Theory of wages
There are two key theories that explain why
salaries are the way they are in a particular
field. These two theories are:
1.Traditional Theory of Wage
Determination
In this theory the law of supply and demand
dictates salary. These days programmers
are in short supply and are in great demand
thus they will command a higher salary.
Likewise doctors and lawyers whose
specialized skills people need command a
high wage. If you looked at the bill my
electrician gave me you would know he is
in demand!
2. Theory of Negotiated Wages
Those employees who work in unions
where the union negotiates salary on behalf
of all workers fit into this theory. Since I am
a teacher my salary is set by collective
bargaining with my union. I may be the best
teacher in the world sought after by many
students and parents but it wouldn’t matter.
However, different methods of wage
payment are prevalent in different
industries and in various countries. There
may be payment by time or payment by
results, including payment at piece rates.
Wages are fixed mainly as a result of
individual bargaining, collective
bargaining or by public or State regulation.
How wages are determined has been the
subject of several theories of wages. The
main elements in these theories may be
summed up as follows:
Below is mentioned the theory of Wages:
(1) Subsistence theory
(2) Wages fund 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
Now let us discuss the theory of Wages in
detail:
(1) Subsistence theory
This theory, also known as ‘Iron Law of
Wages,” was propounded by David Ricardo
(1772-1823). This theory (1817) states that:
“The laborers are paid to enable them to
subsist and perpetuate the race without
increase or diminution.”
The theory was based on the assumption
that if the workers were paid more than
subsistence wage, their numbers would
increase as they would procreate more; and
this would bring down the rate of wages.
In economics, the subsistence theory of
wages states that wages in the long run will
tend to the minimum value needed to keep
workers alive. The justification for the
theory is that when wages are higher, more
workers will be produced, and when wages
are lower, some workers will die, in each
case bringing supply back to a subistence-
level equilibrium.
2. Wages fund Theory
This theory was developed by Adam Smith
(1723-1790). His basic assumption was that
wages are paid out of a predetermined fund
of wealth which lay surplus with wealthy
persons - as a result of savings.
This fund could be utilized for employing
laborers for work. If the fund was large,
wages would be high; if it was small, wages
would be reduced to the subsistence level.
The demand for labour and the wages that
could be paid them were determined by the
size of the fund.
3. The Surplus value theory of Wages
This theory owes its development to Karl
Marx (1818-1883). According to this
theory, the labour was an article of
commerce, which could be purchased on
payment of ‘subsistence Price.’
The price of any product was determined by
the labour time needed for producing it. The
labourer was not paid in proportion to the
time spent on work, but much less, and the
surplus went over, to be utilized for paying
other expenses.
Marx himself considered his theory of
surplus-value his most important
contribution to the progress of economic
analysis (Marx, letter to Engels of 24
August 1867).
4. Residual claimant Theory
Francis A. Walker (1840-1897)
propounded this theory. According to him,
there were four factors of production/
business activity, viz., land, labour, capital
and entrepreneurship.
Wages represent the amount of value
created in the production, which remains
after payment has been made for all these
factors of production. In other words,
labour is the residual claimant.
5. Marginal productivity Theory
This theory 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 worker. In
other words, it assumes that wages depend
upon the demand for, and supply of, labour.
Consequently, workers are paid what they
are economically worth. The result is that
the employer has a larger share in profit as
has not to pay to the non-marginal workers.
6. The bargaining theory of wages
John Davidson propounded this theory.
Under this theory, wages are determined by
the relative bargaining power of workers or
trade unions and of employers. When a
trade union is involved, basic wages, fringe
benefits, job differentials and individual
differences tend to be determined by the
relative strength of the organization and the
trade union.
7. Behavioural theories
Many behavioral scientists - notably
industrial psychologists and sociologists
like Marsh and Simon, Robert Dubin, Eliot
Jacques have presented their views or
wages and salaries, on the basis of research
studies and action programmes conducted
by them. Briefly such theories are:
The Employee’s Acceptance of a Wage
Level
This type of thinking takes into
consideration the factors, which may
induce an employee to stay on with a
company. The size and prestige of the
company, the power of the union, the wages
and benefits that the employee receives in
proportion to the contribution made by him
- all have their impact.
