuneration, bonus or premium to meritorious workers for their extra skill work man ship, prompt performance etc. c. Wage plan should as to encourage even the beginners. With addition to experience and skill, wages should be raised in a phased way. d. Wage plan should be stable but sufficiently flexible to permit adjustment according to changing conditions e. Wage plan should be simple and intelligible to average worker. Complicated procedures confuse the workers and create suspicion among them. f. Wages should be such as to attract talented personnel related to the educational, professional and general abilities of the personnel in different grades and positions. g. Wage policies should be carefully developed, having in mind the interest of (a) Management as the representative of the owner. The employees (c) the consumers and (d) the community. . Wage policies should be expressed in writing to ensure uniformity and stability. i. The general level of wages and salaries should be reasonably in line with that prevailing in the labor market. j. Wage decisions should be checked against carefully formulated policies. k. Equal pay for equal work: If two jobs have equal job difficulty requirements, the pay should be the same regardless of who fills them. l. There should be a clearly established procedure for hearing and adjusting wage complaints. This may be integrated with the regular grievance procedure, if one exist. . The employees, and the union, if there is one, should be adequately informed about the procedure used to establish wage rates. Every employee should be informed of his own position in the wage or salary structure. Secrecy in wage matters should not be used as a cover up for a haphazard and unreasonable wage programme. n. A firmly established and enforced set of wage control plans will serve to assure that established practices and procedures are actually operated in the manner originally intended. 4. 0 Types of wages Wages are following types a. Subsistence Wage A subsistence wage is the amount necessary for the worker and his family to subsist, though only at a meager standard (Haq, 2000: 179). b. Minimum Wage According to this, the workers should be assured a minimum amount as their remuneration so that none will grumble that he getting below the minimum. But the question arises as to what should be the level of minimum wages and how to fix it. The only way to arrive to the minimum wages is to totally it with the standard of living and the cost of living index (Haq, 2000: 180). c. Fair Wage It aims at giving the workers a fair or in other words, the total emoluments would be such as to assure the workers a fair level of subsistence and amenities. This is between the subsistence wage and the living wage. It considered that no employer should pay less than a subsistence wage but that any Company that is prosperous enough to do should pay more. But the word â€Å"fair† is a relative term-what is fair for A. may be unfair B. Therefore, although many exponents have talked about â€Å"fair wage† no Company appears to have introduced this in view of practical difficulties (Haq, 2000: 180). d. Living wage A living wage represents a much higher standard than a subsistence wage. A living wage is generally understood to comprise of that sum of money sufficient to adequately meet them the material, intellectual and spiritual needs of an average working small family in conditions of reasonable health, comfort and efficiency (Haq, 2000: 180). 5. 0 Factors affecting Wages and Salaries There are several factors which affect the wage rate of organization. Some of them are discussed below: a. Ability to pay Organizations which have high sales and profit are able to pay high and salaries to their employees than those which are running at a loss or having low profits. During the period of prosperity, companies pay high wages and during the period of depression wages are cut because funds are not available. b. Supply and demand The demand and supply position of labour affects the determination of wage rates. If there is shortage of labour in the market then the wage rates are high, whereas if the labour supply is continuous then the wage rates are low. . Bargaining capacity If the labourers are organized into trade unions their capacity to bargain increases and can demand for higher wage rates. d. Cost of living. If a company is to achieve a high level of efficiency and morale, it must pay wages that are high enough to enable its employees to enjoy an adequate standard of living; otherwise some employees may be forced to supplement their incomes by maintaining a second job. Other employees may leave for better jobs. e. Government policies The government policies effect the wage rates. To protect the interest of the labourers especially in the unorganized sector, the government fixes minimum wages through legislative measures. f. Prevailing community wage rates In order for a company to recruit and retain good personnel, its wages rates must be comparable to those paid by other companies within the community for similar types of jobs. g. Industry wages A company’s wage policy will, voluntarily or involuntarily, tend to confirm to the wage pattern in its industry, for several reasons. First, competition demands that competitors adheres to the same relative wage level. Second, trade associations encourage uniform wage structures through the dissemination of wage information, including wage and salary surveys, to their members can have â€Å"equal pay for equal jobs† and in order to eliminate geographical differences. h. Job requirements The difficult the job, the higher the wages. The toughness of the job can be ascertained by comparing one job to another in an organization. Job grading is done on the basis of skill, effort, responsibility and job conditions. 