Paper: 01, Human Resource Management

Module: 22, Wages & Salary Administration I: Principles of Wage &

Salary Administration , Essential of Sound Wage & Salary
Administration, Factors affecting wages & Salary Administration.

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Prof. Rajeev Jain

Paper Coordinator Department of Commerce and Management,
University of Kota, Kota

Dr. Pragya Dheer

Content Writer Department of Commerce and Management
University of Kota, Kota
 Items Description of Module
Subject Name Management
Paper Name Human Resource Management
Module Title Wage and Salary Administration I
Module Id Module no. 22
Pre- Requisites Basic knowledge of what Industrial Relations is.
Objectives To study the basic concepts of Industrial Relations
Keywords

QUADRANT-I

Module 22: Wage and Salary Administration I

Learning Outcome
1. Introduction
2. Meaning and Definition
3. Objectives of Compensation Administration
4. Principles of Wage and Salary Administration
5. Essentials of Sound Wage and Salary Administration
6. Factors affecting Compensation (Wages and Salary) Administration
References

Learning Outcomes:

A sound wage & salary administration tries to achieve these objectives:

(a) For Employees: (i) Employees are paid according to requirements of their jobs, i.e; highly skilled jobs
are paid more compensation than low skilled jobs. This eliminates inequalities

(ii) The chances of favouritism (which creep in when wage rates are assigned) are greatly minimised

(iii) Job sequence & lines of promotion are established whenever they are applicable.

(iv) Employee’s morale & motivation are increased because a wage programme can be explained & is
based upon facts

(b) To Employers: (i) They can systematically plan for & control their labour costs

(ii) In dealing with a trade union, they can explain the basic of their wage programme because it is based
upon a systematic analysis of job & wage facts.

(iii) A wage & salary administration reduces the likelihood of friction & grievance over wages inequities

(iv) It enhances an employee’s morale & motivation because adequate & fairly administered wages are
basic to his wants & needs.

(v) It attracts qualified employees by ensuring & adequate payments for all the jobs.
22.1. Introduction:

Compensation administration is always a vexing issue

of the HR managers in the management of human
resources. They always strive to develop compensation
Packages that satisfy the interest of both the
organisation & the employees. But it is a tough &
challenging task for any HR manager as there is an
inherent conflict of interest between the management &
the labour over the sharing of the earnings of the
organization.

Source: http://www.wisegeek.com/what-is-salary-and-wage-administration.htm

Human resources are unique & precious for any organisation. Infact, this is the only resource that is
involved in each & every activity of an organisation. Certainly, the survival & growth of an organisation
is critically linked to the performance & commitment of its workforce. It is thus, necessary for the
organisation to keep the employees satisfied & motivated on a sustained basis. Effective compensation
policies & practices constitute major HR-oriented approach for achieving the desired level of employee
morale & organisational effectiveness.

“One of biggest factors affecting industrial relations is the salary or wage- the compensation an employee
receives for a fair day’s work”. Majority of union management disputes relate to remuneration. Employee
compensation, therefore, influences vitally the growth & profitability of the company. For employees, pay
is more than a means of satisfying their physical needs. It provides them a sense of recognition &
determines their social status. Remuneration is directly or indirectly one of the mainsprings of motivation
is our society.

Therefore, Wage & Salary Administration refers to the establishment & implementation of sound policies
& practices of employee compensation. It includes such area as job evaluation, surveys of wage &
salaries, analysis of relevant organisational problems, development & maintenance of wage structure,
establishing rules for administering wages, wage payment incentives, benefits including health insurance,
profit sharing, wage changes & adjustments, supplementary payments, control of compensation costs &
other related items.

22.2. Meaning & Definition:

Administration of employee compensation is

called compensation management or wage &
salary administration. It involves to wages,
salaries & other forms of employee
compensation. It includes job evaluation,
wage/salary survey, development &
maintenance of wage structure rules for
administration of wages, profit sharing & other
incentives & control of payroll costs. The basic
purpose of wage & salary administration is to
establish & maintain an equitable wage &
salary structure & an equitable labour cost
structure. Source: https://www.slideshare.net/iamlessa/wages-and-salaries-administration
Compensation management is a complex, non transactional process which includes decisions regarding
benefits & variable pay. An employee’s total compensation consists of four components. The relative
proportion of each component in the total compensation varies from firm to firm. The first largest
component is base compensation which means the fixed pay an employee receives on a regular basis,
either in the form of a salary or as wage. Second, the component is allowances such as house rent
allowances (HRA), dearness allowances (DA) & city compensation allowances (CCA). Third, component
is incentive pay designed to reward employees for good performance eg. Performance- linked bonus,
share in profit etc. Fourth, component consists of benefits or indirect compensation or perquisites such as
company accommodation, company car, paid holiday, club membership, stock options & so on .

