UNIT- 03

WAGE AND SALARY ADMINISTRATION

INTRODUCTION:

Wage and salary administration is defined as the process by which wage and salary levels and
structures are determined in organizational settings. Wages are payments for labour services
rendered frequency, expressed in hourly rates, while a salary is a similar payment, expressed in
weekly, monthly or annual rates.
The main objective of wage and salary administration is to establish and maintain an equitable
wage and salary system. This is so because only a properly developed compensation system
enables an employer to attract, obtain, retain and motivate people of required caliber and
qualification in his/her organization.

Meaning of Wage:

Definition: Wages and salaries are the payment for work agreed between an employee and his or
her employer under the contract of employment in the private sector and for contractual agents in
the public service, or employment for civil servants.

Wages are payments for labor services rendered frequency, expressed in hourly rates, while a
salary is a similar payment, expressed in weekly, monthly or annual rates. A 'wage' (or pay) is
the remuneration paid, for the service of labor in production, periodically to an employee/worker.

Theories of Wage:
Theory was based on the basic assumption that workers are paid wages out of a pre-determined
fund of wealth.  This fund, he called, wages fund created as a result of savings. According to
Adam Smith, the demand for labor and rate of wages depend on the size of the wages fund.
Wages for the labor class as a whole.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
Some of the most important theories of wages are as follows:
1. Wages Fund Theory
2. Subsistence Theory
3. The Surplus Value Theory of Wages
4. Residual Claimant Theory
5. Marginal Productivity Theory
6. The Bargaining Theory of Wages
7. Behavioral Theories of Wages.

Wages Fund Theory: This theory was developed by Adam Smith (1723-1790). His theory was
based on the basic assumption that workers are paid wages out of a pre-determined fund of

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
wealth. This fund, he called, wages fund created as a result of savings. According to Adam
Smith, the demand for labor and rate of wages depend on the size of the wages fund.
Accordingly, if the wages fund is large, wages would be high and vice versa.
The wage-fund theory held that wages depended on the relative amounts of capital available for
the payment of workers and the size of the labour force. Wages increase only with an increase in
capital or a decrease in the number of workers.

The wage level is given by the ratio of wage fund and number of worker's employed. In the
above table, wage fund raised is Rs 1, 00, 00,000. When the number of workers employed is
increased from 50000 to 100000 and 150000 the wage level is decreased from Rs 200 to Rs 100
and Rs 66.67 respectively

This theory can be explained with the help of table and figure as following:

Wage fund (W.F) No. of workers (N) Wage level (W.F/N)

Rs 1,00,00,000 50000 Rs 200

Rs 1,00,00,000 100000 Rs 100
Rs 1,00,00,000 150000 Rs 66.67

In the above table, wage fund raised is Rs 1, 00, 00,000. When the number of workers employed
is increased from 50000 to 100000 and 150000 the wage level is decreased from Rs 200 to Rs
100 and Rs 66.67 respectively. It is due to constant wage fund distributed among more workers.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
Assumptions
According to this theory, wage fund is rose before the employment of workers
The workers are paid equally out of the wage fund
The units of labor are homogeneous
The wage level is flexible to the change in number of workers employed
Money is just a medium of exchange
Criticisms
Wage fund is not raised before employing the workers but is rather raised on the basis of
worker’s employed

Wage paid to workers differs from place to place, time to time, person to person and organization
to organization.
Units of labor are not homogeneous. They differ in skill, knowledge, strength, education, attitude
etc.
Wage level is not flexible. Wage level fall is opposed by workers and trade unions
Money is not mere medium of exchange. It has effect on production, investment, employment
level etc.

2. Subsistence Theory: This theory was propounded by David Ricardo (1772-1823). According
to this theory, “The laborers are paid to enable them to subsist and perpetuate the race without
increase or diminution”. This payment is also called as subsistence wages‟.
Subsistence theorists argued that the market price of labour would not vary from the natural price
for long: if wages rose above subsistence, the number of workers would increase and bring the
wage rates down; if wages fell below subsistence, the number of workers would decrease and
push the wage rates up.
In simple the lowest wage upon which a worker and his family can survive.

Means of subsisting: such as. : The minimum (as of food and shelter) necessary to support life.

A source or means of obtaining the necessities of life.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
On the contrary, if workers are paid less than subsistence wages, the number of workers will
decrease as a result of starvation death; malnutrition, disease etc. and many would not marry.
Then, wage rates would again go up to subsistence level. Since wage rate tends to be at,
subsistence level at all cases, that is why this theory is also known as ‘Iron Law of Wages’. The
subsistence wages refers to minimum wages.

Subsistence agriculture occurs when farmers grow food crops to meet the needs of themselves
and their families on smallholdings. Subsistence agriculturalists target farm output for survival
and for mostly local requirements, with little or no surplus.

3. The Surplus Value Theory of Wages:

This theory was developed by Karl Marx (1849-1883). According to Marx's theory, surplus
value is equal to the new value created by workers in excess of their own labor-cost, which is
appropriated by the capitalist as profit when products are sold.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
4. Residual Claimant Theory:
This theory owes its development to Francis A. Walker (1840-1897). According to Walker, there
are four factors of production or business activity, viz., land, labour, capital, and
entrepreneurship. He views that once all other three factors are rewarded what remains left is
paid as wages to workers. Thus, according to this theory, worker is the residual claimant.

