Personnel Management

Wage and Salary Administration

Employee   compensation is a vital part  of human  resource management. Wages salaries and other forms of employee compensation constitute a very large component of operating costs.  “One of the biggest  factors  affecting industrial  relations is th salary  or wage-the   compensation an  employee receives  for  a fair  day’s  work.” Majority of union management disputes  relate to remuneration. No organisation can expect to attract  and  retain  qualified and motivated employees unless  it pays them fair compensation. Employee compensation, therefore, influences vitally the growth and profitability of the company.

 

Objectives of Wage and Salary Administration

• To establish   a   fair   and   equal  structure of remuneration and job responsibilities.
• To get the best talent out of available talent pool with the sound   and   competent   wage   and
• To establish internal equity as well as external equity. Internal equity means similar pay for similar work. External equity  within   the   organisation  means remunerations   compatible   with   the   same job responsibilities outside the organization.
• To enhance productivity and morale of the employees in any organisation, it is very important to have effective wage and salary administration. It is obvious that highly paid employees would like to work more effectively and efficiently.
• To establish job hierarchy and lines of promotion, it is again important to have sound and full proof wages and salary administration. It will be the basis of all other decisions.
• To have cordial relationship between management and union, it is important to have sound and competitive wage and salary administration so that they don’t feel exploited and their level of satisfaction is high.
• To pose a good image of the company in public and alleviate; it is important to have sound and competent wage and salary administration.

Principles of Wage and Salary Administration

• Wages and salary plans should be sufficiently flexible.
• Job evaluation must be done scientifically.
• Wages and salary administration plans must always be consistent with overall organizational plans and programmes.
• Wage and salary administration plans and programmes should be in conformity with the social and economic objectives of the country like attainment of equality in income distribution and controlling inflationary trends.
• Wage and salary administration plans and programmes should be responsive to the changing local and national conditions.
• These plans should be simplify and expedite other administrative processes.

Components of Compensation

Following are the major components of compensation package

1. Basic Pay

It is the first and foremost part of pay, package, which is determined through job evaluation. Pay differentials are to be in proportionate with the worth of job. There are few determinants of Basic Pay i.e., demand and supply of expertise, competitor’s policy of wages and salary administration, statutory requirements, employer’s attitude etc. According-to the Fair WagesCommittee any attempt  to evolve principles for governing the fixation of wages must be made against  the background of general economic conditions of the country  and the level of national  income. The committee gave three  concepts  relating  to basic wages.

The fair wage committee gave three concepts relations to basic wages.

• Minimum Wage

 Minimum wage is that  wage which  is sufficient to cover the bare  physical  needs  of a worker   and  his  family. But  the  committee felt that  the minimum wage should  provide not merely for the base  subsistence or sustenance of life but for the preservation of the health,  efficiency and well-being of the worker  by providing. some  measure    of education,  medical   facilities   and  other   amenities.

 The Fair Wages Committee defined  the components of  minimum wage but  did not quantify  them.  The Indian  Labour  Conference at its  15th Session  held  in July 1957 formally quantified the minimum wage.The Conference laid down the following criterion  for the calculation of minimum wage.

1. The standard working class family should be taken to consist of 3 consumption units for the one earner, disregarding the earnings of women, children and adolescent.
2. Minimum food requirements should be calculated on the basis of a net intake of 2,700 calories, as recommended by Dr. Aykroyed for an average Indian adult of moderate activity.
3. Cloth requirements should be 18 yards per consumption unit per annum.
4. Rent is to be calculated as per the minimum rent charged by the Government under the subsidized Industrial+ Housing Scheme for low income groups.
5. Fuel, Lighting and other miscellaneous expenditure is to constitute 20 percent of minimum wage.

The above norms were revised by the 41^st Labour Ministers Conference in 1992 as under:

3. The standards working class family should be taken to comprise 5 consumption units instead of 3.
4. Minimum food requirements should be calculated on the basis of 2,700 calories per consumption unit in conformity with the food habits of the region.
5. Clothing requirements should be estimated at 80 yards per family per year.
6. House rent should be the same as under the subsidized industrial housing scheme. Fule, lighting and other miscellaneous expenditure should constitute 20% of the total minimum wage.
7. 25% of the total of earlier components should be provided for children education, medical and social needs as per the Supreme Court judgement given in the case of the Workmen vs. Management of Raptakos Brett and Co. Ltd.

