HRM Compensation

Administration
105
Module 12
WAGE & SALARY
ADMINISTRATION
 WAGE and its SOCIOLOGICAL,
PSYCHOLOGICAL & LEGAL sense
3
▰ In a sociological sense, wages characterize stratification of
occupational categories.
▰ In a psychological sense, wages satisfy need directly and
indirectly in response to changing employee aspiration. It
constitutes one of several elements of job satisfaction and is
instrumental for the satisfaction of some needs more than others.
▰ In a legal sense, the term wages or salaries has acquired various
connotations, depending on the context and has become a subject
of special law in many countries. It is most important to an
industrial worker because his standard of living and that of his
family depends upon his earnings.
4
 EMPLOYERS & EMPLOYEES’
STANDPOINTS

▰ The employers perceive wages as a cost of their business efforts

and are keen to reduce labor cost per unit of output. Explicitly,
wages form an important cost factor for the enterprise.
▰ Employees consider wages as a means for satisfying their needs
in terms of an expected standard. They desire to receive at least
as much remuneration as other individuals equipped with similar
skills for doing similar work.
5
 WAGES & SALARY
ADMINISTRATION
▰ Rules have to be developed to determine to what degree
advancement will be based on length of service rather than merit;
with what frequency pay increases will be awarded; how controls
over wage and salary costs can be maintained; what rules will
govern promotion from one pay grade to another, etc.
▰ At the next stage, the employees are to be informed of the details
of wage and salary programme. Although most hourly-paid
workers are informed through the wage contract about the details
of wage programme, a substantially smaller number of salaried
employees have such information about their jobs.
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“ WAGES & SALARY ADMINISTRATION

BASIC
CONCEPTS
7
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It may be defined as money received in the performance of work,
plus the many kinds of benefits and services that organizations
provide to their employees. ‘Money’ is included under direct
compensation (popularly known as wages, i.e., gross pay); while
benefits come under indirect compensation, and may consist of
accident and health insurance, the employer’s contribution to
retirement, pay for vacation or illness, and employer’s required
payments for employee welfare as social security.

COMPENSATION 8
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is the remuneration paid, for the service of labour in
production, periodically to an employee/worker. It
usually refers to the hourly rate or daily rate paid to
such groups as production and maintenance
employees (“blue-collar workers”).

WAGE or PAY 9
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is the lowest wage rate fixed by
law that an employer can pay his
workers (Republic Act No. 6727,
otherwise known as the Wage
Rationalization Act).

STATUTORY
MINIMUM WAGE 10
 WAGES & SALARY
ADMINISTRATION Terms

▰ Nominal Wage - It is the wage paid or received in monetary

terms. It is also known as money wage.

▰ Real Wage - It is the amount of wage arrived after discounting

nominal wage by the living cost. It represents the purchasing
power of money wage.

11
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It normally refers to the weekly or monthly rates
paid to clerical, administrative and professional
employees (“white-collar workers”).

SALARY 12
 WAGES & SALARY
ADMINISTRATION Terms

▰ 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.

▰ Take Home Salary - It is the amount of salary left to the

employee after making authorized deductions like contribution to
the provident fund, life insurance premium, income tax and other
charges.
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 WAGES & SALARY
ADMINISTRATION Terms

▰ Cost to the Company (CTC) - The concept ‘cost to the company’

includes payment made to the employee including pensions,
health insurance, death in service, gratuity, company car or own
the car scheme, child care provisions, subsidized meals, etc. The
CTC includes all the investments made by the employer to the
employee including the monetary and non-monetary benefits.

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 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is a group of positions that are similar as to the kind and level
of work. In some instances, only one position may be involved,
simply because no other position exists. For example, in a small
organization, there will be only one position of personnel
manager. But in large organization, there may be ten employees
with the same title, yet each may perform slightly different work.

JOB 15
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is the “process of determining (by observation and study) and
reporting pertinent information relating to the nature of a specific
job. It is the determination of the task which comprises of the
jobs and of the skills, knowledge, abilities and responsibilities
required of the worker for a successful performance and which
differentiate one job from all others”.

JOB ANALYSIS 16
 WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is an organized, factual statement of the duties and
responsibilities of a specific job.” In brief, it should tell
what is to be done, how it is done and why. It is a
standard of function, in that it defines the appropriate
and authorized content of a job.

