WAGE AND SALARY ADMINISTRATION

1 DEFINITIONS AND CONCEPTS

What is wage and salary administration? Wage salary administration is essentially the
application of a systematic approach to the problem of ensuring that employees are paid in a
logical, equitable and fair manner.

Wage: Wage and salary are often discussed in loose sense, as they are used interchangeably.
But Tanzanian Labour Organization (ILO) defends the term wage as “the remuneration paid
by employer for the services of hourly, daily, weekly and fortnightly employees.” It also
means that remuneration paid to production and maintenance or blue collar employees.

Salary: The term salary is defined as the remuneration paid to the clerical and managerial
personnel employed on monthly or annual basis.

This distinction between wage and salary does not seem to be valid in these days of human
resources approach where all employees are treated as human resources and are viewed at
par. Hence, these two terms can be used interchangeably. As such, the wage and/or salary can
be defined as the direct remuneration paid to an employee compensating his services to an
organization. Salary is also known as basic pay.

Earnings: Earnings are the total amount of remuneration received by an employee during
a given period. These include salary (pay), dearness allowance; house rent allowance, city
compensatory allowance, other allowances, overtime payments etc.

Nominal Wage: It is wage paid or received in monetary terms. It is also known as money
wage.

Real Wage: Real wage is the amount of wage arrived after discounting normal wage by
living cost. It represents the purchasing power of money wage.

Take home salary: It is the amount of the salary left to the employee after making
authorized deductions like contribution to the provident fund, life insurance premium, income
tax and other changes.

Minimum Wage: It is the amount of remuneration which could meet the “normal need of
average employee regarded as a human being living in a civilized society.” It is defined as the
amount or remuneration “which may be sufficient to enable a worker to live in reasonable
comfort, having regard to all obligations to which an average worker would ordinarily be
subjected to.”

Statutory Minimum Wage: It is the amount of remuneration fixed according to the

provisions of the Minimum Wages Act, 1948.

The Need-based Minimum Wage: It is the amount of remuneration fixed on the basis of
norms accepted at the 15th session of the Tanzanian Labour Conference held at Delhi at New
Delhi in July, 1957.

The Conference recommended that minimum wages should ensure the minimum human
needs of industrial workers. The norms laid down by it are:

(i) in calculating the minimum wage, the standard working-class family should be
taken to comprise three consumption units for one earner, the earnings of women,
children and adolescents’ beings disregarded;
(ii) minimum food requirements should be calculated on the basis of a set intake of
calories as recommended by Dr. Aykroyd for an average Tanzanian adult of
moderate activity;
(iii) clothing requirements should be estimated on the basic of per capital consumption
of 18 yards per annum which would give for the average worker’s family of four a
total of 72 yards;
(iv) in respect of housing, the rent corresponding to the minimum area provided under
Government Industry Housing Scheme should be taken into consideration in
fixing the minimum wage;
(v) fuel, lighting and other miscellaneous items of expenditure should constitute 20
per cent of total minimum wage.

The Living Wage: According to the committee on fair wages, the living wage is the highest
amount of remuneration and naturally it would include the amenities which a citizen living in
a modern civilized society is entitled to expect, when the economy of the country is
sufficiently advanced and the employer is able to meet the expanding aspirations of his
workers.

The Fair Wages: Fair wages are equal to the received by workers performing work equal
skill, difficulty or unpleasantness.
Incentive Wage: This is the amount of remuneration paid to a worker over and above the
normal wage as an incentive for employee’s contribution to the increased production or
saving in time or material.

Wage Rate: This is amount of remuneration for a unit of time excluding incentives, over
pay, etc.

Standard Wage Rate: I is the amount of wage fixed for a unity of time fixed on the basis of
job evaluation standards.

Need for Sound Salary Administration

Management has to formulate and administer the salary policies on sound line as:

(i)most of the employees’ satisfaction and work performance are based on pay;

(ii) internal inequalities in pay are serious to certain employees;

(iii) employees compare their pay with that of others;

(iv) employees act only to gross external inequities;

(v) employee comparisons of pay are uninfluenced by levels of aspirations and pay history
and

(vi) employees compare the pay of different employees with their skill, knowledge,
performance, etc.

2 OBJECTIVES OF THE WAGE AND SALARY ADMINISRATION

The objects of wage and s alary administration are numerous and sometimes conflict with
each other. The important among them are:

1. To acquire qualified competent personnel: Candidates decide upon their career in a

particular organization mostly on the basis the amount of remuneration the organization
offers. Qualified and competent people join the best-paid organizations. As such, the
organizations should aim at payment of salaries at that level, where they can attract
competent and qualified people.