• Fair wage

 It is more than just fulfilling the basic needs of an employee but little bit more depending upon the capacity of an industry to pay and other factors like : the performance of an employee, the prevailing wages in the market, level of national income and its distribution,  the contribution of industry towards GDP etc.

• Living wage

 It is the amount that not only fulfills the basic needs but in addition provides certain ammenities necessary for the well being of the worker. According to the Fair Wages Committee, “The living wage to provide himself and his family not merely the bare essentials of food, clothing and  shelter but also a measure of frugal comfort including education for children, protection against ill health, requirements of essential social needs and measure of insurance against the more important misfortunes including old age.”

3. Allowances

Several allowances are paid in addition basic pay. Some of these are mentioned below:

1. Dearness Allowance

Dearness allowance is given to protect the salary from inflation, as inflation rate keeps on increasing day by day.Under Section-3 of the Minimum Wages Act it is described as cost of living allowance. There are different methods used to calculate dearness allowance :

(i) Flat Rate

 According to this  method, D.A. is paid  at a flat rate  to all workers irrespective  of their   wage  levels  and  regardless   of changes  in  the  consumer  price index.   This   method    was   used   in  jute,   cotton   and   engineering   industries    in  West Bengal  in the  early  days  of adjudication.

(ii) Graduated Scale

Under this method, D.A. increases with each slab of salary.Therefore, D.A. as a percentage of basic pay decreases steadily.

Pay Scale (Rs.)	Amount of D.A. (Rs.)	D.A. as percentage of Maximum of the Pay Scale
0-500	100	20
500-1000	150	15
1000-1500	200	13
1500-2000	250	12.5

 

(iii) Index Based Dearness Alowness

This method is applicable in the cotton mills of Mumbai and Chennai as well as in  many Central Government undertakings. In this method a flat rate per point of index is prescribed irrespective of pay scale, in this way all the employees get the same amount. For example if Rs. 1.50 is the rate Rs. 15 will be paid as D.A. whenever the All India Consumer Price Index (AICPP) increases by 10points.

(iv) Dearness Allowances Linked to Index and Pay Scale

This method is used to pay Dearness Allowances to government employees and central public sector undertakings. In this method amount is controlled by both index as well as pay scale. Under this method, Dearness Allowances is inversely proportional to basic pay as, a higher rate of Dearness Allowances is prescribed for lower pay scales and a lower rate for higher pay scales.

b) House Rent Allowance

Employers who do not provide living accommodation pay house rent allowance (HRA) to employees. This allowance is calculated as a percentage of basic pay (30% of basic pay in case of government employees in metros)

c) City Compensation Allowance

This allowance is paid generally to employees in metros and other big cities where cost of living is comparatively high. City compensation allowance (CCA) is generally a fixed amount per month.

d) Transport Allowance/Conveyance Allowance

Some employers pay transport allowance (TA) to their employees. A fixed sum is paid every month to cover a part of travelling charges.

In some cases, medical allowance, education allowance for children, tiffin allowance, etc. are also paid.

3. Incentives

Bonus, profit sharing, commission on sales etc. are the various forms of incentives and basically they are performance based. Star performers are found out and incentives are given to them.

Bonus

Bonus  began to be paid   as an ex- gratia  to workers of textile mills  in Mumbai and Ahmedabad after the First  Word  War. According to the Bonus Commission (1961), bonus is “sharing by the workers in the prosperity of the concern in which they are employed. In case of low paid workers such  sharing in  the prosperity augments their  earnings and helps  to bridge  the gap between the actual wage and  the need  based  wage.” It has little direct  incentive effect because it is usually paid to all workers at the same rate irrespective of their individual efficiency and long after  the close of the financial year.

Payment of Bonus  Act,  1965

The Act provides for the payment of bonus  to persons employed in specified establishments. The main  provisions of the Act are as follows:

(i)   Every employee in the specified  establishments drawing a salary  (basic pay plus D.A.)not exceeding Rs, 3,500 per month  is entitled  to bonus  provided he has worked  for not less than  30 days in the year.

(ii)  Bonus  is to be calculated on a salary of Rs. 2,500 per month  wherever the actual  salary  exceeds this amount.

