This document discusses key concepts related to wages and compensation management. It defines wages, salaries and earnings and outlines the objectives of compensation programs such as maintaining equity and creating skilled workforces. It also examines factors that influence wage determination like ability to pay, demand and supply, prevailing market rates and cost of living. Methods of wage payment like time rates, piece rates and incentive plans are covered. The importance of wages and salary administration for attracting employees and ensuring satisfaction is also discussed.

1. WAGES AND COMPENSATION MANAGEMENT
Prepared by Ms. Shery Asthana
Asst. Prof. (Greater Noida Institute of Management)

2. Wage and Salary Administration – Basic Concepts
• A ‘wage’ (or pay) is the remuneration paid, for the service of labour in
production, periodically to an employee/worker. “Wages” usually refer to
the hourly rate or daily rate paid to such groups as production and
maintenance employees (“blue-collar workers”).
• Indian Labour Organisation (ILO) defined the term wage as “the
remuneration paid by the employer for the service of hourly, daily, weekly
and fortnightly employees”.
• ‘Salary’ normally refers to the weekly or monthly rates paid to clerical,
administrative and professional employees (“white-collar workers”).
• Earnings are the total amount of remuneration received by an employee
during a given period. This includes salary, dearness allowance, house rent
allowance, city compensation allowance, other allowance, overtime
payments, etc.
• The term ‘Wage Structure’ is used to describe wage/salary relationships
within a particular grouping. The grouping can be according to occupation,
or organisation, such as wage structure of craftsman (carpenters,
mechanics, bricklayers, etc.)

3. The Objectives of compensation and administration programme are:
i. To ensure maintenance of equity in respect of payment of salary/wages in terms of
equal pay for equal work.
ii. To establish a system of job analysis so that job description and job specification
activities can be accurate and specific.
iii. To create a pool of talented, skilled and dynamic work force, so that they can
deliver quality goods and services at reasonable cost.
iv. To make employees aware of wage and salary policies, procedures, practice, latest
amendments (if any), so that they can make comparative study with other
organizations to find out salient changes/variations if any.
v. To ensure effective control over all activities concerning wage/salary, welfare, social
security, fringe benefit, incentive, bonus etc.
vi. To introduce a system for complying with provisions of law, statutes and for proper
implementation of agreements, settlement in respect of compensation of
employees.
vii. To make evaluation of jobs so that there cannot be any dissatisfaction amongst
employees in respect of their wages / salaries and other benefits.
viii. To evaluate employee performance accurately for identification of performers and
non-performers so, that steps can be taken to develop competencies for
performance of present jobs and future jobs also.

4. Factors influence the Determination of Wage rate
1. Ability to Pay:-The ability of an industry to pay will influence wage rate to be
paid, if the concern is running into losses, then it may not be able to pay higher
wage rates. A profitable enterprise may pay more to attract good workers.
During the period of prosperity, workers are paid higher wages because
management wants to share the profits with labour.
2. Demand and Supply:
The labour market conditions or demand and supply forces to operate at the
national and local levels and determine the wage rates. When the demand for
a particular type of skilled labour is more and supply is less than the wages will
be more. One the other hand, if supply is more demand on the other hand, is
less then persons will be available at lower wage rates also.
3. Prevailing Market Rates:
No enterprise can ignore prevailing wage rates. The wage rates paid in the industry
or other concerns at the same place will form a base for fixing wage rates. If a
unit or concern pays low rates then workers leave their jobs whenever they get
a job somewhere else. It will not be possible to retain good workers for long
periods.

