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Wages and Salary

By,Faisal Ahmed KhanMBA- 2nd SemHKBK-CE

Contents:Wage and Salary Administration,Factors Influencing Compensation Levels,Wage Payment Methods,Executive Compensation.

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Definitions:Wage: A regular payment, usually on an hourly, daily, or weekly basis made by an employer to an employee, especially for manual orunskilledwork.Salary:A fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee, especially a professional or white-collar worker.Compensation: Somethinggivenorreceivedasanequivalentforservices,debt,loss, injury,suffering,lack,etc.;Example: Theinsurancecompanypaid him$2000ascompensationfortheloss ofhiscar.

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Wage and Salary Administration:A group of activities involved in the development, implementation, and maintenance of a pay system.An ongoing process of managing a wage and salary structure.

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Why do we need to study Wage and Salary Administration?To have a scientific, rational, and balanced wage and salary structure.In a salary administration, the employer should not feel that the employees are paid more than they deserve and the employees should not feel that they are underpaid.The ultimate goal of wage determination process is to establish & maintain an equitable wage structure that enhances the employee commitment to the organization.

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Wage determination process:6

Theories of Wages:1. Classical Wage Theory: This theory is based upon the fundamental concept that labor is a commodity and we have to pay the price according to supply and demand.

2. The Just Wage Theory of St. Thomas Aquinas: A just wage is described as wage which permits the recipient worker to live in a manner in keeping with his position in the society.

3. The Wage Fund Theory: This theory is expounded by John Stuart Mill and his followers based on the Malthusian theory of population and the law of diminishing returns.

4. Bargaining Theory of John Davidson: This theory proposes that the labor is a commodity like anything that could be bought at a price by the user.

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6. The Purchasing Power Theory: This theory tries to establish the relationship between wages and the level of economic activity.

7. Labor Theory of Value: It emphasizes that labor is the source of all the products and that without this important component, there could be no goods for human consumption.

8. The Standard of Living Theory of Wages: A recent development in the labor market is the theory of living wages that means that wages should be based on the cost of living.

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Wage and Salary Surveys:Once the worth of a job has been established, using one of the job ratings systems, the actual salary to be paid for each job must be determined. A major factor in making the determination is the wage survey. Since salaries paid by other companies have an effect on employment, morale and turnover rate, close attention is paid to the salary that is prevailing in the community and industry for specific jobs.A survey ofemployersin the sameindustryand the same area showing thewagesandsalariesthey pay to theiremployees.9

Wage and salary surveys are useful because they show the prevailingcompensationin a given city or other place, which may result in employers making upward or downward adjustments.

The Types of Surveys are:Formal surveys use questionnaires based on benchmarks jobs. The Human Resource Department can prepare sets of questionnaires for their respondents.Informal surveys may be conducted through telephones or informal interviews.

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Steps in Conducting The Surveys:11

Defining the Labor Market: Establishing the boundaries of the pertinent labor market is the most critical step in in the survey procedures. It involves the selection of the industry, the region or area, or the firm to be included in the survey.List of Key Job Position: Selected as universal for a particular wage or salary survey. This will ensure a representatives sampling of the jobs.Detailed Description of Jobs: Key jobs are the labor grades that are comparatively stable in duties and responsibilities. These are occupations that are common in most industries and scattered through the ladder of labor classification and commonly familiar to most people in the industry.

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Collection of Salary Data: This may be done through a set of questionnaires and supplemented by interviews to get the accurate information. The Information must be able to pinpoint the problem areas. Compilation of Salary Data: The data gathered will provide management with the opportunity of arriving at the arithmetical average, the median, and the rage rate paid and the supplementary wage data.Results Surveys: From Here the results are properly evaluated and the HRD prepares the corresponding recommendations to the management of the most appropriate action to take relative to the revision of the current wage structure. Participating companies are also provided with the summary of the findings to foster continuous cooperation.

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Wage Structure in India:Basic PayOvertime PaymentAnnual Bonus14

Factors affecting compensation levels:Ability to pay.Cost of living.Prevailing wage rates.Unions.Productivity.State regulation. Job needs. Demand and supply of labor.

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Executive Compensation:Executives are the key employees of the company.E.g. CEO, CXO, CFO, COO, CTO, CIO, CBO, CHRO, CCO, CMO, MD, VP, GM, President and The Director.

Executive Compensation Includes:Core Compensation: Base Pay+Bonus.Incentives.Stock Options.Fringe Compensation.16

Highest Paid CEOs:17YearCEO, CompanyCompensation1990Steven Ross, Time Warner$75,000,0001991Roberto Goizueta, Coca-Cola$61,000,0001992Alan Greenberg, Bear Stearns$16,000,0001993George Fisher, Eastman Kodak$29,000,0001994Lawrence Coss, Allied Signal$34,000,0001995Lawrence Coss, Green Tree Financial$66,000,0001996Michael Eisner, Walt Disney$194,000,0001997Henry Silverman, Cedant$194,000,0001998Michael Dell, Dell Compter$94,000,0001999Charles Wang, Computer Associates$507,000,0002000Steven Jobs, Apple Computer$381,000,000

Highest Paid Indian CEOs:Name:Company:Designation:Renumeration:(Crores p.a.)Kalanithi MaranSpicejetDirector56.25Balu Ganesh AyyarMphasiSExecutive Chairman & CEO7.45Ashok VemuriiGateCEO8.17N ChandrasekaranTCSMD & CEO11.6Vineet NayarHCLVice Chairman & Joint MD8.42

Vishal SikkaInfosysCEO30T K KurienWiproCEO6.13

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Who Sets Executive Compensation?Compensation Consultants ,Compensation Committees,Board of Directors,Shareholders.

