Salary and Wage Administration | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

The term 'Wage and Salary Administration' refers to the development and implementation of effective policies and practices for compensating employees. Its primary goal is to establish and maintain a fair wage and salary structure. Wages and salaries are often a significant cost in production, impacting a company's growth and profitability. Yet, they are also the main source of income for workers.

Following independence, new wage-related terms emerged, including:

• Statutory Minimum Wages: This refers to the minimum wages legally required under the Minimum Wages Act, 1948.
• Basic Minimum Wages: These are minimum wages set by judicial decisions, industrial tribunals, or labor agreements, which employers must provide to workers.
• Minimum Wages: The concept of minimum wages varies across countries. In the Indian context, it refers to the minimum amount necessary for a worker's sustenance and efficiency, as per the Fair Wage Committee. This includes provisions for education, medical care, and other amenities.
• Fair Wages: This term aims to ensure a fair deal for laborers and improve labor-management relations. The Industrial Truce Resolution of 1947 and the Fair Wages Committee of 1948 aimed to establish principles for fair wages based on the minimum and living wages.
• Living Wages: These are wages that enable a worker to provide not only for basic necessities but also for a measure of comfort, education, health care, and social needs. The level of living wages should be determined based on the national income and the industry's capacity to pay.
• Need-Based Wages: This concept suggests that minimum wages should be determined based on the needs of the worker's family. The Indian Labour Conference of 1957 recommended guidelines for calculating minimum food, clothing, housing, and other essential expenses.

Overall, these terms reflect the evolving understanding of fair compensation and the recognition of workers' needs beyond basic survival.

Wage And Salary Administration - Objectives

The objectives of wage and salary administration are:

• To formulate or revise company HR policies.
• To determine the income levels and return ratios of similar industries.
• To analyze wage disparities.
• To assess the competitiveness of entry-level employee wages.
• To establish hiring rates that are favorable to the community.
• To align wage and salary rates with production costs.
• To reduce labor turnover caused by wage disparities.
• To enhance employee satisfaction and morale.
• To understand market trends in perks and benefits.
• To address existing labor issues related to compensation.

Types of Wages

Determining fair wages can be challenging for management, and it requires careful consideration. Wages can generally be classified into three categories:

• Time wage: This payment method compensates workers based on the time they spend working, such as per hour, per day, per month, or per year. There is no direct correlation between the amount of work performed and the wage earned. This system is commonly used in Indian industries. While it is straightforward and encourages workers to work at their convenience, it may also lead to unnecessary delays and make it difficult to measure worker productivity.
• Piece Rate System: In this payment plan, a worker's compensation is tied to their output, regardless of the time taken to complete the job. The more work they produce, the more they earn. This system incentivizes workers to produce more and allows them to work independently without constant supervision. However, it may not be suitable for goods with artistic value, and the quality of the products can be compromised.
• Wage Incentive Plan: This payment plan combines elements of both time and piece rate systems. It includes:
  • Halsey Premium Scheme: Workers receive a bonus, typically 33% to 50%, if they exceed the standard output for a job within a set time frame. If the job is completed before the standard time, the worker receives a bonus based on the time saved.
  • Rowan Premium Scheme: A worker is paid a premium based on the time saved compared to the standard time. This premium cannot exceed the standard wages.
  • Taylor's Plan: Workers are paid based on the number of units produced. Higher rates are set for workers who exceed the standard workload, while lower rates are set for those who fall below it.
  • Merrick Plan: Workers are offered three grade piece rates based on their efficiency: low for new workers, average for workers with average efficiency, and high for very efficient workers.
  • Gantt Plan: Wages are based on time, but efficient workers receive higher rates per unit of output.
  • Emerson Plan: A combination of the Taylor, Merrick, and Gantt plans, with varying bonus rates based on efficiency.
  • Profit-Sharing Scheme: Workers receive a percentage of the company's profits as a bonus. However, if there are no profits, workers do not receive a bonus, which can lead to worker dissatisfaction.
  • Scalan Plan: Workers receive a bonus based on the percentage of profits earned above the previous year's profits. A portion of this bonus is deducted and distributed among workers in the following year.