JOB DESCRIPTION 17
WAGES & SALARY
ADMINISTRATION Terms What is it?
▰ It is “a statement of minimum acceptable human
qualities necessary to perform a job properly.” It is a
standard or personnel and designates the qualities
required for acceptable performance.

JOB SPECIFICATION
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 WAGES & SALARY
ADMINISTRATION Terms

▰ Job Classification - A job classification is “a grouping of jobs on

some specified basis such as the kind of work or pay”. For
example, a teacher, a doctor, an engineer, etc.
Wage and salary structure consists of the various salary grades and their different levels of
single jobs or groups of jobs. The term wage structure is used to describe wage/salary
relationships within a particular grouping.
The grouping can be according to occupation, or organization, such as wage structure of
craftsman (carpenters, mechanics, bricklayers, etc.). The wage structure or grade is comprised
of jobs of approximately equal difficulty or importance as determined by job evaluation. So, the
term wage and salary structure means the pattern or the breakup of the salary paid to the
employees in their respective organization. 19
5 IMPORTANT SYSTEMS FOR
FIXING SALARY

Wage Job Wage/Salary

Theories Evaluation Survey

▰ Various Factors Affecting

Wage and Salary Levels.
▰ Wage Fixation Institutions
in the Philippines
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“
WAGE
THEORIES
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 ECONOMIC
THEORIES
The Central Questions of a Wage Theory:

➢ Wage Level Related Questions?

➢ Wage Structure Questions?
➢ Variations in Wage Rates and
Structures?
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 The Subsistence Theory of Wages

This theory was formulated by the

French economists Physicorates; later
elaborated by David Ricardo Lassale
and was called the iron law of wages.
This theory is based on 2 assumptions:
i) The law of diminishing return applies
to industry
ii) There is a rapid increase in population

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Analysis of the Theory
▰ The theory stated that the wages of
labor always remained at the
subsistence level. Just the normal
value of a commodity under free
competition is determined by its cost
of production, so value of commodity
‘labor’ is determined by its cost of
production. This theory meant that the
minimum subsistence are required for
the support of the laborer and that of
his family in order to expense a
continuous supply of labor.
▰ According to the theory, the laborer
should be paid just enough to live
and perpetuate his clan; if wages
exceeded the minimum subsistence
level, population would increase
and with it supply of labor, until
wages were again at bare
subsistence level.
▰ If on the other hand, wages fell
below the level there would be a
reduction in population and
therefore in the supply of labor, until
wages were raised to the
subsistence level. Thus the theory is
closely associated with the doctrine
of Malthusian over population.
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Criticism Against the Theory
▰ There is no reason why a laborer should
increase the number of children in his family
if he gets a higher wages. It would be more
natural for the laborer to think of improving
his standard of living instead of increasing
the number. The standard of living when once
improved will powerfully influence the rate of
wages in future.
▰ If the subsistence theory was accepted, the
wages of all laborers, assuming the each has
an equally big family to support, would be
more or less equal. But in practice we find it
is not so. More efficient laborers get higher
than less efficient. The theory is too
pessimistic and does not contemplate about
the role of efficiency in determining wages.
▰ It is absurd to imagine that the labor
population would increase if the wage
rate were increased above
subsistence. The former is a long-
term phenomenon, while the change
in wage rate is a short-term
phenomenon.
▰ The theory considered only the supply
side of labor, but not the demand
side. Even taking the analogy of
general theory of value, the positive
role is played by demand and the
supply gets adjusted. The former is a
long phenomenon, while the change
rate is a short-term phenomenon.
▰ Any way the theory contains an
element of truth as it indicates that
wages cannot fall below a certain
minimum level.
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 Wage Fund Theory

Introduced by John Stuart Mill (1891),

this theory assumes that there is a
fixed wages fund (Lump Sum) which is
distributed equally among all the
laborers. In other words:

