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COMPENSATION ADMINISTRATION

Introduction to Wage and Salary Administration

Submitted by: BSBA-HRDM3-3 Group 1 Maria. Lourdes Liong (leader) Caroline Manuel Kim Charmaine Cruz Sheila Bernavidez

Submitted to: Prof. Ma. Lourdes Hernandez

Compensation administration is a tool used by the management to acknowledge employees contribution to the organization and boost their morale, thus leading to

higher productivity; to further the existence of a company and to improve economic conditions of the community as well. It is a segment of management which focuses on the direct (allowance, incentive pay, salaries, wages &) and indirect payments (health insurance, vacation pay & deferred pay) employees get in exchange for the work they perform. But for our report, we will be focusing on the direct form of compensation, specifically salaries and wages. Salaries and wages are basic monetary provisions to employees by an employer in return for work performed as required. The main difference between salary and wage is that the former usually refers to the remuneration of white-collar employees and is measured by weekly, monthly or yearly periods for rendered service, while the latter refers to the pay of blue-collar workers for their manual labor-skills and is measured hourly, daily or by piecework. Regardless of the size of the organization, wage and salary administration is of vital importance. Larger companies establish a section or division focused on managing financial compensation while smaller ones usually assign it to an employee as part-time activity. DEVELOPMENT OF WAGE AND SALARY STRUCTURE There are seven primary but interrelated factors that shape a company's pay structure: 1. Social Customs: Beginning in the thirteenth century, employees began demanding a "just" wage. This idea evolved into the current notion of a federally mandated minimum wage. Hence, economic forces do not determine wages alone. 2. Economic Conditions: Demand for labor influences employee wages. In addition to that is the cost of living or the purchasing power of the money earned by the employee. During inflations, necessary adjustments in wages/salaries have to be made for an employee to provide for himself and his family. 3. Company Factors: Pay structures depend on the ability of the firm to pay and the kind of technology a company has and on whether a company uses pay as an incentive to motivate employees to improve job performance and to accept more responsibilities. 4. Job Requirements: Some jobs may require greater skills, knowledge, or experience than others and so, means a higher pay rate. 5. Employee Knowledge and Skills: Likewise, employees bring different levels of skills and knowledge to companies and hence they are qualified to work at different levels of a company hierarchy and receive different rates of pay as a result. 6. Employee Acceptance: Employees expect fair pay rates and determine if they receive fair wages by comparing their wages with their coworkers' and supervisors' rates of pay. If employees consider their pay rates unfair, they may seek employment elsewhere, put forth little effort in their jobs, or file lawsuits.

7. Legal Requirements: laws and government regulations related to wages and salaries examples of which are the Minimum Wage Law, Child Labor FACTORS AFFECTING WAGE PLANS There are several factors that affect wage plans, two of which are external competitiveness and internal competitiveness. External competitiveness is how a company's rates of pay compare to those of its competitors. It means balancing the need to keep operating costs (including labor costs) low with the need to attract and retain quality workers. On the other hand, internal competitiveness refers to how employees perceive their co-workers as rivals for pay. If an employee sees that theres bias in the pay system and that higher salaries are given to undeserving performers, the system is broken and will eventually lead to the companys loss of its many workers. The management must inform and explain to employees the relationship between the pay system to specific jobs and situations and how the differences of those jobs and situations are recognized and compensated. Compensation will only be perceived by employees as fair if based on systematic components established to maintain equity such as:

Job Descriptions- A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis-The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. Job Evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Grade Classifications Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre-determined through collective bargaining. Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company.

WAGE LEVELS An acceptable measure, avoiding extremes of too low and too high level of wages, must be established by the management. In the case of too low wages, the effects are poor labor quality, low turn-over rate, difficulty in hiring new employees and low morale of the members of the organization. While the other, high wage level, would still be unadvantageous as well. This is because of the fact that a stable labor force in that condition could lead to being inactive. There are certain factors to be taken into account in the formulation of wage levels: 1. 2. 3. 4. 5. Labor requirement as duly provided by the laws related to labor. Going wage rates that differ depending on locality or geographical area. Relative strength of labor in collective bargaining. Company profits and its ability to pay high wages and wage increases. The productivity of labor. Though quite difficult to determine accurately since modern plants today use not only humans but machinery and equipment too. 6. Supply of labor. This refers to the availability prospective workers with required skills and expertise. 7. Amount essentially and sufficiently needed for a decent living. Final establishment of this wage level has a considerable impact on the companys relations with other manufacturers in the industry, public relations and its ability to attract and keep a good and sufficient size of work force. LABOR MARKET In a free market or laissez-faire economy like the Philippines, the condition of the labor market with regards to demand for labor would be the primary determinant of wage/salary rates because the cash value of everything is influenced by its utility and scarcity. In this light, scarcity or abundance of skilled workers at a certain time and place needed has a major influence on amount of wage/salary paid. Moreover, it is influenced not only by existing but also potential possibilities within the market, which is by the presence or absence of competitive kinds of labor or subtitutes for human labor. FACTORS GOVERNING OCCUPATION: SUPPLY OF LABOR FOR PARTICULAR