2. To support skills needed by the organization

3. To pay for contribution and not time

4. To reward for behavior built on organization values and leadership attributes

5. To provide flexibility for individuals

6. To mix between fixed and variable pay

7. To recognize individual and teams

8. To attract and talent

2. To secure internal and external equity: Internal equity does mean payment of similar
wages for similar jobs within the organization. External equity implies payment of similar
wages to similar jobs in comparable organizations.

1. The ensure desired behavior: Good rewards reinforce desired behavior like performance,
loyalty, accepting new responsibilities and changes etc.

2. To keep labour and administrative costs in line with the ability of the organization to pay.

3. To protect in public as progressive employers and to comply with the wage legislations

4. To pay according to the content and difficulty of the job and in tune with the effort merit of
the employees.

5. To facilitate pay roll administration of budgeting and wage and salary control.

6. To simplify collective bargaining procedures and negations

8. To promote organization feasibi

Lucent Technologies - Establish compensation tracks to reward technical expertise as

well as management development

AT&T CCS - Compensation linked to Non-financial Goals

Federal Express - Offer companion which links employee’s pay to the performance of their
co-workers.

Xerox - Allocate a percentage of corporate payrolls to on-the spot reward and recognition
efforts

Starbucks - Maximize the impact of stock options by offering them to part and full-time
employees.
PM Company - Conduct benchmarking research to determine appropriate compensation
for employees.

AmEx, Xerox, AT&T, Motorola - Tie compensation to customer satisfaction.

GE, Novartis, Motorola - Integrate compensation structure with skill development

FedE, Novartis, Motorola - Tie measurement to incentive compensation

FedE, Hewlet-Packard Starbucks - Enable managers to reward employees creatively

GE, Novartis, Johnson & Johnson - Design a compensation plan to enhance employees
Perception of corporate ownership

3 FACTORS AFFECTING WAGE/SALARY LEVELS

Generally, a large number of factors influence the salary levels in an organisation. Significant
amount them are:

(i) Remuneration in Comparable Industries;

(ii) Firm’s Ability to Pay;
(iii) Cost of living:
(iv) Productivity;
(v) Union Pressure and Strategies; and
(vi) Government Legislations.

Remuneration in Comparable Industries: Prevailing rates of remuneration in comparable

industries constitution an important in factor in determining salary levels. The organisation,
in the long-run must pay at least equal to the going rate for similar jobs in similar
organisations. Further, the salary rates for the similar jobs in the firms located in the same
geographical region also influence the wage rate in the organisation. The organisation has to
pay the wages equal to that paid for similar jobs in comparable industries in order to secure
and retain the competent employees, to follow the directive of Courts of Low, to meet the
trade union’s demands, to satisfy the employee’s need for same social status as that of same
categories of employees in comparable organizations. Comparable industries constitute the
organisation engaged in the same or similar activities, of the same size, in the similar type of
management, i.e., public sector or under the management of same owners, organisations
located in the same geographical region.
Compensation Policy in Levi Strauss

Levi Strauss takes pride in being called an Employer of choice. The company has put place
several unique HR initiatives and processes. In fact, Levi’s even has official annual
Employee Application Day that’s organized by HR. Complete with a barbecue, music band
and fun activities, it is an event that celebrates the value of employees.

Levi’s compensation program is different in that it is designed to evaluate and reward

employees, not for performance, but also aspirational behavior.

A new time-off-with-pay program (TOP), to replace separate vacation, sick leave and floating
holiday plans.

Firm’s Ability to Pay: One of the principal considerations that weight with the management
in fixing the salary is its ability to pay. But in the short-run, the influence of ability to pay
may be practically nil. However, in the long-run, it is quite an influential factor. In examining
the paying capacity of an organisation, apart from profitability, various expenses that the
industry has to bear, certain trends in prices products/ services that are to be charged by the
industry should also be taken into account. In addition, total cost of employees 9salaries,
allowances, cost of franker benefits etc.) Should be taken into consideration in determining
the ability to pay. Trade unions demand higher wages when the company’s financial position
is sound. But they may not accept wage reduction, when the company’s financial position is
in doldrums. Hence, the management has to take decisions judiciously; further, certain
incentives are linked to the profitability. Thus, whatever the influence of other factors may
be, the organization cannot pay more than its ability to pay in the long-run.