6. 0 Factors Guiding Wage Fixation for Industrial Workers Factors which guide the fixation of wage for industrial workers are: a. Capacity of the industry to pay; b. Productivity and skill of labour; c. Prevailing rates of wages for the same or similar occupations in the same or neighbouring localities; d. The level of the national income and its distribution; and e. The place of the industry in the economy of the country. Wage negotiation of training call for knowledge and skill. Functionally and by reason of training, the personnel department is best fitted to handle wage policy of a company. Personnel department cannot be responsible for calculating and paying wages. It is an accounting function of the personnel department, which do it in consultation with the respective department or section heads (Pylee amp; George, 1995: 125-126). 7. 0 Wage Differentials Wages differ in different employments or occupations, industries and localities, and also between persons in the same employment or grade. One therefore comes across such terms as occupational wage differentials, inter- industry inter-firm, inter-area or geographical differentials and personal differentials. Wage differentials have been classified into three categories: First, the differentials that can be attributed to imperfections in the employment markets, such as the limited knowledge of workers in regard to alternative job opportunities available elsewhere; obstacles to geographical , occupational or inter -firm mobility of workers; or time lags in the adjustment of resource distribution and changes in the scope and structure of economic activities. Examples of such wage differentials are inter-industry, inter-firm, and geographical or inter-area wage differentials. Second, the wage differentials which originate in social values and prejudices and which are deeper and more persistent than economic factors. Wage differentials by sex, age, states or ethnic origin belong to this category. Third, occupational wage differentials, which would exist even if employment markets were perfect and social prejudices, were absent. In other words, wage differentials may be: i. Occupational differentials or differentials based on skill; ii. Inter-firm differentials; iii. Inter-area or regional differentials; iv. Inter-industry differentials; and v. Differentials based on sex. i. Occupational Differentials These indicate that since different occupations require different qualifications different wages of skill and carry different degrees of responsibility, wages are usually fixed on the basis of the differences in occupations and various degrees of skills. The basic functions of such differentials are: a) To induce workers to undertake â€Å"more demanding†, â€Å"more agreeable or dangerous† jobs or these involving â€Å"a great chance of unemployment or wide uncertainty of earnings†. ) To provide an incentive to young persons to incur the costs of training and education and encourage workers to develop skills in anticipation of higher earnings in future; c) To perform a social function by way of determining the social status of workers. In countries adopting a course adopting a course of planned economic development, skill differentials play an important role in manpower and employment programs, for they considerably help in bringing about an adequate supply of labour with skills corresponding to the requirements of product plans. Inter-occupational differentials may comprise skilled, unskilled and manual wage differentials; non-manual and manual (white and blue-collar); and general skill differentials generally follow the changes in the relative supplies of labour to various occupations. ii. Inter-firm differentials Inter-firm differentials reflect the relative wage levels of workers in different plants in the same a) Differences in the quality of labour employed by different firms; b) Imperfections in the labour market; and c) Differences in the efficiency of equipment, supervision and other non-labour factors. Differences in technological advance, managerial efficiency, financial capacity, age and size of the firm, relative advantages and disadvantages of supply raw materials, power and availability of transport facility facilities – these also account for considerable disparities in inter-firm wage rates. Lack of co-ordination among adjudication authorities, too, are responsible for such anomalies. iii. Inter-area or Regional Differentials Such differentials arise when workers in the same industry and the same occupational group, but living in different geographical areas, are paid different wages. Regional wage differentials may be conceived in two senses. In the first sense, they are merely a part of inter-industry differentials a particular region. In the second sense, they may represent real geographical differentials, resulting in the payment different rates for the same type of work. In both cases, regional differentiations affect the supply of manpower for various plants in different region. iv. Inter-industry differentiations These differentials arise when workers in the same occupation and the same area but in different industries are paid different wages. Inter-industry differentials reflect skill differentials. The industries paying higher wages have mostly been industries with area and occupation. The main causes of inter-firm wage differentials are: a large number of skilled workers, while those paying