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Analysis of the Theory
▰ It puts more emphasis on demand
of labor (wages fund) compared to
the supply of labor.
▰ It attempts to study wage level in
the short-term. It tried to take into
account long-run too by suggesting
wage fund might grow or shrink in
the long run but that was not the
focal point of the theory.
▰ The theory generalizes about the
general level of wages for an entire
economic system, however it can be
applied to an employer.
▰ Just like subsistence theory, this
theory also attempts to answer the
question of wage level and not of
wage structure and differentials.
The reasons may be that they were
developed during the time when
economies, even of America and
Europe were agrarian.
▰ In the short run, many organizations,
particularly those in the public
sector, do allocate a fixed run for
payment of wages. However, critics
argue that the assumption of a fixed
sum itself is wrong as the sum can
be increased. Even J.S.Mill also
accepted this criticism.
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Criticism Against the Theory
▰ It is not clear from where the wages
fund will come.
▰ No emphasis has been given to the
efficiency of workers and productive
capacity of firms.
▰ This theory is unscientific as wages
fund is created first and wages are
determined later on. But, in practice,
the reverse is true.
▰ This theory does not explain
differences in wages at different
levels and in different regions.
▰ This theory is more applicable to
pure agrarian society where the
gap between two crops is too big.
Now as labour has moved to
manufacturing and there is a move
to pay for performance, it is
possible to pay workers out of the
surplus of current operations also.
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 Marginal Productivity Theory of Wages

The theory assumes certain conditions

to enumerate the concept of marginal
productivity, was developed by Phillips
Henry Wicksteed (England) and John
Bates Clark (USA).
According to this theory, wages are
based upon an entrepreneur’s estimate
of the value that will probably be
produced by the last or marginal
workers. In other words, it assumes
that wages depend upon the demand
and supply of labor.
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▰ It is based on the assumptions of a perfect economy which are as under.
▰ Homogeneous factors of production
▰ Multiplicity of buyers and sellers- so many that no one can control supply
and demand
▰ Certain fixed factors of production
▰ Perfect knowledge
▰ Full employment of all the resources
▰ Perfect knowledge
▰ Full employment of all the resources
▰ Perfect mobility f the factors of production
▰ Profit maximization as the guiding force
▰ Law of diminishing returns 30

Analysis of the Theory
▰ It is totally emphasized demand
for labor and supply of labor
has not received its due
importance.
▰ It was developed making
assumptions about a firm
operating in short-run. However,
it has been refined and has
greater usefulness when
applied to long run problems.
▰ The theory can be used for the study of
both for the micro as well as macro
level. When factors of production are
presumed to be constant, it is
applicable at micro level; when all the
factors can be increased or decreased,
it becomes operational at macro level.
▰ Just like subsistence and wages fund
theory, this also attempts to answer
the question of “wages level” only.
▰ This theory focuses on productivity
and productivity is undoubtedly a
crucially important concept to
practitioners.
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 Criticism Against the Theory
▰ In practice, the employers offer
wages less than the marginal
productivity of labor.
▰ In many cases, the labor unions
are able to bargain for wages
higher than the marginal
productivity of labor.
▰ This theory is based on
perfect competition in the
market which is seldom
found in practice.
▰ It is wrong to assume that
more labor could be used
without increasing the
supply of production
facilities.
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 Investment Theory of Wages

This theory has developed by Gilelman

for the replacement of marginal
productivity theory. Whereas marginal
productivity theory focuses on the
output of labor, investment theory
concentrates on labor inputs, another
side of the same coin.
The theory proposes that the
productivity of an individual employee
is a function of his personal attributes
with which his labor is combined.
Workers attributes include values,
personality, and physical abilities. 33
 Analysis of the Theory
▰ If wages are assumed to be a return on
▰ It focuses both on the supply of
and the demand for labor that
emphasizes the worker’s
investment in productivity.
▰ Its emphasis is on short-run
▰ It emphasizes the micro aspect.
▰ It tries to answer wage structure as
well as the wage level.
investment, logically one would
assume that the larger the investment,
the higher the wage. However, in
practice, this will not be true always s
employees seek a number of other
satisfaction from job, income being
only one of them.
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MOTIVATIONAL
THEORIES
A Review and Application

35
✓ Broadly, as one set of needs is met, the next level of needs
become more of a motivator to an individual.
✓ A satisfied need is not a motivator.
✓ Only unsatisfied needs motivate an individual. We
have an innate desire to work our way up the
hierarchy, pursuing satisfaction in higher order needs.
✓ Self-actualization stimulates a desire for more due to
what Maslow explained as “peak experiences”.

Maslow’s Hierarchy
of Needs
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✓ The job should have sufficient challenge to utilize the full ability of
the employee.
✓ Employees who demonstrate increasing levels of ability should be
given increasing levels of responsibility.
✓ If a job cannot be designed to use an employee’s full
abilities, then the firm should consider automating
the task or replacing the employee with one who has
a lower level of skill. If a person cannot be fully
utilized, then there will be a motivation problem.