Relating to Price Index: The cost of living is another important factor that influences the
quantum of salary. The employees expect that their purchasing power be maintained at least
same level, if not increased by adjusting wages to changes in cost of living. In recent years, in
advanced countries, “a number of labour agreements have ‘escalator’ clauses, providing for
automatic wage and salary increase as cost of living index raises.” Dearness allowance is an
allowance grated to the employees with a view to combating onslaughts of soaring prices.

Productivity: An interesting increasing development in wage determine has been

productivity standard. This is based on the fact that productivity increase is also the result of
employee satisfaction and contribution to the organisation. But wage productivity linkage
does not appear to be so easy since many problems crop up in respect of the concept and
measurement of productivity. But although the wages are not linked direct to the productivity
in an organisation, changes in productivity have their impact on remuneration. This criterion
received consideration of wage boards, “not only because it constituted a factor in the
fixation of ‘fair wage’ but also because it was directly related to such questions of desirability
of extending the system of payment by result.”

Union pressure and strategies: The wages are also often influenced by the strength of
Union, their bargaining capacity and strategies. Arthur M. Ross consult concluded that “real
hourly earnings have advanced more sharply in highly organized industry then in less
unionized industries.” Unions pressurize management through their collective bargaining
strategies, political tacts and by organising strikes etc. Trade unions influence may be on the
grounds of wages in comparable industries, firm’s financial position, rising living cost, those
industries where the wages level is below that of other comparable industries.”

Government Legislations: Government legislations influence wage determination. The two

important legislation which affect wage fixation are: the Payment of Wages Act, 1936 and
the Minimum Wages Act, 1948. The important provisions of Payment of Wages Act,
1936are: ensuring proper payment of wages and avoiding all malpractices like non-payment,
under payment, delayed and irregular payment, payment in kind and under-measurement of
work. The Act covers all employees drawing the wage up to Rs. 1000 per month. The Act
stipulation that the organizations with less than hundred workers should pay wage by the
seventh and the organizations with more than 100 employees should pay the tenth of month.

The Act also stipulation time to pay for payment of dues to the discharged employees. Under
the Act, fines can be levied after due notice to the employees and the fine, deduction are
restricted to 1/32nd of the wage

The important provisions of the Minimum Wages Act, 1948 are: The Act seeks to protect
the workers from under-payment of wages for their efforts, It presented the guidelines for the
fixation of minimum wages which is just sufficient to meet the basic needs of keep a man’s
body and soul’ together.

Statutory minimum wage is determined according to the prescribed by the relevant

provision of the Act. The Act provides for fixing of (i) Minimum wages in certain
employments; (ii) Minimum time rate; (iii) Minimum piece rate; (iv) Guaranteed time rate;
(v) Basic pay and AD. The Act also provides for revisions of minimum wage at fixed
intervals.

PRINCIPLES OF FIXATION OF WAGES AND SALARY

Salary or wage” means all remuneration (other than remuneration in respect of over-
timework) capable of being expressed in terms of money. Wages are defined broadly as any
economic compensation paid by the employer to his labourers under some contract for the
services rendered by them. In its actual sense which is prevalent in the practice, wages are
paid to workers which include basic wages and other allowances which are linked with the
wages like dearness allowances, etc. , but does not include-

(i) Any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or supply of light, water, medical
attendance or other amenity or of any service or of any concessional supply of
food grains or other articles;
(iii) Any traveling concession;
(iv) Any Bonus (including incentive, production and attendance bonus);
(v) Any contribution paid or payable by the employer to any pension fund or
provident fund or for the benefit of the employee under any law for the time being
in force;
(vi) Any retrenchment compensation or any gratuity or other retirement benefit
payable to the employee or any ex gratia payment made to him;
(vii) Any commission payable to the employee.

Principles of Wage Determination

The basic principle of wage and salary fixation is that it should be based on the relative
contributions of different jobs and not on the basis of who the job holders are. If this principle
is adopted, the first requirement is to identify the likely contributions of different jobs. This is
what job evaluation precisely does. It provides the information about what is the worth of a
job in terms of its contributions to the achievement of organizational effectiveness.

Overcoming Anomalies

Job evaluation, if carried on periodically and objectively, helps in overcoming various

anomalies which may develop in an organization over the period of time with regard to
compensation management. Knowles and Thomposon have identified that there are
followinganomalies and evils which may develop in an organization and may be overcome
by jobevaluation:

1. Payment of high wages and salaries to persons who hold jobs and vPositions not requiring
great skill, effort and responsibility;

2. Paying beginners less than that they are entitled to receive in terms of What is required of
them?

3. Giving a raise to persons whose performance does not justify the raise;

4. Deciding rates of pay on the basis of seniority rather than ability;

5. Payment of widely varied wages and salaries for the same or closely Related jobs and
positions; and

6. Payment of unequal wages and salaries on the basis of race, sex, religion, or political
differences. As the major production cost, wages affect profits, business investment,
competitiveness, and are a cost push inflationary factor. As the major income in the economy,
wages affect standard of living, income distribution and poverty, and demand-pull inflation.
As the source of wage disputes is the employer treating wages as their major

cost, and the employee viewing wages as their major income.

