EPAS 12

THE IMPACT OF WAGES ON EMPLOYEE PRODUCTIVITY

RESEARCHER:

STEPHEN APAS

KENNETH AGUSTO

BRETT JUSTINE AGUELO

JOHN NINO TAJANLANGIT

MARK ELJOE TAJANLANGIT

 CHAPTER 1

THE PROBLEM AND ITS SCOPE

Rationale

One of the purposes of someone being the employee or a labor of a company

is to earn an income in the form of wages or compensation. Wages are earned can fulfi ll

basic necessities such as food, clothing and housing. Every company in setting the amount

of the wage paid to an employee must be viable, so that the lowest wage given to meet the

needs of their life (Kanzunnudin, 2007). The calculation of wage increases not only the

necessities of worth living but also infl ation, economic growth, and productivity (Iqbal,

2013).

The concept of productivity of work is divided into two parts: Individual

productivity and organizational productivity. Individual dimension associated with the

characteristics of the personality characteristics of the individual appears in the form of

mental attitude and individual efforts to improve the quality of life. Organizational

dimensions look productivity within the framework of the relationship between input and

output techniques (Kusnendi, 2003).

Aspects of wages becomes important because to be effective if linked to

performance for real. An effective wage strategy is expected to contribute on the viability of

the unit of work, the realization of the vision and mission, as well as for the achievement of

the targets of work (Umar, 2012). Employee productivity measurement using the net value
added shows wages and employee performance has a positive correlation, but the rate of

growth of net value added per worker is faster than the rate of growth of wages per

worker. Means that there are factors other than wages in improving employee performance

that is non-monetary factors (Nayak and Patra, 2013).

One of the most important aspects of a job for most workers is the wage it

pays. Wages allow workers to make a living from their labor. They also provide incentives

to be productive and loyal to an employer. In a broader sense, the wages workers earn fuel

the economy (Dennis Hartman, 2017)

Theoretical Background

Related Theories

Efficiency wage theories

Efficiency wage theories predict that paying higher wages may increase workers'

productivity through three main channels. (Katz [1987] and Levine [1993] review this

literature.) A higher wage may increase worker effort due to the greater cost of job loss, so

workers would want to reduce the chances of being dismissed for low effort. A higher

wage may also increase effort by increasing workers' loyalty to the firm, which may be

especially important in systems that require greater discretionary effort from employees

and in group activities such as problem solving in which effort and output are costly to

monitor (Akerlof, 1982; Milgrom and Roberts, 1995). Indeed, the core concept of the

mutual gains enterprise or high commitment systems (Walton 1985) is consistent with

Akerlof's (1982) theory of labor contracts as partial gift exchange and the role of fairness

conceptions in determination of expectations, effort, and wages. Finally, a higher wage may

reduce firms' turnover and recruitment costs, which might also be important if EI requires

more careful recruitment or increased firm-specific training.

Wage Fund Theory

This theory was developed by J.S.Mill. According to him, the employers set apart a

certain amount of capital to pay wages for labourers. This is fixed and constant. This is

called as wages fund. Wage is determined by the amount of wages fund and the total

number of labourers. According to J.S.Mill, “wages depend upon the demand and supply of
labour or as it is often expressed as proportion between population and capital. By

population is here meant the number only of the laboring classes or rather of those who

work for hire and by capital, only circulating capital An increase in wage rate is possible

only by an increase in wage fund or by a reduction in the number of labourers. Thus there

exists a direct relation between wage rate and wages fund and inverse relation between

wage rate and number of labourers. This theory also states that trade unions are powerless

in rising the general wage rate.

RELATED STUDIES

The Study showed a significant negative effect on the wages of employees

performance. Other finding is negative effect of wages which are moderated by the quality

of work life is caused by the effect of intrinsic motivation (quality of working life) is more

powerful than extrinsic motivation (wages). Quality of work life is quasi moderators that

weaken the wages variable. Further research is recommended to expand the research by

adding independent variable that affects the performance of employees.(Hendra

Gunawan,2015

This study indicates that wages, work motivation, and employee’s job satisfaction

significantly influenced by the employee’s performance at manufacturing industries in

Makassar Industrial Area. It also indicates that job satisfaction affects employee’s work

motivation, positively.(Rivai,2009)

The study also finds that the marginal effect of the minimum wage on labor

productivity varies across industries but does not vary across either age groups or

education levels. Using Gelbach’s decomposition method, this study finds that (1) states

with high labor productivity were more likely to have a higher minimum wage and (2) both

minimum wage and labor productivity are rising over time.(romel,2002)

According to Brian and Gor (2000) that Compensation has positive impact

on employee performance. It is proved from correlation analysis that all the independent

variables have weak or moderate positive relationship to each other. Regression analysis
shows that all the independent variables have insignificant

and positive impact on employee performance.

