Unit8:CompensationManagement Structure:

8.1 Introduction Objectives 8.2 Wage&SalaryAdministration SAQs 8.3 ManagingCompensation SAQs 8.4 8.5 8.6 8.7 Designing&AdministeringBenefits Summary TQs Answersto SAQsandTQs

8.1Introduction The terms wage and salary are often used as synonyms. The term wage is commonly usedforthoseemployeeswhosepay iscalculatedaccordingtothenumberofhoursworked. The word salary applies to compensation that is uniform from one period to the next and does not depend uponthe number of hours worked. Certain theories were propounded for determination of wages but these could not standthe testof time. Afew labour and wage theories are discussed in this unit. It also focuses on job evaluation and methods of job evaluation.
Objectives:

Afterstudyingthisunit,youwillbeabletoexplain: Conceptsincompensation Managingcompensation Benefitsdisbursement 8.2Wage&SalaryAdministration The term compensation management, or alternatively, wage and salary administration has come to be accepted as the designation for the field of endeavour concerned with the establishmentandimplementationofsoundpoliciesandmethodsofemployeecompensation. Itincludessuchareasasjobevaluation,developmentandmaintenanceofwagestructures,wage

surveys, wage incentives, wage changes and adjustments, supplementary payments, profit sharing,controlofcompensationcosts,andotherrelatedpayitems.

Thetermwageiscommonlyusedforthoseemployeeswhosepayiscalculatedaccordingto the number of hours worked. Thus, the weekly pay check will fluctuate as the number of hoursactually workedvaries.Thewordsalaryappliestocompensationthatisuniformfrom oneperiodtothenextanddoesnotdependuponthenumberofhoursworked.Salaried often implies a status distinction, because those who are on salary are generally whitecollar, administrative, professional, and executive employees,whereas wageearners aredesignated ashourly,nonsupervisory,orbluecollar.Wageearnersinsomeorganizationsdoreceivefull wageiftheyareabsentforsuchreasonsassickness,whereassalariedemployees,especiallyat thelowerlevels,oftenreceiveovertimepaywhentheyworkoverthestandardworkweek. Ajobisdefinedasacollectionoraggregationoftasks,duties,andresponsibilitiesthat,asa whole, is regarded as the reasonable assignment to an individual employee. A job may includemany positions,forapositionisajobperformedbyanindividualandhencerelated to a particular employee. Thus, an employee has his position, but many positions may involvethesameassignmentofdutiesandconstituteasinglejob.Thejobisimpersonalthe position ispersonal. SelfAssessmentQuestionsI 1. Theterm______________iscommonlyusedforthoseemployeeswhosepay is calculatedaccordingtothenumberofhoursworked 2. _________________oftenimpliesastatusdistinction, becausethosewhoareonsalary aregenerallywhitecollar,administrative,professional,andexecutiveemployees, whereaswageearnersare designatedashourly,nonsupervisory,orbluecollar 3. A__________isdefinedasacollectionoraggregationoftasks,duties,and responsibilitiesthat,asawhole,isregardedasthereasonableassignmenttoan individualemployee. 8.3Managingcompensation
Thebasicpurpose of wage andsalaryadministrationis toestablishand maintainan equitable wage and salary structure. Its secondary objective is the establishment and maintenance of an equitable labourcost structure i.e., an optimal balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximised and conflicts are minimised. The wage and salary administration is concerned with the financial aspects of needs, motivation and rewards.

Managers, therefore, analyse and interpret the needs of their employees so that reward can be individuallydesignedtosatisfytheseneeds. Theword'salary'isdefinedintheOxfordDictionaryasfixedperiodicalpaymenttoapersondoing other than manual or mechanical work. The payment towards manual or mechanical work is referred to as wages. The word pay refers to the payment for services done which would include salaryaswellaswages. Wagesarecommonlyunderstoodaspriceoflabour.Inordinaryparlance,anyremunerationpaidfor servicesisetymologicalwage.Benhamdefineswageasasumofmoneypaidundercontractbyan employertoaworkerforservicesrendered. Labourwasalwayslookeduponasacommoditygovernedbythelawofsupplyanddemand.Certain theories werepropounded for determination of wagesbutthese could notstandthetest oftime. A fewtheoriesarediscussedbelow: Subsistence theory: This theory, also known as 'Iron Law of Wages', was propounded by David Ricardo (17721823). According to this theory, wages tend to settle at a level just sufficient to maintain the workers and his family at minimum subsistence levels. The theory applies only to backward countries where labourers are extremely poor and are unable to get their share from the employers. Standardoflivingtheory:Thistheoryisa modified form ofsubsistencetheory. Accordingtothis theory, wages aredeterminednotbysubsistencelevelbutalsobythestandardoflivingtowhicha classoflabourersbecomehabituated. Residual claimant theory: Francis A. Walker (18401897) propounded this theory. According to him, there were four factors of production/ business activity viz., land, labour, capital and entrepreneurship.Wagesrepresenttheamountofvaluecreatedintheproductionwhichremainsafter payment has been made for all these factors of production. In other words, labour is the residual claimant. Thewagefundtheory:Accordingtothistheory,afterrentandrawmaterialsarepaidfor,adefinite amountremains forlabour. Thetotal wage fund and the number of workers determinetheaverage worker'sshareintheformofwages. Demandandsupplytheory:Accordingtothistheory,wagesdependuponthedemandandsupplyof labour. Marginalproductivitytheory: Thisisanimproved form of demandandsupplytheory. Wages are determinedbythevalueofthenetproductofthemarginalunitoflabouremployed.