Herzberg›s Motivation -
Hygiene Theory
(Two Factor Theory)
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✓ Equity theory thus helps explain why pay and conditions alone do
not determine motivation. Importantly we arrive at our measure of
fairness - Equity - by comparing our balance of effort and reward,
and other factors of give and take - the ratio of input and output -
with the balance or ratio enjoyed by other people, whom we deem
to be relevant reference points or examples (‘referent’ others).
✓ What matters is the ratio, not the amount of effort or
reward per se.

Adams’ Equity Theory

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People respond to a feeling
of inequity in different ways.
Generally the extent of de-
motivation is proportional to
the perceived disparity with
other people or inequity, but
for some people just the
smallest indication of
negative disparity between
their situation and other
people’s is enough to cause
massive disappointment and
a feeling of considerable
injustice, resulting in de-
motivation, or worse, open
hostility.

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✓ In order to enhance the performance-outcome tie, managers
should use systems that tie rewards very closely to
performance. Managers also need to ensure that the rewards
provided are deserved and wanted by the recipients. In order to
improve the effort performance tie, managers should engage in
training to improve their capabilities and improve their belief
that added effort will in fact lead to better performance.
✓ Emphasizes self-interest in the alignment of rewards with
employee’s wants.
✓ Emphasizes the connections among expected behaviors,
rewards and organizational goals.

Vroom’s Expectancy
Theory
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OTHER WAGE
THEORIES
A Short List
41
▰ Classical Wage Theory - based upon the fundamental concept that labor is a commodity
and we have to pay the price according to supply and demand. *wage- the price of labor
▰ The Just Wage Theory of St. Thomas Aquinas - This was the first theory on wages
advocated during medieval period. The essence of this theory is that the worker should
be paid on the level of maintaining himself and his family. Workers’ cost of living should
be considered first in the cost of production; the basis in the implementation of minimum
wage laws (Tri-partite Board- composed of Labor, Management and Dept, of Labor). It
permits the recipient worker to live in a manner in keeping with his position in the society;
▰ Bargaining Theory of John Davidson -Propose that labor is a commodity like anything
that could be bought at a price by the user -Brings about the organization of labor unions.
▰ Purchasing Power Theory -Tries to establish the relationship between wages and the
level of the economic activity.
▰ Labor Theory of Value - Karl Marx propounds this theory of labor -Gives credence to the
value of labor -Emphasizes that labor is the source of all products and that without this
important component, there be no goods for humans consumption.
▰ Standard of Living Theory – Karl Marx pointed out that the “Wage of labour is determined
by a traditional standard of living, which, in turn, is determined by the mode of production
of the country concerned.” 42
▰ Residual Claimant Theory – According to Walker, the wages are determined on the
basis of the amount left after the payment of rent, profits and interest to land,
entrepreneur and capital respectively out of the production value.
The amount of wages = Production value – (Rent + Profits + Interest).
▰ The Bargaining Theory of Wages – According to this theory the wages and other
terms of employment are determined on the basis of the relative bargaining strength
of the two parties, viz., the employer and the employees. Webbs stated that, “the
conditions of the market which under a system of free competition and individual
bargaining determines the conditions of employment.”
Contribution of Behavioral Scientists to the Wage Theories – According to behavioral scientists, wages
are determined on the basis of several factors like the size, nature, prestige of the organization,
strength of the union, social norms, traditions, customs, prestige of certain jobs in terms of authority,
responsibility and status, level of job satisfaction, morale, desired lines of employee behavior and level
of performance.
Thus, the first five wage theories influenced the wage determination until 19th century. But the
influence of these theories had been reduced to a greater extent during the 20th century. The
bargaining theory of wages and the behavior theory of wages influence much the determination during
the present century. The modern and important system of salary administration is job evaluation.
43
 HOW TO CONTROL WAGE AND
SALARY ADMINISTRATION?