The Internal Wage Structure
Social norms, traditions, customs prevalent
in the organization and psychological
pressures on the management, the prestige
attached to certain jobs in terms of social
status, the need to maintain internal
consistency in wages at the higher levels,
the ratio of the maximum and minimum
wage differentials, and the norms of span of
control, and demand for specialized labour
all affect the internal wage structure of an
organization.
Wage and Salaries and Motivators
Money often is looked upon as means of
fulfilling the most basic needs of man.
Food, clothing, shelter, transportation,
insurance, pension plans, education and
other physical maintenance and security
factors are made available through the
purchasing power provided by monetary
income - wages and salaries.
Merit increases, bonuses based on
performance, and other forms of monetary
recognition for achievement are genuine
motivators.
Wage structure
Also known as a “wage structure” or
“salary structure,” a compensation structure
is the strategy use to determine how each
employee in company is paid. It considers
information like the length of employment,
industry minimums and maximums, and
merit.
How to Set Up a Wage Structure
1. Establish Value for Each Position
Determine what each job title in your
company is worth. You will likely want to
use market pricing (including that research
we mentioned above) to figure out what a
particular job description should get paid. If
you haven’t refreshed your salaries in a
while, be prepared for some surprises. Also
remember to compare job duties and
responsibilities and not rely on job titles
alone.
2. Consider the Company’s Competitive
Posture
Where does your business compare to the
rest of the pack? Do you pay more than
other companies in your industry? Or do
you pay less? If there is a considerable
difference in pay, why? You may find that
your attempts to pay more than others isn’t
getting you a good ROI. You could also
discover that your workers are grossly
underpaid for the unique talents they
provide.
3. Define Compensable Leverage for
Company
Once you decide how attractive your base
salary is for new workers, you need to
determine your “compensable leverage.”
This term refers to salary rate increases and
how they match up to market averages.
When an entry-level programmer moves up
a pay grade, are they still getting paid
competitively? The difference between pay
grades should be influenced somewhat by
the market, so that those progressing
through the ranks of your business still feel
like they are fairly compensated along their
career path.
4. Look at External Inequalities
Ideally, every employee, in every position,
feels that they are being compensated
fairly. Sometimes, some positions are being
paid differently (in comparison to market
rates) than others. If your sales team is
earning close to what other sales
professionals in the same industries are
making, but your customer service reps
aren’t, this can cause a rift among workers
and lead to employee’s dissatisfaction.
While no one sets out to have these types of
inconsistencies, they can happen when the
market changes quickly and your pay
practices haven’t caught up. Take this time
to compare all of your positions against the
market.
5. Create Company Salary Structure
You’re now ready to make that
compensation plan. Use the data you
collected to make pay grades, including
starting wages and salary caps for every
position in your business. Another
alternative is to group job titles that have
the same pay rates into one group for easier
tracking and documentation.
6. Match Current Employee Pay to New
Structure
With a new plan in place, you’ll need to
implement it for existing workers. You’ll
likely find that some employees are
underpaid, with others making more than
what they should under the new plan. For
those who are underpaid, put them on track
to earn what they should as soon as it is
financially possible. If the gap is small, you
can bump them up right away. Other gaps
may take multiple pay raises to get the job
done.
Wage fixation
Wage Fixation: The act empowers the
appropriate government (central or state) to
fix and revise the minimum wages for
different categories of workers. The
minimum wages can be fixed based on
time, i.e., hourly, daily, monthly, or on a
piece-rate basis.
Factors Considered for Fixation: When
determining minimum wages, the
appropriate government takes into account
factors such as the skill level required for
the job, the nature of work, prevailing rates
of wages in similar employments, cost of
living, and other relevant factors.