5. 4. Cost of Living:-In many industries wages are linked to enterprise cost of living which ensures a
fair wages to workers. The wage rates are directly influenced by cost of living of a place. The
workers will accept a wage which may ensure them a minimum standard of living.
• Wages will also be adjusted according to price index number. The increase in price index will
erode the purchasing power of workers and they will demand higher wages. When the
prices are stable, then frequent wage increases may not be required
5. Bargaining of Trade Unions:-The wage rates are also influenced by the bargaining power of
trade unions. Stronger the trade union, higher will be the wage rates. The strength of a trade
union is judged by its membership, financial position and type of leadership.
6. Productivity:-Productivity is the contribution of the workers in order to increase output. It
also measures the contribution of other factors of production like machines, materials, and
management .Wage increase is sometimes associated with increase in productivity. Workers
may also be offered additional bonus, etc., if productivity increases beyond a certain level. It
is common practice to issue productivity bonus in industrial units.
7. Government Regulations:-To improve the working conditions of workers, government may
pass a legislation for fixing minimum wages of workers. This may ensure them, a minimum
level of living. In under developed countries bargaining power of labour is weak and
employers try to exploit workers by paying them low wages. In India, Minimum Wages Act,
1948 was passed empower government to fix minimum wages of workers. Similarly, many
other important legislation passed by government help to improve the wage structure.

6. Importance of Wages and Salary Administration
•Attract and Retain the Employees: If an organization possesses good wage and salary
structure, it will attract and retain suitable, qualified, and experienced personnel.
•Builds High Morale: The wage rates established for various categories of jobs should be
internally consistent; it will motivate the employees of the organization. It will build the high
morale of employees and act as an incentive to greater employee productivity and efficiency.
•Satisfied Employees: A good wage and salary structure will keep the employees satisfied. There
will be lesser labor turnover, industrial disputes and employee grievances and exigencies.
•Labor Cost Equitable: A good wage and salary structure will maintain two types of equitabilities
viz., (a) labor cost equitable and, (b) equitable wage and salary structure. Pay according to the
work performed by an employee. If an employee is performing hazardous work pay him more.
•No Favoritism/Bias: If an organization has a definite wage and salary structure, favoritism bias
can be avoided.
•Clearly drawn the line of promotion: If a company has a good wage and salary structure, it can
have a definite sequence of jobs and clearly drawn the line of promotion.
•Image of Progressive Employer: A good and definite wage and salary structure would enable
the company to project in the public. All image of a progressive employer.
•Harmonious Industrial Relations: A good wage and salary structure will serve as a sound basis
for collective bargaining and enable the maintenance of satisfactory union-management and
employee-management relations.
•Ensure Minimum Wages: A good wage and salary structure should also conform to the
minimum wage laws.

7. Job Evaluation
A process of determining the relative worth of the various jobs within the
organisation so that differential wages may be paid to jobs of different worth.
Job Evaluation as an effort to determine the relative value of every job in a
plant to determine what the fair basic wage for such a job should be.
The main characteristics of job evaluation may be summed up as:
1. It is a method with a systematic approach.
2. It is an analysis of the work involved in its starting point.
3. It is an attempt to determine the requirements of the work involved for any
incumbent.
4. It is a process by which jobs in an organisation are appraised.
5. It is a process of analysing and describing positions, grouping them, and
determining their relative value by comparing the duties of different positions
in terms of their different responsibilities and other requirements.

8. Job Satisfaction
• Pleasurable emotional state resulting from the appraisal of one’s job as
achieving or facilitating the achievement of one’s job values.
• Job satisfaction is defined as the extent to which an employee feels self-
motivated, content & satisfied with his/her job. Job satisfaction happens when
an employee feels he or she is having job stability, career growth and a
comfortable work life balance. This implies that the employee is having
satisfaction at job as the work meets the expectations of the individual.
• Job Satisfaction factors
– Compensation & Working Conditions
– Work life balance
– Respect & Recognition
– Job security
– Challenges
– Career Growth

9. Wage Payment: Method
• Time Rate Plan: The method which is related to the hours of work is known as Time
Rate Plan. Under this method the worker is paid at an hourly, daily or weekly rate
and his remuneration, thus, depends upon the time for which he is employed and
not upon his contribution to production.
This method of wage payment is suitable where:
(1) The quality of the work is of paramount importance;
(2) The output of the individual workers cannot be measured;
(3) The speed of production cannot be influenced by the energy of the worker;
(4) Where close supervision of work is possible; and
(5) Where increased production and productivity do not commensurate with the
incentive paid.
• Piece Rate: This system is also known as payment by result. Under this system the
payment of wages is based on performance. This system is the oldest and is widely
applicable in many industries like garment manufacture, ancillaries of various kinds,
plastic, footwear, printing etc. Payment of wages is based on the number of units of
a product produced by a worker irrespective of the time taken.