Wage and salary administration should be

controlled by some proper agency. This
responsibility may be entrusted to the
personnel department or to some job
executive. Since the problem of wages and
salary is very delicate and complicated, it is
usually entrusted to a Committee composed
of high-ranking executives representing
major fine organizations.
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 WAGE AND SALARY
ADMINISTRATION PROBLEMS
▰ Wage and salary administration involves consideration of various interests
such as those of employers, employees, government and society at large. The
employer is interested in securing a satisfactory level of output in tune with the
remuneration paid to his employees, establishing standard wages for standard
occupations, adjusting wages to changes in the market, maintaining equity in
wage relativities, rewarding efficient employees through incentives or
performance-based remuneration and providing effective arrangements for
dealing with compensation issues.
▰ A sound compensation policy may also contribute to achieving certain social
objectives by ensuring more equitable compensation, reduction of wage
exploitation and satisfying employees’ ambitions. The interests of the
employer may not be in conformity with those of the employees and their
union. Difficulties may also have to be encountered in ensuring compliance
45
with governmental policy in the field.
PROBLEM1: Wage and Salary Level

▰ An important field of compensation is the wage and salary level. Problems in

this area are directly related to the conditions of labor market. If the level of
wages and salaries is too low, there will be the problem of attracting and
maintaining a competent workforce.
▰ There may also be difficulties in complying with statutory rates of wages or
those awarded by tribunals and courts, and also the rates arrived at as a result
of bargaining. On the contrary, if the level of wages and salaries is too high, the
competitive position of the undertaking in the product market will deteriorate.
▰ The setting of an appropriate level of wages and salaries calls for a careful
consideration of several factors such as – (i) market conditions, (ii)
governmental policy and regulation, (iii) prevailing level of wages in
comparable employments, (iv) collective bargaining and union wage policy and
(v) management’s approach towards proper wage and salary level.
46
PROBLEM2: Wage and Salary Structure

▰ Many organizations work out the wage structure on the basis of “job
evaluation.” The main concern of the management is to prevent wage
inequities and correct anomalies wherever necessary.
▰ During more recent years, especially after the advent of globalization and
emergence of highly competitive product markets, managements have to give
serious attention to remunerating different categories of employees on the
basis of their performance and productivity. Setting of wage and salary
structure by the management also involves the problem of strategic decisions
regarding various components of wages.
▰ In many organizations, the wage structure is based on collective agreements,
industrial awards, court decisions or wage board recommendations. In these
cases, the freedom of management to work out the wage structure for its
organization is severely curtailed.
47
PROBLEM3: Wage Fixation for
Individual Employees
▰ The setting of wage structure and determination of the level of wages involve
pricing of various jobs. Very often, problem arises as to whether all the
employees employed on the same job should be paid the same wage. Payment
of the same wages to all employees employed on the same job may lead to
dissatisfaction among efficient and senior employees. The problem is
generally sought to be solved in two ways.
▰ The first is the adoption of incentive system or performance-based
remuneration. Another method is that of setting up wage ranges—a starting
rate, a standard rate and a maximum rate for individuals on the same job. In
such a case, procedures have to be devised for enabling individuals to move
through the ranges.
▰ One such procedure may be automatic increases based on length of service.
Another may be to allow increases on the basis of merit rating or performance
appraisal. The third may be a combination of both. 48
PROBLEM4: Methods of Wage Payment

▰ Generally, there are two principal methods

of wage payment. These are as follows –
(i) payment on the basis of time such as
by hour, day, week or month (time rate),
and (ii) payment on the basis of output
that is by piece produced (piece rate).
▰ In a particular organization, either or both
may be used depending on the
arrangement of work and consent of the
parties. Where incentive schemes are in
operation, there is a problem of selecting
the most suitable of these or a system
combining both may be adopted.
49
PROBLEM5: Compensation for
Executives and Managerial Personnel

▰ The problem of remuneration of executives and managerial and professional

personnel is not generally tackled in a planned and systematic manner. This
has been in contrast to more or less careful attention to the pay problems of
workers. Efforts have been made to design pay plans for them in such a way
so as to offset the effects of progressive income tax. One way for satisfying
this group has been providing them with substantial fringe benefits not
coming under the purview of income tax law.
▰ However, in India, recent amendments to income tax law have brought a
number of fringe benefits under the coverage of taxation. As a result, the
advantages available to this class of personnel through the availability of
fringe benefits have materially declined. Despite these limitations, lucrative
schemes of performance-based remuneration and rewards for these
categories of personnel have been adopted in most of the competing
industrial organizations. 50
PROBLEM6: Control

▰ To the management, control

constitutes the central problem in
wage and salary administration.
Control in wage and salary
administration involves the
evaluation of the sufficiency and
efficiency of the solutions reached
on the total compensation
problem. The management has to
control both payroll and labor cost,
and also has to realize that the
value in return of wage bill is more
important than the wage bill itself.
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 Thanks for Listening,
Young Managers!

COPYRIGHT
© 2021 by Prof. Mariz Jor M. Paler, MPA
All Rights Reserved.

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