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.