10. • Incentive Wage Plans: Premium Bonus Systems are variations of the piece rate
systems and they mainly differ in showing of bonus. The mechanism of this system
is that the results of efficiency are shared by the employer and employee on some
agreed basis.
The basic purpose of an incentive wage is to induce worker to produce more so
that he can earn a higher wage. It aims at both increased productivity and
production. The factory overhead cost per unit is reduced because of increased
production i.e. greater number of units are produced.
• The following features are common to all types of premium bonus plans:
(i) Minimum wage is guaranteed to every worker.
(ii) Savings arising out of employee’s higher efficiency are shared by both the
employer and the employee
(iii) Labour cost decreases with the increase in production and productivity.
(iv) Employees are provided with modern facilities, equipment and latest
techniques to increase productivity and production.
Incentive wage plans involve differential piece rates and bonus plans. The premium
bonus plan may be individual or group.

11. Wages and Salary Administration
with Major Component
• The wage or salary components of Indian employees depend on various factors
such as paying capacity of employers, conditions of labour market and legal
provisions.
The major components of an employee’s wage are:
1. Basic Pay
2. Dearness Allowance (D.A.)
3. Incentive
4. Fringe benefits
5. Annual statutory bonus
1. Basic Pay:
• It is a wage paid over a period of time to the employees. Period of time could be
monthly or fortnightly. The principles of various methods of regulation of pay
serve as guidelines in determining basic pay. Besides these, the nature of job,
experience needed and specific skill required to perform a particular job are also
considered during the course of fixing of basic pay.

12. 2. Dearness Allowance (D.A.):
D.A. is the second important component of wage packet paid to the employee
which compensates the rise in prices of essential commodities. In other words, D.A.
is paid to neutralize the effects of inflation. Now a days, the payment of D.A. has
become an integral and essential part of the organizational wage system in India.
Generally three methods are applicable for the computation of D.A. in India:
(i) All India Consumer Price Index (AICPI) – The Labour Bureau Shimla, compute the
AICPI from time to time considering the base 1960 = 100 points.
(ii) Time Factor – D.A. is linked to the rise in the AICPI is a related period instead of
linking it to fortnightly or monthly fluctuations in index.
(iii) Point Factors – D.A. rises in line with a rise in the number of index points above
a specific level.
3. Incentive:-
Incentive plans are applicable to all the employees of the organisation but payable
to only efficient and performer employees. Employees of higher skill and energy
can earn extra wages by extra effort. Incentives are designed to stimulate human
effort over and above the current efforts. It gives the employees a feeling of
security, fair dealing and also ensures higher productivity and high wages. Both
employer and employees share the benefit of time saved. It is the best example of
win-win situation.

13. 4. Fringe Benefits:
This refers to the extra amount paid to employees in addition to the normal wage or salary.
They are applicable to all employees of the organisation and are not directly related to the
performance of employees. Now a days, these fringe benefits become important part of a
compensation package of employees.
These are house rent allowance, city compensatory allowance, medical allowance, home
travel concession, medical and educational facilities, transport benefit, paid holidays,
subsidies loan facilities such as – house construction and vehicle loan, provident funds,
gratuity and pension funds and other benefits.
5.Bonus:-
Bonus is a very important earning component of employees, besides wage or salary. The
dictionary meaning of bonus is an addition payment amount of the employees beyond the
normal wage or salary. According to Corpus Juris Se cundum, “Bonus is an allowance in
addition to what is usual, current or stipulated; a sum given or paid beyond what is legally
required to be paid to the recipient; something given in addition to what is ordinarily
received by or strictly due to the recipient.”
It means bonus carries an idea of something uncertain and indefinite in addition to the
normal wage or salary, paid to the employees after the close of financial year; under. The
payment of bonus act, 1965, it has secured the legal right of the employee.