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UNIT 11

Wage and Salary Administration


The task of developing sound policies and practices in the matter of employee compensation is what wage and salary administration is concerned with. Its main objective is to determine an equitable pay structure in every workplace. Its main term Wage refers to any payment made usually at the end of the days work. The term further denotes payment made to workers doing physical word. Salary, on the other hand, refers to payment made to employees at the end of every month. The term salary usually refers to payment made to those doing white-collar job, i.e., deskwork.

Objectives of Wage and Salary Administration


The following objectives of wage and salary administration may be stated as follows: 1. To pay employees in accordance with their job requirement: Employees shall be given pay in accordance with the relative worth of their jobs. The relative worth of jobs may be determined taking into account such factors as the qualifications expected of the individual, the skill required to perform, the responsibility attached to the job and so on. 2. To eliminate any scope for favoritism There shall not be any discrimination or favouritism in the matter of wage and salary payment on the basis of sex, caste, religion and so on. 3. To attract capable hands Good wages administration shall ensure adequate compensation for work done. Only then the organisation will be able to get competent persons. 4. To improve the morale of employees As the employees are assured of pay in accordance with the requirements of their jobs, their level of morale improves. As a result, they are able to perform better. This results in higher productivity.

5. To control labour turnover Inadequate pay is one of the main reasons for employees leaving their jobs (called labor turnover). Sound wage administration ensures adequate compensation for employees for work done and thereby helps to control the problem of labour turnover effectively. 6. To establish lines of promotion Different pay scales are established keeping in mind the level of work, i.e., clerical, supervisory, etc. 7. To have better rapport with workers unions As the employer is in a position to explain the basis of pay fixation, he is in a position to have better rapport with the workers unions. 8. To eliminate scope for grievance Another important objective of sound wage administration is that it eliminates for any grievance over pay inequalities.

Guiding principles of wage and salary administration


The following principles guide wage and salary administration in determining the right pay for all its employees:

1. Payment of remuneration shall be determined in accordance the requirements of


each job.

2. The pa policy of the organisation shall protect the interests of both the employer
and the employee.

3. The wage rates for similar jobs in similar organisations shall be taken into
consideration.

4. The policy of the organisation shall recognise individual differences. Those


employees contributing more shall be paid more.

5. The employees and their union shall be informed of the procedure adopted to
determine the wage rates.

6. The pay structure shall be made flexible so that any adjustment required can be
made easily.

7. There shall be a prompt payment of the amount due to the employees.

8. The pay given to the employee shall assure him and his family a reasonable
standard of living.

9. There shall exist a forum to redress employees grievances over pay inequalities. 10. The wage policy of the organisation shall be reviewed periodically in tune with the
changing needs.

Factors Influencing Wage policies


These various factors influencing the wage policy of an organisation have been explained below: 1. Availability of funds obviously, availability of funds is an important factor determining the wage policy of a concern. If finance is not a constraint, the enterprise will be attractive pay package. On the other hand, if the enterprise is starved of funds, it will not be able to pay its employees well. 2. Demand and supply forces If the demand for certain is greater than the supply, the enterprise may have to offer higher pay to induce persons with such skills to work for it. On the other hand, the enterprise will have an upperhand in the matter of pay fixation. It may be mentioned here that there was a time when computer professionals were in demand in the job market throughout the world. As a result, the employers had to offer an attractive pay package. But now the job market is flooded with computer professionals and as a result they are not in a position to demand more pay. 3. Pay policy of competing firms Employees working for a firm do compare their pay scales with those of employees working for competing firms in the same industry. The employer, therefore, has to consider the pay policy of the rival concerns before fixing the pay scales of his employees. 4. Trade union pressures Powerful trade unions are in a position to pressurise the management too hike the salary of the employees periodically. In India, the trade unions of employees working in Railways, Nationalist Banks etc., are so powerful that by organising a days strike, they are able to get all their demands settled.

5. Inflationary pressures The purchasing power of money declines with an increase in the rate of inflation in the economy. As a result, even when there is an increase in the wage or salary of an employee, there is no increase in his real income. To offset the effects of inflation, employees are given what is known as dearness allowance (DA). DA is an important component of an employees pay scale. As cost of living rises, the employer has to great DA to his employees and this increases his pay commitment. 6. Relative worth of jobs The employer cannot keep the same pay for employees doing different kinds of jobs. The requirements of different like CA, MBA, B.E, B.Tech. etc., while for others a mere degree in any discipline may be an adequate qualification. Likewise, certain jobs require certain special skills like knowledge of stenography, computer accounting etc. It is, therefore, necessary to assess the relative worth of jobs before determining the pay. 7. Quantum of work done The quantum of work done by employee may also be taken into account in determining his pay. Salesmen, for example, are paid commission as a percentage of the business done by them. Factory workers may also be paid wages according to the output produced by them. 8. Government regulations The government has enacted various laws to safeguard the interests of the employees working in different organisation. We have, for example, the Payment of Wages Act, the Minimum Wages Act, the Equal Remuneration Act etc., to protest the interests of the working class. While formulating the wage policy, the employer, therefore, cannot ignore the implications of these laws.

