Wage & Salary Administration

It presents the analytical framework for reward systems the company level which includes financial & non-financial rewards , employee benefits, incentives & their link with productivity. It summarizes the key issues in the wage system from the point of view of the key actors in the industrial relations system workers, unions, managements & the government.

Theories of Wage
There are mainly three types of theories of wage:
Economic Theories: These theories can be broadly classified into two categories:

The theories that explain wages predominantly in terms of factors that influence the supply price of labour.
The theories that consider wages as being determined primarily by factors which influence the demand price of labour.

Theories of Wage (cont)

Economic Theories (Cont) Though the wage theories important policy implications some relevance for certain occupations or in certain regions , none of them are adequate as general theory having universal applicability.

Theories of Wage (cont)

Subsistence Theory
This theory is based on assumption that labour, like any other commodity is purchased & sold in the market, & in the long run, the value of labour trends to be equal to the cost of production. The labour cost is equal to the amount which is necessary for the maintenance of the worker & his family at the subsistence level. Conversely, if the wages fall below the subsistence level, children will die or some workers might decide to have fewer children, would eventually bring down the birth rate. This would result in decreased labour supply, which would ultimately be equal to the demand for it. Therefore, in the long run, the wage rate gets adjusted at the subsistence level. This theory is also known as Iron Law of Wages.

Theories of Wage (cont)

The Surplus Value Theory

This theory is associated with Karl Marx. According to his view, the supply of labour always tended to be kept in excess of the demand for it by a special feature of the capitalist wage system. Also, the worker did not get full compensation for the time spent on the job. The rate of surplus value , which is the ratio of surplus labour to necessary labour, is also referred as rate of exploitation under the capitalist for of production.

Theories of Wage (cont)

The Wages-Fund Theory John Stuart Mill tried to explain the movement of wages in a changing world. He observed that there was changing natural rate defined by the changing ratio of capital to population. Thus, according to this theory, wages are determined by: 1. The wage fund which has been expended for obtaining the services of labour. 2. The number of workers seeking employment. It was assumed that a wage-fund is fixed & does not change. Any change in the wage rate, therefore, would be due to a change in the number of workers seeking employment.

The Wages-Fund Theory

This theory was rigid in its own way. It demonstrated that bargaining power or trade union cannot raise the wage level & that efforts to discourage the accumulation of capital the wages were bound to lower wages by reducing them the wages-fund. This theory showed that productivity of labour was determined by the level of wages. If the rise in wages could augment the efficiency of labour as well, stimulating to set out more funds in the purchase of labour.

The Marginal Productivity Theory

J.B Clark was the first to develop this theory. Later on, Marshall had made some amendments in the shape of refinements added to this theory. According to this theory, both demand & supply together determine the factor price, which in a perfectly competitive market, is equal to the marginal revenue productivity of the factor. This theory assumed that there was a certain quantity of labour seeking employment & the wage rate at which this labour could secure employment in a competitive labour market was equal to the addition to total production that resulted from employing the marginal unit of the labour force. It was also assumed that production was carried out under the conditions of diminishing returns to labour.

The Bargaining Theory John Davidson, an American economist, was the first exponent of the Bargaining Theory of Wages. He argued that the wages & hours of work were ultimately determined by the relative bargaining strength of the employers & the workers.

According to this theory, there is an upper limit & a lower limit on wage rates & the actual rates between these limits are determined by the bargaining power of the employers & the workers. The upper limit marks the highest wages the employers would be willing to pay, whereas, the lower limit indicates the minimum wages prescribed under the strength of resistance of the workers at the subsistence wages below which they will not available for work.

Demand & Supply Theory

Alfred Marshall, the chief exponent to this theory, explained the complexity of the economic world tried to provide a less rigid & deterministic theory. According to him, the determination of wages is affected by the whole set of actors which govern demand for & supply of labour. The demand price of labour, however, determined by the marginal productivity of the individual worker. The term supply & labour can be expressed in a number of senses. First, it refers to the number of workers seeking employment; these are the workers who have no alternative livelihood & join the labour market seeking employment for wages. Secondly, supply & labour may refer to the number of hours each worker is available for work. The supply of labour in this sense increases with any increase in the number of working hours.

The Purchasing Power Theory Keynes applied a new theory to the economy as a whole & not to an individual firm or industry. According to him, wages are not only the cost of production for an employer but also incomes for the wage earners who constitute a majority in the total working population. A major part of the products of an industry is consumed by the same workers & their families. Hence, if the wage rates are high they will have more purchasing power, which would increase the aggregate demand for goods & the level of output. Conversely, if the wage rates are low, their purchasing power would be less, which would bring about a fail in the aggregate demand. Therefore, according to him, a cut in the wage rate instead of removing unemployment & depression will further add to the problem.

Behavioural Theories of Motivation

Equity Theory Equity can be external or external. Internal equity refers to the pay differential between & among the various skills & levels of responsibility. External equity refers to concerns regarding how wage levels for similar skill levels in one firm compare with those in other firms in similar or the same industry & location.

Expectancy theory
It suggests that motivation depends on individuals expectations about their ability to perform tasks & receive the desired rewards. An employers responsibility is to help employees meet their needs &, at the same time, attain organizational goals. Employers must try to find out match between employees skills & abilities & the job demands.