Wage Determination

Determining wages involves a multi-faceted process. This includes conducting job analysis, salary surveys, analyzing organizational issues, constructing wage structures, establishing wage administration rules, communicating these to employees, assigning grades and prices to each job, and ensuring the payment of guaranteed wages. The wage determination process is a series of steps that are interconnected.

Wage Determination Process:

• Job Analysis: This step involves identifying the specific tasks, knowledge, and skills required for a job, as well as the conditions under which it must be performed. It is a technical process used to define job duties, responsibilities, and accountabilities. This includes determining the methods, equipment, skills, and attitudes necessary for effective job performance.
• Job Evaluation: This is a formal process used to assign wage and salary rates to jobs. Various systems and products exist to guide this process, each with different approaches to packaging, pricing, philosophy, procedures, and utility. It is a systematic technique for determining the value of a job, which makes it easier to establish a fair and rewarding wage structure.
• Conducting Salary Surveys: Once job evaluation has determined the relative worth of jobs, the actual amounts to be paid must be determined. This is done by conducting wage or salary surveys in the relevant area. Employers use these surveys in several ways: to price benchmark jobs, to price a percentage of positions directly in the market, and to collect data on benefits.
• Grouping Similar Jobs into Pay Grades: After determining the relative worth of each job, jobs are grouped into pay grades, which consist of jobs of approximately equal nature or importance. This is done based on job evaluation results.
• Preparation of Wage Structure: The next step is to establish the wage structure. This involves making decisions such as whether to provide for merit increases, whether to pay above, below, or equal to the market average, and determining the number and width of pay grades and the extent of overlap. The wage curve is used to help assign pay rates to each pay grade or job.
• Developing Pay Ranges: Jobs that are similar in terms of classes, grades, or points are grouped together, and pay ranges are developed for each pay grade. These pay ranges make it easier to attract experienced employees and allow for performance differences between employees.
• Wage Administration Rules: Finally, rules for wage administration are developed, which determine how advancements in service are determined (based on seniority or merit), how control over wage and salary costs is maintained, and the frequency of pay increases.

Factors Affecting Wage and Salary Administration

The wage policies of organizations vary, with some paying the minimum necessary to attract labor, while others pay above market rates to attract high-quality workers. Some managers believe in the economy of higher wages, thinking that paying more will attract better workers who will be more productive. However, most organizations aim to be competitive in their wage programs, paying near the going rate in the labor market.

A sound wage policy involves adopting a job evaluation program to establish fair wage differentials based on job contents. Factors typically considered for wage and salary administration include:

• The organization's ability to pay: Wage increases should be given by organizations that can afford them. Companies with high profits tend to pay higher wages than those running at a loss.
• Supply and demand of labor: Labor market conditions determine wage structure and level. If demand for certain skills is high and supply is low, wages for those skills rise.
• Prevailing market rate: Organizations generally conform to the wage rate in the industry and community. This is influenced by competition, government laws, trade unions, and the need to attract and maintain a sufficient quantity and quality of manpower.
• The cost of living: Pay adjustments are based on increases or decreases in the cost of living index. Workers and trade unions demand wage adjustments when living costs increase.
• The living wage: Wages should enable an employee to maintain a reasonable standard of living. However, employers prefer to base wages on contribution rather than need.
• Psychological and social factors: Wages are perceived as a measure of success, security, and self-worth. People may take pride in their work and wages, or feel inadequate.
• Skill levels available in the market: With rapid growth and technological advancements, the skill levels of employees are constantly changing, affecting wage levels.

In summary, wage and salary administration is influenced by various factors, including the organization's ability to pay, labor market conditions, prevailing market rates, the cost of living, the living wage, psychological and social factors, and skill levels in the market.