Methods of Payment of Wages


The methods of payment of wages, basically, fall under two categories: (a) Time Wage (b) piece Wage. These have been explained below.

Time Wage
In the case of time wage, the workers will be paid on the basis of the time spent by them on the job irrespective of the quantum of work done. For example, if per day wage is fixed at Rs.75 for 6 hours of work (between 10 A.M to 5P.M with a lunch break of 1 hour), any worker adhering to the time schedule will receive Rs.75. There may be differences in the level of output of different worker s, which is ignored. The time wage method is a conventional one and is widely used even today.

Merits
The advantages of time wage method are as follows: 1. It is simple to use. Calculation of wages under the time wage method is easy. 2. The workers will not attempt to do the work hurriedly. This ensures quality of work. 3. There are no ill feelings among workers as there is equality in the payment of wages. 4. The time wage method is the most suitable one in those workplaces where it is not possible to determine the contribution made by individual employees, e.g., office work. 5. The wear and tear of tools and machines is also less as there is no rough handling. 6. The method enables the workers to receive stable income.

Demerits
The following method, however, suffers from the following limitations:

1. It fails to take into account the capabilities of individual workers. Some workers
are capable of doing more work within the stipulated time than others. But they do not drive any benefit out of it.

2. As payment is based only on time spent, there may be a tendency on the part of
the workers to go slow. This results in delay in the completion of work.

3. The method necessitates close supervision to ensure that workers do not waste
time during working hours. This may also lead to higher supervision costs.

4. It is not possible to measure the actual performance of individual workers. 5. The method further allows people without ability or willingness t take part in
work.

Piece Wage
Under the piece wage method, the workers are paid based on the output produced by them. Supposing the piece rate is Rs.5, workers who produce 10 units will receive Rs.50 and another worker who produces 15 units will receive Rs.75 on normal working day. Thus, unlike the time wage system where the output of individual workers is ignored, in the case of piece wage system the workers get payment only based on the output produced.

Merits
The advantages of the piece wage method are given below: 1. It takes into account the capabilities of individual workers. People who are more efficient will be able to earn more. 2. It does not give scope for the workers to go slow. The workers know that their remuneration depends on the quantum of work done by them. 3. Close supervision is not necessary, as there id no tendency on the part of the workers to waste time. 4. Every worker strives to produce more in order to earn more. This encourages healthy competition among the workers.] 5. There is increase in production, as workers, by and large, show preference top step up output. 6. It is possible to identify efficient and less efficient workers. This guides the management on such matters as training, promotion, transfer, etc.

Demerits
The following are the drawbacks of the piece wage method:

1. There may arise ill-feelings among workers, as only some of them are able to earn
more.

2. The method does not ensure stable income for the workers. 3. The quality of work may suffer, as the workers are only keen on increasing the
quantum of output. They may not pay adequate attention to the quality of work.

4. The wear and the tear of tools and machines is greater due to improver handling as
work is hurriedly done.

5. The administration of the piece wage method is difficult. Proper records will have
to be maintained to determine payment to individual workers.

6. The method cannot be used in those workplaces where it is not possible to


determine the output of individual workers precisely.

Distinction between Time Wage and Piece Wage Methods


From the discussion we had on time wage and piece wage methods, it is possible to bring out the following points of distinction between the two: The point of distinction between formal and informal organisation have been tabulated below:

Time Wage
1. The time spent by the workers is the basis for determining their wages.

Piece Wage
1. The quantity of output produced by the workers is the basis for payment of wages.

2. The workers, by and large, receive the same remuneration.

2. The remuneration of each worker varies according to the output he produces.

3. Workers receive stable income.

3. Workers may not have stable income.

4. Wear and tear of the tools and machines is low. 5. The method is suitable where it is not possible to determine the output of individual workers. 6. Quality of work, generally does not suffer. 7. Close supervision in necessary. 8. Administration of time wage is easy.

4. Wear and tear is high.

5. The method is suitable only when it is possible to determine the output of each and every worker. 6. There is greater scope for poor quality of work. 7. Close supervision is not required. 8. Administration is difficult.