Purchasing power theory: According to this theory the prosperity, productivity and progress of industrydependontherebeingsufficientdemandtoensurethesaleofitsproductsandpocketingof reasonable profits. A large pact of the products of industry is consumed by workers and their families andifwages arehigh, demandwillbegood.However,ifwages andthepurchasingpower oftheworkersarelow,someofthegoodswillremainunsoldoutputwillgodown,whichwillresult inunemployment. Thebargainingtheoryofwages:JohnDavidsonpropoundedthistheory.Accordingtohim, wages aredeterminedbytherelativebargainingpowerofworkersortradeunionsandofemployers.When a trade union is involved, basic wages, fringe benefits, job differentials and individual differences tendtobedeterminedbytherelativestrengthoftheorganizationandthetradeunion. TheTribunalsandWageBoardshavegenerallyfollowedtheprincipleslaiddownintheFairWages Committee'sReportonfixingwages.TheCommittee,initsreport,hasgivenaconsiderablethought towagedifferentialsandhasstatedthatthefollowingfactorsshouldbetakenintoconsiderationfor fixationofwages: 1. Thedegreeofskill. 2. Thestrainofwork. 3. Theexperienceinvolved. 4. Thetraininginvolved. 5. Theresponsibilityundertaken. 6. Thementalandphysicalrequirements. 7. Thedisagreeablenessofthetask. 8. Thehazardattendantonthework,and 9. Thefatigueinvolved. Classification of wages: The International Labour Organization (ILO) in one of its publications, classifiedwagesasunder: 1. Theamountnecessaryformeresubsistence 2. Theamountnecessaryforhealthanddecencyand 3. Theamountnecessarytoprovideastandardofcomfort. InIndia,wagesareclassifiedas: a. Minimumwage b. Fairwageand c. Livingwage Minimum wage: A minimum wage has been defined by the Committee as "the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the worker.Forthispurpose,theminimumwagemustprovideforsomemeasureofeducation,medical

requirementsandamenities".Inotherwords,aminimumwageshouldprovideforthesustenanceof the worker's family, for his efficiency, for the education of his family members, for their medical careandforsomeamenities.Itisverydifficulttodeterminetheminimumwagebecauseconditions vary fromplaceto place,industrytoindustry and from workerto worker. However,theprinciples fordeterminingminimumwageswereevolvedbytheGovernmentandhavebeenincorporatedinthe MinimumWages Act,1948,theimportantprinciplebeingthatminimumwagesshouldprovidenot onlyforthebaresustenanceoflifebutalsoforthepreservationoftheefficiencyoftheworkersby wayofeducation,medicalcareandotheramenities. FairWage:AccordingtotheCommitteeonFairWages,"itisthewagewhichisabovetheminimum wagebutbelowthelivingwage."Thelowerlimitofthefairwageisobviouslytheminimumwage the upperlimit issetbythe "capacity oftheindustrytopay".Betweenthesetwolimits, the actual wagesshoulddependonconsiderationsofsuchfactorsas: i) Theproductivityoflabour ii) Theprevailingratesofwagesinthesameorneighbouringlocalities iii) Thelevelofthenationalincomeanditsdistributionand iv) Theplaceofindustryintheeconomy. LivingWage:ThiswagewasrecommendedbytheCommitteeasafairwageandasultimategoalin a wage policy. It defined a Living Wage as "one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including education for his children, protection against illhealth, requirements of essentialsocialneedsandameasureofinsuranceagainstthemoreimportantmisfortunesincluding old age". In other words, a living wage was to provide for a standard of living that would ensure goodhealthfortheworker,andhisfamilyas wellas a measureofdecency, comfort, educationfor hischildren,andprotectionagainstmisfortunes.