The wages result is important for employee productivity because a lack of reward is

the potential reason for decreasing worker’s productivity and wage is the most impact

production, the successful employee gets his/her rights through compensation framework

for their wages. Then again, the employee’s productivity plays an important role in

organizational execution and the quick factors that increase employee productivity are

great capital.(mrunal parashar,2019)

In their study of three industries, Appelbaum, Bailey, Berg, and Kalleberg (2000)

found that teams and their overall HPWO index (but not quality circles) were associated

with higher wages in two indus tries (steel and apparel) but not in a third (medical

instruments).

Batt (2001) found that after she held constant her full set of controls, two HPWO

practices (quality circles and teams) were not associated with higher wages, whereas a

measure of discre tion in work positively affected wages, as did her measures of product

market strat egy. By contrast, Hunter and Lafkas (2003), in a study of customer service

representa tives in banking, found that quality circles were associated with higher wages

but that their measure of discretion was not.

Cappelli and Neumark (2001 ), working with a nationally representative dataset

from manufacturing firms, found a generally positive relationship between HPWO systems

and establishment labor costs per worker.

Black, Lynch, and Krivelyova (2004), working with the same data, found an effect of HPWO

systems on wages only when they interacted the work organization variable with union

status.

Handel and Gittleman (2004), using data collected in 1995, found no wage impact

of HPWO systems. Osterman (2000) found that wages did not increase in a nationally

representative sample of establishments that introduced HPWO systems.

The Act prescribes the standards and criteria for minimum wage fixing: demand

for living wages; wage adjustment vis-à-vis the consumer price index; cost of living and

changes or increases therein; the needs of workers and their families; the need to induce

industries to invest in the countryside; improvements in standard of living; prevailing wage

levels; fair return on the capital invested and employers’ capacity to pay; effects on

employment generation and family income; and equitable distribution of income and

wealth according to the imperatives of economic and social development (Bersales, 2009,

p. 1).

Nonetheless, Bersales’ (2009) analysis of indicators used for the different criteria

currently used in minimum wage determination in three regions of the Philippines

(National Capital Region, Region VII, and Region XI) highlights the potentially positive

correlation of the minimum wage with each of the following indicators: labour

productivity, the consumer price index, the stock market index representing investments,

and gross regional domestic product/gross domestic product.

The findings of a Bureau of Labor and Employment Statistics (BLES) survey5

(2008, p. 1) indicate that more than half of establishments without a union relied on
minimum wage orders of a regional tripartite wages and productivity board to revise the

wages of regular and non-regular rank-and-file employees. In unionized enterprises,

collective bargaining agreements primarily served as the basis for wage-setting for regular

rank-and-file workers (79.4 per cent), while tripartite board orders were widely used to fix

the wages of non-regular rank-and-file workers (71.4 per cent).

Salaries /amount of salaries given to employees (academic staff) can be well

understood as a way of motivating them. This can well be explained in the role of money as

a condition reinforce, an incentive which is capable of satisfying needs, an anxiety reducer

that serves to erase feelings of dissatisfaction, Opsahl and Denette (motivation and

organizational climate pp65-66).

BassettJones and Lloyd(2005) presents that two views of human nature underlay

early research into employee motivation. The first view focuses on Taylorism, which

viewed people as basically lazy and work-shy, and thus held that these set of employees

can only be motivated by external stimulation. The second view was based on Hawthorn

findings, which held the view that employees are motivated to work well for “its own sake”

as well as for the social and monetary benefit. This type of motivation according to this

school was internally motivated.

Various researchers (such as Wallace, Szilagyi, Gupta and Shaw) contend that

money is indeed a motivator. This is because it can be seen by individuals as a goal in itself;

as a means of giving satisfaction, and as a symbol of internal recognition or external status.

On contrary studies have also revealed that money is a poor motivator and can hardly

influence level of performance. It is further argued that it may produce temporary

compliance rather than sustained improvement. It does not change behavior, merely a
superficial conformity with what the organisation signals to be important. Individual

performance –related pay emphasizes individual contribution whereas the task might

require team work; may cause short terminism rather than long terminism, Peffer,n.d.

In their most recent study, Gilchrist, Luca and Malhotra set out to answer a

basic question;”Do employees work harder when paid more?”. In their findings, it was

concluded that employees will improve performance if the additional salary is perceived as

a gift. An increase in salary as promised by employers in work contract is most likely not to

be effective in improving the employees’ performance. Companies therefore should think

carefully not just to pay employees but how to pay them. The same amount of

compensation can be structured in ways that will be less appreciated and reciprocated,

Malhotara, etal, 2013. Merit pay/pay for performance adjusts salaries upwards

and provides compensation for higher levels of performance. A standard for individual

performance is set, such as increased student achievement. If a set standard is reached, the

individual receives a bonus or salary increase (Rechardt, Robert, Rebecca, 2003).