Balance Method
This method is a combination of both time and piece wage methods discussed above. Under this method, if the wages of a worker as per piece rate calculation are more than the time wage, he is given credit to the extent of the difference and is paid the time wage. If his time wages is greater than his piece wage, he is paid the time wage and his account is debited to the extent of the difference. This process continues. Payment under the balance method has been the balance method has been explained with an example below:

Time wage = Rs. 75. Piece wage = Rs. 3 per unit. Assuming different quantities of output, the remuneration of a worker under the balance method may be calculated as follows: The points of distinction between formal and informal organisation have been tabulated below:

Output (units)

Piece wage Time (Rs.) Wage (Rs.)

Debit (Rs.)

Credit (Rs.)

Balance (Rs.)

30 22 32 15

90 66 96 45

75 75 75 75

Nil 9 9 30

15 Nil 21 Nil

+15 +6 +27 -31

Different Concepts of Wages 1. Bare or Basic wage It is amount of wage that is just sufficient for an employee
to have all the bare necessaries of his family, i.e., food, clothing and shelter met. In a civilised society, the concept of bare or basic wage has little significance.

2. Statutory Minimum Wage It is the amount of wage determined as per the


provisions of the Minimum Wages Act of 1948. Wherever the Minimum Wages Act becomes applicable, the employers would be required to pay their employees wages as determined under the Act irrespective of their ability to pay.

3. Minimum Wage It is the wage that is considered necessary to meet not only the
are necessaries but also the educational and medical needs of the employees family. Determining the minimum wage, of course, is difficult, as the living standards cannot be determined accurately. The size of the family, the minimum wage should support, also cannot be precisely determined.

4. Living Wage It refers to the amount that is required to provide the following for
the workers and his family: (a) Food, clothing and shelter (b) Education and health (c) Protection against certain misfortunes (d) Fulfillment of social needs. Living wage involves the payment of a very high amount and not many employers will be in a position to offer the same to their employees.

5. Fair wage It refers to the amount of wage that is above the minimum wage but
below the living wage. Factors such as the capacity of the employer to pay, the productivity of labour, the prevailing wage rate in the locality etc., would determine the amount of fair wage.

Need-based Minimum Wage


The Indian Labour Conference has laid down the following criteria for the determination of minimum wage:

1. The size of the standard working class family is restricted to five members.
The earning of women, children and adolescents will be ignored.

2. An intake of 2, 700 calories is considered the minimum food requirement of an


adult of moderate activity.

3. The clothing requirement of the family is determined at 80 years per year. 4. As far as house rent is concerned, the minimum rent charged by the Government
in any area for houses provided under the subsidized Housing Scheme for the lowincoming groups will be applicable.

5. Fuel, lighting and other miscellaneous expenses should constitute 20% of the total
minimum wage.

Pay differences
There are differences in the wages and salaries of persons doing different jobs and attached industries. There are also differences in the remuneration of persons engaged in similar kind of job. Such differences arise in view of the following reasons: 1. Differences in occupations Different occupation call for different qualifications and skills. As workers are paid in accordance with their credentials, differences in pay are bound to arise. 2. Inter-firm differences Sometimes, employees doing identical jobs in firms within the same industry may be getting different amounts of wages. The firms within a particular industry need not be identical. Inter-firm differences arise due to differences in capital employed, level of technology, managerial efficiency, age and size of the firm etc. in view of these differences, difference in wage rates is inevitable. 3. Regional differences There may be differences in the pay of workers working for similar firms but located in different regions. Regional differences are caused by such factors as availability of manpower, cost of living, weather and climatic conditions, etc. 4. Inter-industry differences There are differences in the remuneration of employees engaged in similar jobs but working for different industries. For example, a clerk working in a textile mill and another working in a sugar mill may not be getting the same wages. The difference in wages might have been due to differences in the employees qualifications and skills, financial soundness of the employer, profit-earning capacity of the business, bargaining power of the trade unions and so on.

5. Demographic differences Differences in wages are also caused by


demographic, i.e., population characteristics like age and sex. For the same job, a women worker may be paid less when compared with a male worker. This is particularly true in the case of physical work, e.g., construction work. This is probably because women have poor bargaining power. Employment of child

labour is a punishable offence. But still some organisations employ children for doing sundry jobs and also pay them very low remuneration.

Executive Compensation
The method of determination of remuneration payable to the managerial personnel of a concern (like the General Manager, the Production Manager, the HR Manager and so on) is different from that used for the subordinate staff. Unlike the employees who can represent their grievances through their union, the executive is also not determined based on his performance but on the performance of the whole organisation. The executive remuneration usually comprises of four components:

(i) (ii) (iv)

Salary Bonus

(iii) Stock options and


Perquisites The salary of the executive is determined by a mutual agreement with the employer. Bonus is paid as a percentage of the business points. The shares of the company may also be issued to the executives at a special price.

