Wages and Salary Administration

Introduction: Main aim of the wages and salary administration is to establish and implement sound policies, rules and regulations for payment of wages and salaries to employees. Each and every employee has to be paid adequate compensation for the services he renders to the organisation. The compensation is one of the major factors of motivation to the employees, which has great bearing on the performance of the employees and inturn, the performance of the organisation. Compnesation in addition to wages and salary include pension, bonus and profit sharing. Employees also drive a certain amount of personal satisfaction as compensation for a job well done. Wages and salary administration include job evaluation, development and maintainance of wage structure, rules for administering wages, incentive plans and costs. Besides these there are certain aspects of job compensation which an employee looks for such as job satisfaction, job content, responsibility, creativity, word of praise, promotion etc. Objectives: Every organisation strive hard to have good workforce. To attract, obtain, retain and motivate worker there should be a sound wage structure in place. The main objective of the wages and salary administration is to formulate and maintain equitable wages and salary system. The objectives can be organisational or individual. Organisational objectives: Wages according to the job requirement: Job requiring high degree of skill and educational qualifications are paid higher wages and vice versa. Minimised favouratism: Favouratism in the wages system is to be minimised. Hight employee morale: Equaitable compensation keeps the morale of the employees high. Individual Objectives: Maintain equity and fairness in compensation for similar jobs. Attracting and retaining employees. Make system cost effective. Reduce friction over inequility of wages. Efficiently deal with labour unions over negotiation of wages.

Beach has listed the five objectives of wages and salary administration: To recruit persons for a firm. To control pay rolls. To satisfy people, reduce the incidence of turnover, grievances and frictions. To motivate people to perform better. To maintain a good public image. Principles of Wages and Salary Administration: There are three main principles on which wages structure may depend. (i) External Equity (ii) Internal Equity (iii) Individual Worth (i) External Equity: All the external factors / variables such as demand and supply of labour, market rate etch. Influence the level of compensation in an organisation. All these factors are to be considered

while fixing the compensation in an organisation otherwise, it will be difficult to attract and retain the employees. The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. (ii) Internal Equity: All the jobs in an organisation are arranged in a hierarchy according to their relative worth. Job evaluation is the process by which relative worth of the job is acertained. The compensation system should ensure differences in pay according to the relative worth of the job. In other words the compensation system should ensure that more difficult jobs should be paid more. (iii) Individual worth: Each and every employee should be paid according to his services he/she renders to the organisation. The employee should be compensated according to his / her performance. The individual compensation should be fair enough in comparision to others doing the same job i.e Equal pay for equal work. The problem of how to determine wages within individual organizations is complex. There are many factors to consider and many sources of information. Although there are several internal processes, and influential factors of wage determination, what is examined below are the external factors that influence wage determination. External factors are those that operate outside of, and are beyond, the influence of any individual organization. The various factors that are examined are; Demand and Supply of Labour Cost of Living Legislative Influences Trade Unions Productivity Prevailing Wage Rate

Demand and Supply of Labour: Unemployment rates (occupational and overall) in the labor market influence wages through their affect on the organisations ability to attract and retain employees. The product/service market is a valuable source of information in determining pay rates and levels. This is so because the demand for labor is a derived demand that is dependant on the demand for the products and services produced by labour. The elasticity of demand for the organisations product/ service puts a lid on the maximum pay level it can afford. Elasticity of demand is a measure that defines the ability of a factor (product) to withstand a change (increase) in its price. The more inelastic the demand for a product/ service, the less its demand (sales) will be affected by an increase in its price. Therefore, organizations with a product/service that is relatively price inelastic, can afford higher costs of labor (wage level) that can be passed on, in the form of price increases in the final product. The concept of elasticity can be further applied to labor itself, as a factor of production. The demand for labor will be more inelastic (and therefore able to withstand price increases) if; it is an essential factor of production the supply of complimentary factors of production are relatively inelastic; the demand for the final product is relatively inelastic. the cost of labor is relatively small, in relation, to the total costs of production.

Cost of Living:

Some organisations may be more able to keep wages at a certain level, in line with increases in the cost of living. The cost of living index is the measure of cost of living. The cost of living index is used in determining regional pay differentials. In applying regional pay differentials, multi-location organisations may compare the relative cost of living in different locations and adjust pay rates and levels accordingly. Legislative Influences Legislative factors are determined outside of individual organizations and affect wages. Legislative influences include labor standards, and specifically minimum wages. Many employers rely on a low skill, low wage (minimum) transient workforce. Any increase in the minimum wage affects both the rates paid to the employees and the employers wage level. In addition, legislative requirements such as pay equity and employment equity increase the administrative burden and cost to the employer. These costs may affect the wage level of an organization and therefore, its wage rates. Trade Unions: Trade unions play a vital role in establish wage structure. The stronger and powerful trade unions can have more bargaining power and hence more wages. Stronger trade unions can put pressure on the management for higher wages by resorting to strikes and threat to strikes. Productivity: Increase in the productivity decrease the production cost hence more profit. As per the principle of payment by performance if the productivity of the worker is high wage / salary rate will be high and vice-versa. The productivity can be increased not with the workers efforts alone. Technological improvements, better organisation and management, greater inguenity and skill by labour are all responsible for the increase in productivity. Ability to Pay: Companies that have good turnover and high profit can pay more to its employees than that those having low turnover and low profit. Organisation fix wages what they can afford to pay. The reason being and increased wage cost can not enable the organisation to stand in competitive environment especially in the long run. All the employer must not pay less than their competitors to attract and retain workers. Marginal firms and non profit organizations and pay relatively low wages because of low or no profit. Prevailing Wage Rate: To survive in the competitive environment the organisation has to pay in line with the prevailing rate of wages. This is also called going wage rate. If the wages paid by the organisation are lower than those paid by other firms than the firm may not be able to attract and retain the employees. This criterion is mainly use for establishing the wage structure. This is because of the following reasons: Various government laws and judicial decisions make the adoption of uniform wage rate compulsory. Trade unions accept and encourage this system to ensure equal pay for equal work across the industries and regions. All firms functionally related in an industry require essentially the same quality of employees with the same or labour the same skills and experience

Methods of wage payment and Incentive Plans Methods

Time Wage System 1.Time wage System Features:

Piece rate System

For the amount of time spent on the job Quality of work is of utmost importance Job relates to offer or clerical work When mental work is involved

Advantages: Simplicity Feeling of security Equality of wages Less wastage Acceptable to trade unions

Disadvantages:

Inefficiency Lack of motivation Increased supervision Fixed wage bill

2.Piece wage System Features: Worker paid for the amount of work completed, irrespective of the time taken Suitable when production is to be increased Suitable when methods of production are standardised When job involves more physical work Where work does not require personal skills of higher order

Advantages:

Incentive for higher production Fairness Costing is easier Lesser supervision Economical

Disadvantages:

Low quality Insecurity to workers Strained Industrial relations Difference in rate fixation More administering work Increased wastage Health Hazards Incentive Wage Plans

Incentive wages relate earnings to productivity and may use premiums, bonuses or a variety of rates to compensate for supervisors performance also. Benefits:

Innovation in paying system Feeling of co-operation from the management's part Improvement over the basic wage methods Increased motivation for the employees Kinds of Incentive Plans

Time based incentive plans

Production based incentive plans

Halsey Plan

Rowan Plan

Emerson Plan

Bedeaux Plan

Taylor's differencial piece rate plan

Merricks Gantt task multiple and piece rate bonus plan plan