The major argument in favor of merit pay is that it can foster individual

motivation by recognizing effort, achievement and rewarding it in a concrete way.

(Reichardt etal, 2003)

Bratton and Gold, 2003:292 referred to fringe benefits as non-financial rewards

added to the basic pay, related to work behaviors, performance, learning and experience.

The characteristics of fringe benefits include; promotion, advancement and job stability,

leadership allowance, responsibility allowance and recognition allowance. Fringe benefits

in institutions provide a basis on which employees work towards the achievement of set
goals. Therefore University administrators and managers often use fringe benefits as a

means of improving performance (Dessler, 2003).

The expectancy theory explains that in any given situation, the greater the number

and variety of rewards that are available to the employees (academic staff), the greater the

probability that extra effort will be exerted in attaining the set goals or targets in the hope

of getting the desired rewards (Bodden, 2008).

Gerald Cole (2004) agrees with this and explains that the Vroom focused especially

on the factors that are involved in stimulating an individual to put an effort in doing

something since this is the basis of motivation.

According to Farazmand (2007), employees who receive the same wages regularly

are more likely to perform poorly than the employees who receive some incentives. Among

the most common incentives that can be given to employees and in this context academic

staff include; Transport allowance: This is given to an employee to meet his expenditure for

purpose of commuting between place of residence and place of work/duty. (Abhishek,

2010).

Overtime allowance: This is the additional amount paid to hourly employees who

work for more than 40 hours a week (Murray, 2010). Accommodation or housing

allowance: This is the amount of money or given to an employee in compensation for basic

living expenses. (Knyszewska Elzbieta, 2010).

Robbins (2003) indicated that employees who are unsatisfied with their jobs had

many absenteeism cases than those with job satisfaction with high attendance levels.

Regardless of fringe benefits being financial, their existence and provision in time gives a

substantive reason for employees to stay longer at places of work.

Related Literature

Wage is one of the most important motivational factors, as we had been told from

the time immemorial that we shall eat from our sweat. The main reason why workers get

involved in paid jobs is to earn a living which is salary or wage. Reasonable salaries must be

paid on time, that is, it must be paid as at when due and promptly, as well. The workers

should be able determine the time such salaries will be paid by the organization. Again,

there must be a relative uniformity in the mode and manner such salaries and wages will

be paid to the workers. While fixing salaries, the organization must consider factors such as

the cost of living, company ability to pay, capability of company to pay, etc (Chukwudi,

Odogwu & Adedehinbo, 2012).

Wages become an important aspect of being effective if linked to the performance

significantly (Umar, 2012). Granting wages remuneration is the most complex task for the

industry, is also the most significant aspects for workers, because of the amount of wages

reflects the size of the value of their work among the workers themselves, their families

and communities. Wages are very important for the industry because it reflects the

industry’s efforts to defend human resources in order to have a high loyalty and

commitment to the industry. Effective wages strategy is expected to contribute to

maintaining the viability of the work force, the realization of the vision and mission, as well

as for the achievement of work objectives (Umar, 2012).

According to Rivai (2009), with increasing competition in the business, the industry should

be able to compete and one of the tool that can be used by the industry is the wage. If the
system is fair and competitive wage perceived by the employee, then the industry will be

easier to attract potential workers, maintain and motivate in order to further improve its

performance, thus increasing productivity and the industry is able to produce products at

competitive prices, which in the end, the industry is not only superior in competition, but

are also able to survive, even able to increase profitability and grow their business. Wage

plays a very important to workers and also for the survival of the industry. Wages is one of

form of compensation, where workers receive compensation from the employer for the

work or services that have been done to fulfill their necessities of life.

Similarly, Suwarto (2003) suggested that the wage is one of the most sensitive

aspects of the employment relationship and in industrial relations. Between 70-80% of

cases occur in labor relations and industrial relations issues contain wage and various

related aspects, such as allowances, wages, wage structure, wage scale.