less have been industries with a large proportion of unskilled and semi-skilled workers. Other factors influencing inter-industry differentiations are the extent of urbanization, the structure of product markets, the ability to pay, labour-capital ratio, and the stage of development of an industry. Personal wage differentials These arise because of differences in the personal characteristics of workers who work in the same plant and the same occupation. â€Å"Equal pay for equal work† has been recommended by the I. L. O. convention (No. 100), as also by industrial courts, Labour Tribunals, the Minimum Wages Committee and the Fair Wages Committee. But in practice this principle has not been fully implemented because in occupations which involve strenuous muscular work, women workers, if employed, are paid less than men workers. Lack of organizations among women employees, less mobility among them, their lower subsistence and their weak constitution are other reasons which bring them lower wages than their male counterparts receive. 8. 0 Methods of Wage Payment System The various method of wage payment may be classified as given below: 8. 1 Conventional methods a. Time Rate It is also known as ‘day rate system’. Under this system the worker is paid only on the basis of time he has worked on his job and no consideration is given to the quality and quantity of work completed by him. The longer the worker remains on his job, the higher is the payment. The formula for calculating wages under this system is: Total amount earned= no. of hours, days, etc, worked ? rate per hour, day, etc. There is no fixed rule for time rate. For instance when high level professionals are engaged on contract basis their duration is longer and payment is on their higher side. Whereas unskilled workers are usually engaged for a short period and the rate at which they are paid is quite low. Advantages of time rate a. It is simple method and the labourers can know how much remuneration they will get. b. Since the wages are fixed, the workers have not to rush to reach a particular level of output. . It is beneficial for the freshers as in the beginning they cannot give a higher output but they are assured of a fixed remuneration. d. As the wage do not depend on output, the workers can produce quality goods. Limitations I. This system does not distinguish between efficient and inefficient workers and there are no incentives for the workers to increase their inefficiency. II. Since wages are not related to output it makes difficult to control labor costs. III. As it gives security to the workers they are tempted to work slow which results in loss to the employer. IV. It is not only effects the quantity but also the quality of goods as there is no incentive for efficient workers. b. Piece Rate Under this system the worker is paid according to the work done or the number of pieces of work completed irrespective of the amount of time taken to do so. The rate per unit of output is fixed and the wages are paid on the basis of number of units completed. The formula for calculating under this system is: Total amount earned= units produced ? rate per unit. But this system is applicable only in case of those jobs which can be measured in physical terms and can be standardized. Under this system the income of the workers depends on their efficiency to produce. Advantages a. Productivity increases as the earnings are directly linked with production. b. This system induces to produce more regardless of quality. c. It helps in establishing the cost per unit which helps in the fixation of prices of the goods produced. d. As wages are paid according to the output it ensures a degree of fairness to everyone. Limitations a. No attention is paid to the production of quality goods. b. In order to produce more there is improper handling of machines resulting in breakdown causing loss of employer. There is no security to the workers and if the worker is unable to produce due to certain reasons his earning are affected. d. This system leads to unhealthy competition among the workers which causes jealousy and dissatisfaction among them. 8. 2 Incentives Bonus Methods An incentives method or plan is a system of wage payment which offers inducement to the workers in the form of bonus to maintain high levels of production. A well developed incentive plan should be beneficial to both management and the workers. From the management point of view it should result in reduced unit cost and increase output. There should be optimum utilization of facilities, improvement on cost control leading to less variable production cost. From the workers point of view it should facilitate on their efforts to earn more and improve their efficiency (Sainy amp; Kumar, 1998: 136-137). There are different types of incentive plans. For instance personal incentives which are either time based or production based. Time based incentives plans are also called premium plans. Some of the incentives plans are discussed. a. Personal or Individual Incentives Bonus Schemes Under this system the individual worker is rewarded for his excellent performance or for making optimum use of the machines and equipment (Sainy amp; Kumar, 1998: 137). b. Halsey Plan Under this plan bonus or premium is paid to the worker on the basis of the time saved. A standard time required for a job is determined before hand. If a worker takes standard time or even exceeds the standard time to complete a job he gets normal wages calculated at the time rate. If he completes the job in less than the standard time, he gets a bonus equal to 50 percent of the value of time saved.