SelfAssessmentQuestionsII
1. The term is commonly used for those employees whose pay is calculated accordingtothenumberofhoursworked. 2. The term . is defined in the Oxford Dictionary as fixed periodical payment to a persondoingotherthanmanualormechanicalwork. 3. ..theoryisalsoknownas'Iron LawofWages', 4. ..TheorywaspropoundedbyFrancisA.Walker.

8.4DesigningandAdministeringBenefits
Management: Generally the persons who manage enterprises fix wages in the first instance. The employerconsidersthestateofthelabourmarketandtakesintoaccountofwhathecanaffordtopay and the value of the worker to him. The workers willingness for employment at the rate offered impliesthattheyagreetoworkatthatrate,thoughtheyhavehadnopartinfixingit. 1. CollectiveBargaining:CollectivebargainingisstillintheinitialstageinIndia.Althoughitisa desirable development in the relations between management and labour, it cannot be imposed uponeithersidebycompulsionandshouldevolvenaturallyfromwithin. 2. Voluntary Arbitration: In voluntary arbitration, both parties agree to refer their dispute to mutuallyagreedarbitratorandhisawardbecomesbindingontheparties. 3. Wage Legislation: Wages are fixed according to law in some industries. The Central GovernmentandStateGovernmentsmayfixminimumwagesundertheMinimumWagesActof 1948 for industries in which workers are exploited or too unorganized to protect their own interests. In order to advise them in the matter of fixing minimum wages, the Governments appoint Minimum Wages Committees and the Advisory Boards. The Committees and the Advisory Boards consist of equal number of workers and employers representatives and also independent members whose number should not exceed one third of the total number of members. 4. Conciliation:TheIndustrialDisputes Act, 1947, provides for considerationin case of disputes between employers and workers. If an agreement is reached in the course of conciliation proceedings, it becomes binding on the parties and takes effect from the date agreed upon or from the date on which it is signed by the two parties. In case no agreement is reached, the Conciliation Officer sends a full report of the proceedings. On receipt of this report, the governmentmaydecidetoreferthecasetoIndustrialTribunalforaward. 5. Adjudication: Labour courts and Industrial Tribunals are set up under the Industrial Disputes Act,1947.Onstudyingtheawards onegetstheimpressionthattheadjudicatorsareattempting tojustifytheirdecisioninsocialandethicalterms.Atthesametime,thereisadesiretosatisfy both parties to the dispute, and therefore, economic factors such as capacity to pay, unemployment,profits,conditionoftheeconomyorwelfareoftheindustryconcerned,aregiven dueprominence. 6. Wage Boards: The boards are appointed by the Government and usually consist of seven memberstworepresentativesofmanagement,twooflabour,twoindependentmembersanda chairman. The board is expected to take into account the needs of the specific industry in a

developingeconomy,thespecialfeaturesoftheindustry,therequirementsofsocialjustice,and thenecessityforadjustingwagedifferentialinsuchamannerastoprovideincentivestoworkers for advancing their skill. Its recommendations may be accepted by the Government either completely or partly, and may be statutorily imposed on the industry in question, or may be rejected. Inanutshell,wagesareinfluencedbothbysocialandeconomicfactors.Inonecase,economicfactors may play a major role, whereas in another, social factors may be predominant. Thus, wages are productofbothsocialandeconomicfactors.

8.5.Summary 1. In residual theory, 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 afterpaymenthasbeenmadeforallthesefactorsofproduction 2.WageBoardsareappointedbytheGovernmentandusuallyconsistofsevenmemberstwo representativesofmanagement,twooflabour,twoindependentmembersandachairman. 3.Fairwageisthewagewhichisabovetheminimumwagebutbelowthelivingwage.

8.6.TerminalQuestions
1. Explain Wage Administration Policy. What are the ways by which wages and salaries are managedinIndia? 2. DescribetheprocessofWageFixationandthemachineryavailableforit.

8.7AnswerstoSAQsandTQs SelfAssessmentQuestionsI 1Wage,2Salaried,3 job SelfAssessmentQuestionsII

1. Wage,2Salary,3Subsistencetheory,4Residualclaimanttheory,5Minimumwage AnswerstoTQs: 1. Referto8.2 2. Referto8.3 3. Referto8.4