In this case the wage becomes an important aspect, because the rewards (wages)

would be effective if linked to real performance, Noe (2000). Wage an effective strategy is

expected to contribute to maintaining the viability of the work unit, the realization of the

vision and mission and to the achievement of work objectives. Specifically Dessler (2007)

asserts that money is the main factor that drives a person's motivation to excel. On the

other hand, satisfaction is closely related to the characteristics of the factors that generate

or initiate behavior, Gitosoedarmo & Sudita (1997)

Maryanto (2004) stated in his research that benefits positively influence the work

motivation of workers. Apart from that research conducted by Arianto (2004), and

Guritno&Waridin (2005) suggested that job satisfaction has positive influence on employee
performance. And studies conducted by the Honey (1996) showed a significant

relationship between employee job satisfaction with performance, both large and small

industrial industries. The influence of wages to workers is enormous. High work

motivation, job satisfaction, performance, and also anxiety, loyalty, workers, much

influenced by wages, Nitisemito (1996).

According to Sumarsono (2003), issues that could arise in the areas of wages

is that employers and workers in general have a different understanding and interest on

wages. For employers, the wage can be seen as a burden or expense that must be paid to

workers and taken into account in determining the total cost. The greater the wages paid to

workers, the smaller the proportion of profits for employers. Everything incurred by

employers

In this case the wages become an important aspect of being effective if linked

to the performance significantly (Umar, 2012). Granting wages remuneration is the most

complex task for the industry, is also the most significant aspects for workers, because of

the amount of wages reflects the size of the value of their work among the workers

themselves, their families and communities. Wages are very important for the industry

because it reflects the industry’s efforts to defend human resources in order to have a high

loyalty and commitment to the industry. Effective wages strategy is expected to contribute

to maintaining the viability of the work force, the realization of the vision and mission, as

well as for the achievement of work objectives (Umar, 2012).

Furthermore, according to Rachmawati (2008), wages become the most

important reason why people work among other reasons, such as for achievement,
affiliation with others, develop themselves, or to actualize themselves. At least 90 percent

of conflict between workers and employers due to wage issues, not others. It became

evident that the wage is an important aspect

According to Rivai (2009), with increasing competition in the business, the

industry should be able to compete and one of the tool that can be used by the industry is

the wage. If the system is fair and competitive wage perceived by the employee, then the

industry will be easier to attract potential workers, maintain and motivate in order to

further improve its performance, thus increasing productivity and the industry is able to

produce products at competitive prices, which in the end, the industry is not only superior

in competition, but are also able to survive, even able to increase profitability and grow

their business. Wage plays a very important to workers and also for the survival of the

industry. Wages is one of form of compensation, where workers receive compensation

from the employer for the work or services that have been done to fulfill their necessities of

life.

Measurement of employee productivity is an activity that is very important

because it can be used as a measure of success in supporting the success of the

organization’s employees (Said, 2008). Factors used in the measurement of labor

productivity include the quantity of work, quality of work and timeliness (Simamora,

2004). Individual characteristics that affect performance include age, gender, and

education, length of employment, job placement and work environment.

According to Harvard Business Review, wage hikes—in the case of Amazon—

increase productivity for two main reasons. First, paying wages above the market rate can
be an important motivating force because current employees have more to lose. In other

words, workers have more to lose by slacking off since it is harder to find an equivalent

salary at another company. Because of this, they are more motivated to do good work and

remain at their job. These wage increases (also known as “efficiency wages”) can be traced

back to Henry Ford himself. Ford nearly doubled the average wages of workers at nearby

manufacturing plants, calling the move his “finest cost-cutting move” because of

substantially increased productivity.

Statement of the Problem

The purpose of this study is to determine the effect of wages on employee productivity in
Ajinomoto Company. Specially the study aims to answer the following questions:

1. What is the profile of employees productivity?

1.1 Skill;

1.2 Service Quality;

1.3 Work Behavior; and

1.4 Work Ethics?

2. What is the employee monthly salary?

2.1 5,000-10,000;

2.2 11,000-15,000; and

2.3 16,000-above?

3. What is the impact of wages on employee?

DEFINITION OF TERMS

WAGES: It can be described as compensation being paid to employee on hourly

basis.

SALARIES: This is referred to as compensation being paid to employee on monthly

basis.

ADMINISTRATION: It may be though as planning, organizing and controlling of the

activities of a company in relation to the direct and indirect payment being paid to

employees for the work they performs or the services they render.

Adams (1913) defines administration as the capability to co-ordinate many, and often

conflicting, social energies in a single organization in an orderly manner such that they can

operate in Unity.

EMPLOYEE: This is referred to as a person who works in a company in return for a

wages and salaries.

PRODUCTIVITY: This rate at which works in a company or country produces goods

and the amount produced with how much time work or money is needed to produce them.
Scope and Delimitation

In the study, effort shall be made to identify the remote and immediate causes of

administration of wages and salaries on employee productivity in a private organization. In

order words, the study shall be limited to the issues in objectives of the study then to

examine the wages by which private sectors administers wages and salaries being paid to

employees in their organization or establishment.