Components of Minimum Wages: The
minimum wages include the basic wage,
which is the minimum rate fixed by the
government, and any additional allowances
such as dearness allowance, house rent
allowance, or other special allowances
Wage payment
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
Salary Administration
Wage and salary administration is a
collection of practices and procedures used
for planning and distributing company-
wide compensation programs for
employees. These practices include
employees at all levels and are usually
handled by the accounting department of a
company
Difference between salary and wages
Points Salary Wages
1.Fixed amount paid on a monthly basis
Hourly or daily rate of pay
2.Typically paid to employees in a
professional or managerial role Primarily
paid to non-executive or hourly workers
3.Consistent amount regardless of hours
workedVaries based on the number of
hours worked
4.Often includes benefits and bonuses
Benefits and bonuses may be limited
5.Generally negotiated during the hiring
processSubject to legal minimum wage
regulations
6.Suitable for positions with regular
working hours Common in industries with
fluctuating work schedules
7.Commonly associated with white-collar
jobs Frequently associated with blue-
collar jobs
8.Provides stability and financial
predictability Reflects immediate
compensation for work performed
9.Typically paid on a monthly or semi-
monthly basis Paid on a weekly, bi-
weekly, or monthly basis
10.Payment is unaffected by time taken off
work Absences directly impact the
amount earned
Basis for compensation fixation
1. Organization’s ability to pay
Companies with good sales & profits tends
to pay higher compensation. In the long run
it is important because in prosperity time,
employers pay high to carry profitable
operation. But in depression wages &
compensation are cut down due to non
availability of funds. Where ever minimum
wages legislation is applicable organization
should pay, irrespective of their capacity to
pay.
2. Supply & Demand of labor
Labor market condition always operate at
National, Regional& local level. Higher
demand & low supply of skilled person
results in rise in compensation. Lower
demand & higher supply results in decrease
in compensation.
3. Prevailing Market rates
Also known as Comparable wage or Going
wage rate. Going rate system involves
fixing wage/salary rate in tune with what is
paid by different units of an industry in a
locality. Going rates are generally paid in
the initial day of company and plant
operation.
4. Trade Unions Bargaining Power
Generally stronger & more powerful the
trade union, higher the wages and
compensation. But the concept is changing
with collective bargaining and strong
Industrial relation.
5. Job Requirements More difficult the job,
Higher the Wages & Compensation.
Measure of Job difficulty, used with
relative value of job to another
Organization (Comparison).Job Grading
Relative Skills Efforts Responsibility Job
Conditions
6. Managerial Attitude Decisive Influence
on Compensation Management
Whether Firm should pay Below Average
Rate above Average Rate What Job Factors
used to reflect Job worth Performance or
Length of Service These matters requires
approval of Top Executives.
7. Cost of Living Known as Automatic
Minimum Equity Pay Criteria
Based on Cost of Living Index and CCA are
the Integral Part of it Negative Effect
Increase in Cost of Living usually possess
additional burden on Employer without
corresponding improve in Productivity
8. Productivity Measured in terms of
Output per hour Negative
Technical Improvement Better
Organization & Management Better
Methods of Production Greater Skills by
Labor Negative Productivity Calculation &
Definitional Measurement and Conceptual
Issues
9. Pay for Performance Linking Pay to
Performance Jobs & Work Flows
Continues Appraisal Incentive Methods
10. Skills level available in market
with growth of Industries, Business &
Trades all over the world results in
Shortage of Skilled Resources
Technological Advancement Automation
of Work Process Computerization.
Components of Wages
1. Basic wage: 1. a wage or salary based on
the cost of living and used as a standard for
calculating rates of pay.
2. a rate of pay for a standard work period
exclusive of such additional payments as
bonuses and overtime.
2. Overtime wages: Overtime wages refers
to the compensation you receive for
working beyond normal working hours.
3. Dearness allowance: Dearness
Allowance is paid by the government to its
employees as well as a pensioner to offset
the impact of inflation.
4. Time-rate wages: Time-rate wages
compensate workers based on time spent
working rather than output or productivity.
5. Efficiency Based Wages: Efficiency
wages refer to employers paying higher
than the minimum wage to retain skilled
workers, increase productivity, or ensure
loyalty.
6. Incentive Schemes: incentive plan or
incentive schemes an arrangement under
which additional payments are made to
employees as a means of increasing
production.
7. Individual bonus schemes: Individual
bonus schemes are based on the personal
achievements and results of each employee.
They are usually tied to specific metrics,
such as sales, productivity, quality, or
customer satisfaction.