Perquisites for Executives


The executives are also entitled to get several perquisites. These are: 1. Free well-furnished accommodation 2. Medical care 3. Servants 4. Free telephone 5. Free magazines and periodicals 6. Chauffeur driven car 7. Facilities for entertaining clients 8. Leave travel concession 9. Holiday homes

10. Reimbursement of education expenses of children etc. Factors influencing executive compensation
Several factors influence executive compensation. Important among these are the following:

1. Professional qualification: An execute needs to have professional qualification. To


be a HR manager in a big concern, the individual will be excepted to possess an MBA with specialization in HR management and also have considerable experience. Such a person naturally has to be paid well.

2. Paucity of professionals: The availability of professional in certain spheres of


industrial activity like production, marketing and finance is less compared to the demand. As a result, higher remuneration has to be well.

3. Complex nature of the executive job: The executives have greater responsibilities
compared to the employees. The head of a department for example, has to be responsible to the employer not only for his performance but also for the performance of the men in his department The executive must be good in liaison work as well.

4. Financial soundness: Big concerns invest crores of rupees in business and they
need capable persons to manage the affairs. As finance is not a constraint for such concerns, they are in a position to pay their executives well.

5. Provisions of the Companies Act, 1956: As per the provisions of the Companies Act
of 1956, the management personnel, of a company registered under the Act are entitled to get remuneration at a certain percentage of the annual profits.

6. Globalisation effect; The globalisation policy allows multi-national companies to


start endures in India. These companies are financially very sound and therefore are in a position to offer a very attractive pay package to their executives.

LAWS RELATING TO PAYMENT OF WAGES


Many Acts have been enacted in India to regulated payment of wages to the working class. Important among these are the following:

1. The Minimum Wages Act, 1948 2. The Payment of Wages Act, 1936 and 3. The equal Remuneration Act, 1976.
These have been explained briefly here.

The Minimum Wages Act, 1948


The object of this Act is to safeguard the interests of the workers by fixing the minimum raters of wages in certain establishments. The Act applies particularly to those undertakings where the labour employed is highly unorganised and as a result the workers are made to accept very low wages. The Act enables the Central and the State Governments to fix minimum rates of wages payable to employees in a selected number of sweated industries. Under the Act, the wage period may be an hour, a day, a month or such other longer period. The Act recognises payment of wages in cash or kind both. The Act regulated payment of wages for overtime work as well.

The Payment of Wages Act, 1936


The object of this Act is to protect the interests of those employees who are not getting very high salaries and to check irregularities in payment of wages and unauthorised deductions there from by the employers. The wage period under the Act shall not exceed one month. The Act does not permit payment of wages in kind. The Act allows the payment of wages of an employee by cheque or by crediting his bank account. Certain deductions from the wages of an employee are permitted. The deduction include, among others, the following (i) (ii) (iii) Deductions for fines Deductions for absence from duty Deductions for damage or loss of goods entrusted to the employee

(iv)

Deductions for house accommodation and such other amenities supplied by the employer

(v) (vi)

Deductions for the recovery of advances given to the employee Deductions for the recovery of loans granted for house-building or other purposes

(vii)

Deductions for payments to co-operative societies and insurance schemes.

The Equal Remuneration Act, 1976


This Act aims at preventing discrimination in the matter of payment of remuneration to employees on the basic of sex. In certain workplaces, women employees may be paid less compared to men although the nature of work done by both is the same. The Equal Remuneration Act has been enacted only to do away with such a practice.

Essentials of a good system of wage payment


The ingredients of a sound system of wage payment may be stated as follows: 1. No ambiguity: The wage plan of the enterprise should be such that it is clear, unambiguous and understood by every employee. 2. Should ensure internal equity: It means that pay differences among the employees should be directly related to their job requirements in terms of age, experience, qualification, skill etc. 3. Conformity with the pay structure of rival firms: The pay structure of a firm should fall in line with that of the rival firms. Only than the organisation will be able to attract competent persons and also retain them. 4. Built-in incentive: The pay structure itself should a built-in incentive to induce the employees to perform better. This can be achieved by linking the career advancement benefits of employees to their performance. 5. Easy computation: Calculation of remuneration of every employee should be easy. 6. Should avoid undue delay in payment: Payment of wages should be made at the appropriate time. Wages are usually paid at the end of the days work. Sometimes, it may be paid every weekend. Employees receiving salary get payment at the end of every month.

7. Should lay emphasis on quantity as well as quality: If payment of remuneration is based on the quantum of work done, the quality of work may suffer. If, on the other hand, the stress is on the quality of work alone, there will be a tendency to go slow. It is, therefore, important that the emphasis is on both quantity and quality. 8. Should provide for yearly increment: Annual increments need to be given to employees in recognition of their years of service. 9. Should ensure stable income: The wage plan should guarantee stable income for the working class. If there is wide fluctuation in the income of an employee, he cannot have a reasonable standard of living.