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Methods of Wage Payment:Time Wage System: Laborers get wage on the basis of time which is utilized in organization irrespective of the quality of work done. These wages may be charged on per hour, per day, per month or per year basis. It is also called as day wages system or time work system where the laborer/ employee is paid on the basis of production hours.W=T*R.20

Suitability of Time Rate System: The system may prove to be quite ideal is the following cases:Where quality of production is relatively more important than quantity, e.g., tool room, testing and inspection, etc.Where it is difficult to measure the performance precisely, e.g., the performance of indirect workers, night watchman, gate-keepers, maintenance and repair work, etc.Where output of the worker is beyond his control, e.g., where his speed of work is restricted by the speed of machines or conveyor belts, or where his work is dependent upon the work done by other workers.Where close supervision of work is possible.Where the nature of work is such that there is no basis for incentive plan, e.g., night watchman.Where production is intermittent on account of delays, power shut-down, etc.

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Advantages Of Time Rate System: The following are some of the important advantages of time rate system ofwagepayment:

* Time rate system is simple to understand and easy to calculate.* Time rate system is quite useful for organizations that use costly inputs for quality outputs.* Time rate system is beneficial for average and unskilledworkers.* Time rate system assures regular income and creates the feeling of economic security among theworkers.* Time rate system does not discriminate theworkersand is preferredby tradeunions.22

Disadvantages Of Time Rate System: The following are some notable disadvantages of time rate system ofwagepayment:

* Time rate system does not help in increasing output and improving efficiency as there is no correlation between effort and reward.* Time rate system is not justifiable betweenefficientand inefficientworkersandskilledand unskilledworkers.* Time rate system pays for idle time, which increases the cost of production. *Time rate system encourages a slow tendency among workers during working hours and encourages them to work overtime.* It is difficult toestimateexact labor cost in advance.* It requires strict supervision to get the required quantity of output.

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Piece Wage System:Laborers get the wages on the basis of their work done. No time element will be used for calculation of wages. Under this method, laborer tries his best for producing the products faster for getting more wages. This method is also called payment by result. In simple words the the employee is paid on the basis of the work done.W=U*R.

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Piece rate system is suitable under following situations:Where production quantity is more important than the quality of the product.When the work is of repetitive nature.When the mass manufacturing system of production is followed and the work is standardized suitable for continuous manufacturing.When it is possible to measure the production output of worker separately.When strict supervision is not required and difficult.When the production is dependent on human efforts.

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Advantages Of Piece Rate System: The following are some important advantages of piece rate system ofwagepayment:

* Piece rate system payswagesaccordingto the output producedby theworkers. It encouragesefficientworkers.* Piece rate system helps toreduceidle time.* Piece rate system gives incentives to theworkersto adopt a better methodof production for increasing their production and earning.* Piece rate system helps the management to determine the exact labor cost per unit for submitting quotation.* Piece rate system reduces per unit costof productiondue to increased volumeof production.* Piece rate system requires less supervision cost.26

Disadvantages Of Piece Rate System: The following are the notable disadvantages of piece rate system:

* Piece rate system does not help in producing quality output as theworkersare concentrated more on quantity instead of quality.* Piece rate system does not help for a uniform flowof productionand makes difficult to regulate the production schedule.* It is very difficult to fix an acceptable and reasonable piece rate for each item of output or job.* Piece rate system adversely affect theworkers' health as well.* It requires extra supervision cost for quality output and effective use of materials,tools and equipment.27

Types of Piece Wage Systems:Straight piece rate: In this system, the piece rate forms the basis of payment i.e. payment for whole production is made on the basis of piece rate fixed. If the piece rate of Rs. 1.5 per .unit is fixed, then the wages will be calculated by multiplying the output by the rate fixed.E.g.: A worker producing 200 units will get Rs. 3000 (i.e. 200 x 15). If the production output is raised to 210 the wages will be Rs. 3150 (210 x 15). Thus a worker will have to increase the output in order to get higher wages. The rate of payment remains same irrespective of production level or level of output.

Increasing piece rate: In this system different rates are fixed for different levels of production. A certain production level is decided and if the production goes beyond that level, higher rates are given. For example, a piece rate of Rs. 21- per unit may be fixed for production up to 100 units, Rs 2.10 per unit for output between 101 to 150 units and Rs. 2.25 per unit for a production beyond 150 units and so no. There is an incentive to get higher rate for production beyond a certain level.28

Balance or Debt Method: This method is a combination of time and piece wage systems. The worker is guaranteed a time rate with an alternative piece rate. The employee is paid for completing the tasks in deadlines.In this method, a worker is paid a fixed wage based on the time rate with a provision of piece wage method. How? This is just like minimum rent with a provision of short working recoupment in case of royalty. If a worker produces less quantity in a period, he is given wages as per time rate and excess paymentover piece rate is treated as credit.This credit is compensated in the period when he/she produces more than time rate wages. Thus, he is given time wage whether he produces more or less than it.

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Suppose, the time wage is Rs. 500 per week and the piece wage rate is Rs. 10 per unit..This method ensures the worker the receipt of a fixed amount as wage in all cases. From workers point of view, this method has relevance in work situation where work flow is flexible /irregular such as docks. This method is also known as debt method.30

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Thank you