1. Size of labor force. It refers to the number of qualified workers who are able and willing to render their services in a certain market at a specified time. The size of the labor force has an effect on wage/salary price. 2. Attractiveness of the job. Attractive jobs with desirable working conditions will capture the interest of many workers as opposed to unattractive and hazardous jobs which pose a threat to the safety of workers, like for instance, factory work in chemical plants or window cleaners of high buildings.

3. Degree of natural skill and ability required. Certain specialized knowledge, skills and abilities are demanded in some jobs, like those in the computer and electronics industry. And lack of people who possess those requirements demanded by certain industries will lead to a scarcity in labor supply. 4. Length of training required. Some jobs require further extensive training after completing intensive training. They must undergo training for several months before they are placed on their regular job. Demand for labor is the number of workers whose services are wanted/needed in a given market at a particular price. Some of this come from consumers needing personal services by professionals. Just like for supply of labor, there are factors influencing the demand for labor which are: 1. Labor is a derived demand. Changes in the demand for a certain product by factors like because of change in fads or other external factors other than income will have an whether increased or decreased demand for labor to manufacture that product. With regards to changes income, a decrease in income or the purchasing power of earnings will cause a decrease in the demand for particular products, especially those considered as wants. 2. Marginal productivity of wages. Work will be employed up to a point where value of the last workers output is equals his cost to the firm or his total wage/salary since he began his work. 3. Replacing labor with capital. Shift from labor-intensive (man) to capitalintensive industry (machinery/equipment) results in decline of demand for labor. Just as commodity prices are set in the market there are also labor market with its own wage rates and wage scales. Whenever workers offer their services to prospective employers for a price, a labor market comes into existence. The wage contract is where the interaction of the demand and supply of labor is ultimately expressed. The wages actually paid is a fixed agreement between the employer and employee. Contracts are wage transaction of the labor market. To every contractual transaction, there appears several parties: actual, prospective and regulatory. The contracting parties are the employer and the employee. LABOR UNIONS Labor unions are organizations of employees formed to promote and protect their interests and rights through collective action resulting in greater bargaining power. Its primary interests are improved salary/wages, working conditions, work hours, fair treatment, job security and other benefits such as vacation leave, sick leave, hospitalization and insurance. Their aims are both economic and political. Political in a sense that they promote and/or oppose activities related to the formulation and implementation of laws related to work. Labor unions exercise strong hold on labor supply. This is achieved through what is called as closed shop a shop closed through the efforts of organized labor rather than

the employer. It is of two kinds: the closed shop with the open union, where a nonunion man may find employment but eventually has to join the union as a condition to keep his job; and the closed shop with the closed union, where only members of the union can be hired, representing the highest degree of control achieved by organized labor. The latters held belief is that those who share the benefits should share the costs. It is argued that hiring of both union and non-union workers result in conflict because differences in attitude and mentality. The closed shop is necessary to a obtaining a successful bargaining agreement to employers. It strives for solidarity and the right of unions to have control over the hiring of employees. It is also claimed that benefits the company through a more or less uniform and efficient production made available by the union. LABOR LEGISLATION Minimum wage law is a law created to establish a minimum wage to ensure that workers be able to maintain a decent standard of living despite sudden changes in the cost of living as brought on by inflation and other economic crises affecting earnings. This law is made for two important reasons. First, to protect people from most jobs that provide very low wages which deny their right to a decent living. Second is the reality that many employers will not give workers an increase in wage/salary on their own initiative. The Employers Confederation of the Philippines (ECOP) was made to look into the causes of strikes and violations on the Minimum Wage Law, 13th month pay, and emergency cost-of-living allowances. During the time of the discovery of findings by a study conducted by the Ministry of Labor that more than 86% of 283 firms inspected from January-October 1981 were not abiding with the wage laws. The ministry found out that the strikes and violations were caused by this violation. ECOP came to the defense of the firms saying that the government should first evaluate if this violation was caused by inability of these firms to comply with minimum wage laws and allowances under economic difficulty during that time. There were also evidences of some people choosing to work for less than the minimum wage rather than have no work at all. They secretly agree to this arrangement and help their employers continue on with the non-compliance of the law just so they are employed.