The residual-claimant theory of wages, originated by the American economist Francis A.

Walker, held that wages were the remainder of total industrial revenue after rent, interest, and
profit (which were independently determined) were deducted.

The residual claimant need not be the same person all the time. For example, a firm might be
having several factors engaged directly or indirectly in production, such as labourers, suppliers,
bondholders, shareholders, etc. The firm owes definite amounts to factors like labourers,
suppliers, etc.

In simple the residual-claimant theory holds that, after all other factors of production have
received compensation for their contribution to the process, the amount of capital left over will
go to the remaining factor.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
5. Marginal Productivity Theory: As applied to wages, the marginal-productivity theory
holds that employers will tend to hire workers of a particular type until the contribution that the
last (marginal) worker makes to the total value of the product is equal to the extra cost incurred
by the hiring of one more worker.
The marginal productivity theory of distribution, as developed by J. B. Clark, at the end of the
19th century, provides a general explanation of how the price (of the earnings) of a factor of
production is determined.

6. The Bargaining Theory of Wages: The bargaining theory of wages holds that wages, hours,
and working conditions are determined by the relative bargaining strength of the parties to the
agreement. Smith hinted at such a theory when he noted that employers had greater bargaining
strength than employees.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
7. Behavioral Theories of Wages: It has been found that wages are determined by such factors as.
size and prestige of the company, strength of the union, the employer's concern to maintain the
workers, contribution by different kinds of workers, etc.

Difference between salary and wages

The main difference between salary and wages lies in the fact that salary is fixed, i.e. it is
predetermined and agreed between the employer and employee, while wages are not
fixed, as it varies depending on the performance of the labor. This article presents you the
important differences between salary and wages in tabular form.

BASIS FOR
SALARY WAGE
COMPARISON

Meaning A fixed pay that an individual A variable pay that an individual

draws for the work done by draws on the basis of hours spent in
him on an annual basis. completing the certain amount of
work.

Skills Skilled personnel Semi-skilled or unskilled

Type of cost Fixed Variable

Rate of payment Fixed rate Wage rate

Payment cycle Monthly Daily

Basis of payment Performance basis Hourly basis

Paid to whom Employees Labor

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
 BASIS FOR
SALARY WAGE
COMPARISON

Nature of work Administrative-office work Manufacturing-process work

KRA Yes No
(Key resultant
area)

Extra pay for extra No Yes

hours

Components of wages
Some of the most common components of your salary slip include the basic pay, DA, HRA,
other allowances, EPF and other tax deductions.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
What is the definition of basic wage?
noun. variants or basic salary. : a wage or salary based on the cost of living and used as a
standard for calculating rates of pay. : a rate of pay for a standard work period exclusive of
such additional payments as bonuses and overtime.

What is basic wages under EPF Act?

Where the wage is universally, necessarily and ordinarily paid to all across the board, such
emoluments are basic wages
Overtime wages
Money earned at an increased rate for working more than the usual number of hours in one week

What is overtime wages in India?

Minimum Wages Act, 1948

According to Section 33, workers who work overtime must be paid at a rate that is double their
regular rates of pay. It states that the employer may accept actual work up to a maximum of 9
hours every 12-hour shift on any given day

What is an example of overtime?

Overtime is defined as extra time worked in addition to an employees' normal contracted hours.
For example, if an employee is contracted to work 8 hours a day, and they work 9 hours, then
this would mean they have done 1 hour of overtime
Calculating Overtime for Hourly Employees
Overtime pay is the amount of overtime paid to each employee in a pay period. Overtime pay is
calculated: Hourly pay rate x 1.5 x overtime hours worked.
Here is an example of total pay for an employee who worked 42 hours in a workweek:

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
Regular pay rate x 40 hours = Regular pay, plus
Regular pay rate x 1.5 x 2 hours = Overtime pay, equals
Total pay for the week.
A more detailed example:
An employee works 50 hours in a week.
Her normal pay rate is $15 an hour.
So she is paid $600 for her 40 hours at $15 an hour, plus $225 for her additional 10 hours of
overtime (at $15 x 1.5 x 10 = $225).
Her total pay for the week would be $825.
Dearness allowance
An amount of money that is added to a person's basic pay or pension because of rising prices and
other costs.

Time rate wages :

Time rates are used when employees are paid for the amount of time they spend at work. The
usual form of time rate is the weekly wage or monthly salary. Usually the time rate is fixed in
relation to a standard working week (e.g. 35 hours per week).
This method is oldest form of payment to workers. In this method, wages is paid on the basis of
time spent by the worker irrespective of the output or work done.

Wages= Total hours worked X Wages rate per hour

EFFICIENCY BASED WAGES :

Efficiency wages are above-market wages paid by employers in order to improve the
productivity of their workforce.
Efficiency wages refer to the level of wages paid to the employees to retain their skill set and
improve the workforce productivity in an organization. The theory states that an increase in
wages leads to increased productivity and motivates employees to stay loyal to the firm.

Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS
Mrs. Manjula BK
Assistant Professor
Department Of Management
AIGS