(iii)    Every employer is bound  to pay a minimum bonus  of 8.33 per  cent of the salary  of an employee or Rs.  100 per year whichever is higher  whether or not he has  any allocable surplus in the accounting year.2

((v)   If in any  accounting year  the  allocable surplus    exceeds the  amount   of minimum bonus  payable to employee the employer shall pay a higher bonus subject  to a maximum of 20% of salary or wage.

(v)     The surplus  or deficit in the allocable surplus  can be carried  forward to be set off or set on during  the next four years.

(vi) Where an employee has not worked for all the working days in any accounting year, the minimum bonus  of Rs.  100 or  60 as  the  case  may be,  shall  be proportionately reduced, if such bonus  is higher  than  8.33 of his salary  or wage.

(vii)   No minimum bonus   is  payable by a newly set  up  establishment  in  the circumstances prescribed under  Section  16 of the Act.

(viii)  The bonus  is to be paid  within 8 months  from  the close of the accounting year.

(ix)    An employee dismissed from service for fraud,  theft, misappropriation or sabotage of property and riotous/violent behaviour on the premises or the establishment is not entitled  to bonus.

(x)   An employer can deduct  puja or other customary or interim  bonus  paid to the employee from the bonus  payble under  this Act. Similarly, any financial loss to the employer due to misconduct of an employee can be deducted.

4. Fringe Benefits

These benefits are usually paid to the senior officers. Provident funds, pensions, gratuity, encashment of earned leave, company house, company car, leave travel concession(LTC) , medical aid, interest free loan, holiday homes, entertainment, stock options etc. are the examples of such benefits.

The International Labour  Organisation (I.L.O.)has described fringe benefits as follows:

“Wages are often augmented by special cash benefits, by the provision of medical and other services  or by payments in kind that form part  of the wage for expenditure on the goods  and  services. In addition. workers  commonly receive such benefits  as holidays with pay, low cost meals,  low rent housing,  etc. Such  additions to the wage proper  are sometimes referred  to as fringe benefits. Benefits that have to relation  to employment or wages should  not be regarded as fringe benefits  even though they may constitute a significant part  to the worker’s total income.”

The main features  of fringe benefits  are as follows:

(i)   Fringe benefits  are  a supplement to regular  wages or salaries.

(ii)   These benefits  are paid to workers  not for any specific job or performance but to stimulate their  interest  in the’ work.

(iii)    Fringe benefits  involve a labour  cost for the employer and  are  not meant directly  to improve  efficiency. For example, money spent  on lighting in the factory is not a fringe benefit as it does not supplement the wages of employees.

(iv)    Fringe  benefits   refer  .to items  for which  a  direct  monetary value  to the employee can be ascertained, e.g.,  paid holidays, pension, etc. On the other hand,  services  refer to the items such as athletics, legal aid, dispensary, etc.

(v)   Fringe benefits  add  to the workers’ standard  of living or welfare.

(vi)    These benefits  may be statutory or voluntary, Provident Fund is  a statutory benefit whereas  housing  for workers  is a voluntary benefit.

Objectives of  Fringe Benefits

Fringe benefits  are given for the following reasons:

i. to recruit  and  retain  the best  employees;

ii. to protect employees against  certain  hazards,   g.,  life insurance, old age pension,  etc.;

iii. to improve motivation and morale of workers by satisfying some unsatisfied needs

iv. to improve work  environment and industrial relations;

v. to ensure health,  safety and welfare of employees;

vi. to develop a sense  of belonging and loyalty among workers;

vii. to meet statutory requirements;

viii. to satisfy  the demand  of trade  unions;

ix. to improve  the public  image of the enterprise.