Norms for fixation of wages in industry.

1. While computing the minimum wages, the standard working-class family should be
considered as consisting of four consumption units and the earnings of women, children and
adolescents should be excluded.

2. The minimum food requirements should be determined on the grounds of a net intake of
2700calories as laid down by Akroyd for a normal adult in India.

3. Clothing needs should be established on the basis of a per capita consumption of 16.62
meters per year.

4. As regards housing, the minimum wages should be determined from the standpoint of the
rentcorresponding to the minimum area specified under the government Industrial Housing
Scheme.

5. Miscellaneous expenditure on items such fuel, lighting etc. should from 20 per cent of the
totalminimum wage. The resolution further prescribes that the authorities involved in the
issue should justify any deviation from these norms.The following principles have always
been the bases of the wage determination process.All are economically valid. At different
stages they have collectively, and singularly, been usedto determine wage increases.

1. Preserving real income:

This is the argument used by employees and Unions viewingwages as an income. Following
this principle usually results in wages being indexed to inflation.In periods of rising inflation,
indexation becomes a problem of an institutionalized wage-pricespiral. Underlying aspects
that have also impacted on real wage preservation arguments have been a "basic" minimum
wage, and comparative wage justice.

2. Labour productivity:

A valid economic theory connects wages to labour productivity.Conflict arises over the
measurement of productivity. Rewarding labour with a wage increasewhen technology,
and/or capital investment, increases labour efficiency may not be justified.

d keep jobs adequately manned

.7. Living wage:

This means that wages paid should be adequate to enable an employee tomaintain himself
and his family at a reasonable level of existence. However, employers do notgenerally favor
using the concept of a living wage as a guide to wage determination because they prefer to
base the wages of an employee on his contribution rather on his need.

8. Managerial Attitudes:

Top management’s desire to maintain or enhance thecompany’s prestige is a major factor in

the wage policy of a number of firms. Desires to improveor maintain morale, to attract high
caliber employees, to reduce turnover, and to provide a highliving standard for employees as
possible also appear to be factors in management’s wage policydecisions.

9. Psychological and social factors:

these determine in a significant measure how hard a person will work for the compensation
received or what pressures he would exist to get hiscompensation increased. Psychologically,
persons perceive the level of wages as a measure of success in life, people might feel secure,
has an inferiority complex, seem inadequate or feel thereverse of all these. Sociologically and
ethically, people feel that “equal work should carry equalwages” that ‘wages should be
commensurate with their efforts’ that they are not exploited and

“that no distinction is made on the basis of caste, color, sex or religion.” To satisfy the
conditionsof equity, fairness and justice, a management should take these factors into
consideration.

PRINCIPLES OF WAGE AND SALARY ADMINISTRATION

The government of India provides many regulations for regulating the wages and
salaryadministration such as,

➢The minimum wages act 1998

➢The equal remunerations act 1976

➢The companies act 1956

➢The industrial dispute act 1956

➢The payment of wages act 1936 etc.

The following guidelines should be followed in the administration of wages and salary,

1.Wage policy should be developed keeping in view the interests of the employer, the
employees, the consumers and the community.

2.Wage policy should be stated clearly in writing to ensure uniform and

consistentapplication.

3.Wage and salary administration should be consistent with the overall plans of the company.
Compensation planning should be an integral part of the financial planning.

4.Wage and salary plans should be sufficiently flexible or responsive to changes internaland
external conditions of the organization.

5.Management should ensure that employees know and understand the wage policy of
thecompany.

6.All wages and salary decisions should be checked against the standards set in advance inthe
wage policy.

7.Wage and salary plans should simplify and expedite administrative process.
8.An adequate database and proper organizational setup should be developed for
compensation determination and administration.

9.Wage policy and programme should be reviewed and revised periodically in

conformitywith changing needs.Thus, by following the above mentioned principles of
determination andadministration of wages and salary the objectives such as- to establish fair
andequitable remuneration, to attract competent personnel, to retain presentemployees, to
improve productivity, to control costs, to establish job sequencesand lines of promotion
wherever applicable, to improve union managementrelations, to improve public image of the
company can be effectively met.