8. Group bonus schemes: Team-based
bonus schemes are based on the collective
achievements and results of a group of
employees who work together on a
common project, task, or goal. They are
usually tied to team-level metrics, such as
revenue, profit, customer retention, or
quality improvement.
Effect of various labor laws on wages
The Wage Code regulates wage and bonus
payments in all employment. The Code
combines the provision of the following
four laws: (i) the Payment of Wages Act,
1936, (ii) the Minimum Wages Act, 1948,
(iii) the Payment of Bonus Act, 1965, and
(iv) the Equal Remuneration Act, 1976.
Preparation of pay Roll :
Here’s a more detailed overview of the
eight steps involved in processing payroll.
Step 1: Establish employer identification
number.
The first step in processing payroll is to
establish EIN and state and local tax ID
numbers. (You’ll need to do this whether
you process payroll manually or use a
payroll platform.) The government uses
these identifiers to track your business’s
payroll taxes and to ensure that you meet all
requirements.
If you don’t know your EIN or don’t have
one, you can apply for an EIN online.
Access information from your state and
municipality to obtain state and local tax
IDs.
Step 2: Collect relevant employee tax
information.
Before you start processing payroll, your
employees must complete various tax
forms so you can account for allowances
and other details for payroll taxes. These
payroll forms include Form W-4, Form W-
9 and Form I-9 (if it is a new employee).
You must also provide various state and
local forms, but these will depend on where
your business operates.
Before processing an employee’s first
paycheck, you should also have these
documents on hand:
• Job application: Even if the
employee never filled out a formal
application, having this document on file
ensures all vital payroll information is in
one place.
• Deductions: The employee may
participate in employee benefits, such as
health insurance, a health savings account
or a retirement savings plan. Proper payroll
processing ensures that the correct amounts
for these benefits are withheld each pay
period.
• Wage garnishments: You may be
required by law to garnish your employees’
wages if they owe money, such as IRS
payments or child support. Wage
garnishments are court-ordered; make sure
you have the proper documentation on hand
and in your records.
Step 3: Choose a payroll schedule.
Once the relevant tax and legal information
to set up payroll, you must choose how
frequently to run payroll. There are four
typical pay schedules: monthly,
semimonthly, biweekly and weekly. It’s
essential to understand each option before
you decide which is best for your business.
Step 4: Calculate gross pay.
Now that set a payroll schedule, you can
start processing your first payroll. To do
this, you must calculate each employee’s
gross pay. Gross pay is the total number of
hours an employee works in a given pay
period multiplied by their hourly rate.
Here’s an example of a gross-pay
calculation:
1. Worker A has worked 50 hours for
your weekly pay period and earns $20 per
hour.
2. 40 hours x $20/hour = $800
3. 10 hours x $30/hour (time and a
half) = $300
4. Gross pay = $1,100
Step 5: Determine each employee’s
deductions.
Gather information from your workers’ W-
4s, federal and state requirements,
insurance requirements, and benefits
requirements to determine each employee’s
deductions. This can get complicated; each
state collects different taxes from small
businesses, so you must research your
state’s policies before completing this step.
Step 6: Calculate net pay, and pay your
employees.
Subtract each employee’s deductions from
their gross pay. The amount left over is the
employee’s net pay, or take-home pay. This
is the amount you’ll pay each employee.
You’ll have to hold the deductions and pay
them with your payroll taxes each month or
quarter, depending on the schedule you
establish.
Step 7: Keep payroll records, and make any
necessary corrections.
As you process payroll, it’s essential to
keep records of your transactions for tax
and compliance purposes. If an employee
disputes a payment or the IRS needs
documentation down the line, you must
have records at the ready. Maintaining
records, including year-to-date payments, is
especially crucial if an employee disputes a
paycheck. With good records, you’ll be
able to sort out any issues quickly.
Step 8: Be mindful of ongoing
considerations.
Remember that must file business’s taxes
quarterly and annually. It’s essential to
consult a business accountant to ensure
understand how payroll taxes fit into this
aspect of operations and must also report
new hires to the IRS. When work with a
payroll solution or an accountant, this
usually isn’t responsibility.