Factors Affecting Wage and Salary Administration

• Demand and supply factor is the major factor which affects wage and salary administration process. Number of available talent determines the wages rate. If number of talented people available is more than required, wages will be low and vice-versa.
• Attitude and ability of employers will also affect the wages and salary structure and obviously, they will pay according to their returns and profits.
• Labour unions also play an important role in determining the wages; they exert pressure on the employers to be competitive with their competitors outside. The pressure may be exerted through collective bargaining, strikes and other methods.
• It has become very difficult to beat inflation as it is increasing at high speed and therefore, the value of real wages decline. Dearness allowance is given to maintain the balance and there is a clause in labour agreements also, according to which pay increases with the increase in cost of living automatically.
• Wages and salary also depends upon the inputs given by job evaluation. Job evaluation actually determines the worth of job keeping in mind the job requirements.
• Major determining factor is that what others are paying in the same industry to the individual with same qualifications. Every employer has to pay according to that.
• Wages and salary are basically determined by the performance of an individual as it effects the efficiency and productivity of any organisation. The more they get, the more they would like to give it back.
• Central Government, State Government and other regulatory bodies formulate certain laws which is necessary for every employer to abide by.

 

How to Determine Wages and Salary

Following are the steps to determine wages and salary

(i) Job analysis To determine wages, it is very important to analyse the job and then get prepared with the content of job description and job specification. The data collected through job analysis is the major determinant of wages and salary.

(ii) Job evaluation Job evaluation is also done through the data provided by job description. Hierarchy is also made by job evaluation and in this way the relative fixation of wages and salary is done. The relative job value is then converted into money value.

(iii) Wage survey The major factor which any employer would consider while fixing wages and salary is that what is the wage/salary level in that particular region in the same industry for similar jobs. Other facilities being provided by their competitors would also be considered.

(iv) Developing wage Structure After undergoing a through survey and confirming about their competitors, a wage structure compatible to the competitors is prepared, keeping in mind few things like rules and norms prescribed by regulatory bodies, legislation relating to wages, width of pay-grades, inflation, provision for performance increase, co-ordination between job evaluation and salaries amount etc.

(v) Formulating rules It is very necessary to formulate norms and rules that will govern hike in payments, promotions from one grade to another. How much time period and the kind of meritorious performance is required to get the promotions. After the rules are formulated, they need to be communicated formally to all the employees without any ambiguity.

(vi) Performance evaluation The performance of each and every individual is evaluated adopting various methods of performance evaluation and the hike in the salary and promotion will depend upon the results obtained after performance evaluation. It is feasible that the employee working for many years may earn more on the lower pay scale than a fresher working on the higher scale due to continuous increments.

This is how the fixation of wages and salary of any individual can be done. The effective, proper and authentic administration of wages and salary is done, provided all the steps are followed properly.

Wage Policy in India

In India, the question of wages assumes paramount importance because of acute poverty, larger scale unemployment and high population. No fixed norms and means are followed in fixing wages and salary. So, lots of expediencies are found in fixing wage.

Following are the main objectives of wage policy in India

• To ensure the fulfillment of their basic needs at least in every sector, whether in agriculture, industry or service sector.
• To create a highly objective, impersonal and unbiased system so that disparities related to occupation, industry, region or regional are reduced io minimum level.
• To beat inflation and compensate employees equitable to the rise in prices.
• To ensure no disparity between the wages and salary of private and public sector.
• To maintain proper balance between high profitability units and others to avoid stress and frustration.
• To maintain proper co-ordination with the outside agencies and other regulatory bodies so that there is no conflict with the trade unions.
• To motivate and encourage employees by providing them with proper incentive systems of payment.
• To provide employees with opportunities to grow and get promotions by developing their skills.
• To eliminate malpractices in the payment of wages.
• To avoid exploitation of employees by the employer in the condition of non-availability of wage policy in the country.

Regulation of Wages by Government of India

India   aims   at  rapid    economic  growth,   industrial   peace,   price   stability,  equitable distribution   of income   and   progressively  rising   standard   of living  for  the  working class.   In order   to  realize   these   objectives,  the  Government  of India   regulates  wage rates   through   the  following methods.

i. The Minimum Wages Act, 1948

The given Act provides for setting up a tripartite machinery having the representatives from employers, unions and the government to fix up the minimum wage rates and revise at regular intervals not exceeding five years. The main objective is to save labour or less previliged people from being exploited by the more priviliged society. The Act neither defines minimum wages nor lays down norms for its determination. According to National Commission on labour, it is neither possible nor required in a country like India due to its wide spread regional disparities.

ii. The Payment of Wages Act, 1936

The given Act regulates the rate of payment for overtime work and regular payment of wages. It also instructs not to have unauthorised deductions and unnecesary fines. It also monitors that no employee is drawing less than the specified pay.

iii. The Equal Remuneration Act, 1976

The  main   object   of  this  Act  is  to prevent   discrimination    in remuneration   on the  basis   of sex.  Under   the  Act it is the duty  of the  employer  to pay  equal  remuneration   to men  and  women   workers  for the same   work   or  work   of a  similar   nature.    No  discrimination   is  to be  made   against women   in  recruitment   and  in  conditions  of service   unless   provided  for  under   an law  for the  time  being  in force.

iv. Section 5J9-A of the Companies Act, 1956

The given Act pays its role when employer is winding up of a company then it is the prime responsibility of employer to pay worker’s dues in priority. If the company’s assets are inadequate to meet these in full, these due and debts due to several creditors are to abate in equal ratio.

v. The Industrial Disputes Act, 1947

 Under  the Act conciliation is compulsory in  all  wage   disputes   in  public    utility   services   and   optimal   in  other    industrial establishments.   The  Act also  empowers  the  appropriate   Government  to constitute one  or more  Industrial  Tribunals  or National tribunals  and  to refer  a wage  dispute to these  Tribunals   for  adjudication.

vi. Wage boards

A wage board is a tripartite body set up by the Government of India on industry wise basis to fix and revise pay. It consists of an impartial chairman, two independent members, and 2 or 3 representatives of workers and employees      each.      The      wage      boards  recommendations are submitted to the government and government may accept, modify or reject their recommendations. It is necessary for the parties to follow, if accepted once.

While  determining  wages,  Wage Boards   take  into  account  the  following factors:

(a)    Need-based  minimum  wages.

(b)    Industry’s  capacity  to pay.

(e)   Productivity  of labour.

(d)    Prevailing rates   of wages.

(e)  Various wage  legislation

(f) Level of income   and  its  distribution.

(g)   Place  of the  industry  in the  economy.

(h)    Needs  of industry  in  a developing economy.

(i)  Requirements   of social  justice.

(j)    Need  to provide  incentive for  improving productivity

The National Commission  on Labour   has  recommended   the  following measures to make  Wage Boards   more   effective:

a) a wage board   should   be required  to submit   its  recommendations   normally within  the year.

(b)  unanimous   recommendations    should   be made   statutorily  binding,

(c ) the  recommendations    of a Wage Board   should   remain   in force  for  a period of five years, and

(d) a manual of procedure   for Wage Board   should   be

vii. Pay commission

Pay Commission determines the wages and allowances of Central and State Government employees. If there is any dispute related to Pay Commission awards and their implementation, then commissions of inquiry, adjudication by tribunals and the joint consultative machinery take the responsibility of solving them. The recommendations of the commission help to widen disparities between A, B, C and D grade service groups.

viii. Committee on Fair Wages 1948

 In the opinion of the committee, “Any attempt to evolve principles for governing the fixation of wages must be made against the background of the general economic condition of the country and the level of the national income.” It introduced the concepts like minimum wage, fair wage and living wage.

ix. National Commission on Labour 1969

It states that it is not possible to fix up the national minimum wage because of wide spread regional differences. The commission suggested, “The wage policy has to be framed taking into account such factors as the price level which can be sustained, the employment level to be aimed at, requirement of social justice, and capital formation need for growth.”

 x. Ghakraborty Committee 1974

 This committee emphasises the need of National Wage Commission and a National Board to evaluate all jobs and proper justification to the employees in respect to their knowledge, skills and abilities. It also stressed the need for uniformity in wage payments across regions, industries and occupations.

xi. Bhoothialingam Study Group 1978

This group evolved many guidelines to reduce disparities and anomalies prevailing in wages in the country, but trade unions did not like their suggestions.

xii. National Commission on Labour 2002

This commission recommended that every employer must pay each worker his one month’s pay as bonus before an appropriate festival. It also recommended that Central Government must notify the national minimum wage.

Methods of Payment

There are two methods of payment

1. Time Wage System

• Wages are paid on the basis of time spent irrespective of the work done. In the past, workers were paid on the daily basis.
• The unit of time may be a day, a week, a fortnight or a month.
• In this method workers feel secure, confident and assured of being paid at the end of the day.
• This method is suitable where units   of output    are  non-measurable    as  in  case   of office  work   and mental  work   is involved   as  in policy

Time  wage  system has   the  following advantages:

i. It is the simplest and the oldest  It is easy to understand  and  workers can  easily  compute  their  own  remuneration.

ii. Earnings   of  workers   are   regular, fixed and   they   do  not   suffer   from temporary loss  of efficiency. This  gives  them   a sense   of economic security and   self-confidence.   The  worker  is  assured   of  a  fixed   income  and   can, therefore,  plan  his  expenses accordingly.

iii. The plan is economical as no detailed records of output are required.

iv. As there is no pressure   to speed   up  production,  the  quantity of work can be kept    A worker  can  show  his  skill.

v. This   method  also  avoids wasteful handling  of materials  and      In  the absence   of  rough handling of machinery,    repairs    and    maintenance expenditure  is low. Workers can adjust   the  pace  of work  so that  there   is no injury   to their   health.

vi. Learners can   concentrate   on  learning  the  best   methods  of work   as  their earnings  are  not  dependent  on  the  amount  of work.

vii. Unions prefer      time   wage   as  it does   not   differentiate   between  efficient and      inefficient    A sense  of equality and  solidarity is created  among them.

viii. Where  work    done    is  of  an   intangible   nature,   g.,   mechanics.    design engineers,   service,  etc.   It is  difficult  to  measure   output   accurately   and standards   of output cannot be laid  down.  In mental and  non-repetitive jobs, therefore,  time  wage  is a more   equitable and  convenient method.

ix. In continuous or  assembly line  production,  the  pace  of work  is beyond the control of an  individual  Time  wage  is,  therefore,  a better   method.

x. It is an  objective method.

xi. The employer can  calculate  the  wage  bill  in advance.

The  time  wage  system suffers from  the  following disadvantages:

i. The method provides  no incentive for better   performance  as  reward  is not proportionate to effort. It makes no distinction between efficient and  inefficient workers. Efficient and  hardworking employees receive the same  remuneration as  Inefficient employees and  It thus  has  a demoralising  influence and  encourages  soldiering  on  the job.

ii. Guaranteed  remuneration   makes workers  indifferent  and complacent.

iii. Calculation of labour  cost  per  unit  is difficult as the  total  wage  bill  does  not  change with  the  volume of production.

iv. In the  absence of an incentive to hard   work, productivity of labour becomes low unless close supervision is used. Thus, costs of supervision are high.

v. Control   over  labour   cost  becomes   difficult  and  more  payment   may  be made for  the  lesser   amount of work.

2. Piece Wage System

• In this method, compensation is based on the amount of work done or output of a worker.
• Reward is in proportion to the effort, so people tend to work hard to gain more incentives.
• Efficient workers get an opportunity to showcase their talent and earn more, if ambitious.
• Greater is the number of pieces produced by a worker, higher is his remuneration. Thus, a workman is paid in direct proportion to his output.

Piece Wage system has following advantages:

i. Promotions become more objective as they are dependent upon the performances instead of anyone’s whims and fancies.

ii. Worker co-operate more in this method with innovative schemes of rationalisation designed to improve efficiency of operations.

iii. Ambitious and  efficient  workers    are  provided   ample   opportunity   to utilise their  talent  and  increase   their  earnings   and  thereby   improve   their  standard of living and

iv. The method is just  and  fair  to all. Efficient  workers   get ample   reward,   while shirkers   are penalised.

v. The cost of labour    per  unit  of output   can be easily  calculated  as the wage bill varies   in direct   proportion   to the

vi. As workers themselves   have  a stake   in maximisation   of efficiency, cost  of supervision   is low.

Piece  wage  system   is,  however,   subject   to the  following drawbacks:

i. It is very difficult   to fix piece  wage     Employers  often  cut  the  piece  rate when  they  find  workers    are  producing  large  quantities.

ii. The earnings   of workers   are not stable  and  they may  suffer  due  to temporary delays   or    They  feel insecure   and  dissatisfied.

iii. In  order   to  maximize   their   earnings,    workers    work   with  excessive  This  may  affect  their   health.   It also  increases    the  wastage   of materials    and wear  and  tear  of machinery.

iv. Detailed records    of production   have  to be  kept   so that  the  clerical   work  is increased.   The  method    is  not  practicable   when  contribution   of individual workers    cannot   be  calculated,  i.e., construction  work.