22.3. Objectives of Compensation Administration:

Equity

Industrial Enhancing
Relation Efficiency

Control Motivation

Law & Goodwill

Regulation in market

22.3.1. Equity in Compensation:

The primary objective of compensation administration is to ensure internal & external equity in the
payment of salary & other benefits to the employees. Internal equity refers to the payment of equal
compensation for jobs of similar nature & worth within the organisation. The organisation should
determine the worth of each job through a job evaluation process.

22.3.2. Enhancing Individual & organizational efficiency:

Achieving the desired level of individual & organisational efficiency is also on objective of compensation
administration schemes. Every organisation considers compensation as an effective instrument to fulfill
the organisational goals & objectives by enhancing the productivity, performance & commitment of the
employees.

22.3.3. Employee Motivation & Retention:

Retaining the existing employees is another objective of the compensation programmes. A well- designed
compensation scheme motivates the employees & facilitates the retention of the best employee for a long
time in the organisation.

22.3.4. Goodwill in the Labour Market:

Encouraging the best candidates to apply for the job vacancies & to make them accept the job offers
issued by the organisation after successful selection in another objectives of compensation administration.
Through an effective compensation policy, an organisation can create a highly positive image of itself in
the labour market.

22.3.5. Adherence to laws & Regulations:

Complying with the prevailing laws & regulations & legislation of the country of operation is another
objective of the compensation administration system. A sound compensation system would normally
consider the challenges & constraints imposed by the government on compensation management.

22.3.6. Controlling the HR cost:

Any compensation administration aims at keeping the HR cost well under control. Certainly, a good
compensation policy would neither overpay its employees. In fact, an effective compensation policy
would reasonably satisfy the divergent needs & aspiration of both the employees & the employers.

22.3.7. Improving Industrial Relations:

An effective compensation administration scheme intends to improve the labour- management relations in
the firm. In many organisation, compensation is the major source of conflict between the management &
the labour unions.

22.4. Principles of Wage & Salary Administration:

The generally accepted principles governing the fixation

of wages & salary are:

(i) There should be definite plan to ensure that

difference in pay for jobs are based upon variations in
job requirements, such as skill effort, responsibility or
job or working conditions & mental & physical
requirements.

(ii) The general level of wages & salaries should be

reasonably in line with that prevailing in the labour
market. The labour market criterion is most commonly
used.

Source: https://www.slideshare.net/sakir264/wage-
and-salary-administration-20136548
(iii) The plan should carefully distinguish between jobs & employees. A job carries a certain wage rate, &
a person is assigned to fill it at that rate. Exceptions sometimes occur in very high. Level jobs in which
the job-holder may make the job large or small, depending upon his ability & contributions.

(iv) Equal pay for equal work i.e; if too jobs have equal difficulty requirements, the pay should be the
same, regardless of who fills them.

(v) An equitable practice should be adopted for the recognition of individual difference in ability a
contribution. For some units, this may take the form of rate range, with in- grade increases; in other it may
be a wage incentive plan, in still other, it may take the form of closely integrated sequences of job
promotion.

(vi) There should be a clearly established procedure for hearing & adjusting wage complaints. This may
be integrated with the regular grievance procedure, it is exists.

(vii) The employees & the trade unions, if there is one, should be informed about the procedure used to
establish wage rates. Every employee should be informed of his own position, & of the wage & salary
structure.

(viii) The wage should be sufficient to ensure for the worker & his family reasonable standard of living.
Workers should receive a guaranteed minimum wage to protect them against conditions beyond their
control.

(ix) The wage & salary structure should be flexible so that changing conditions can be easily met.

(x) Prompt & correct payments of the dues of the employees must be ensured & arrears of payment
should not accumulate.

(xi) For revision of wages, a wage committee should always be preferred to the individual judgement,
however unbiased or a manager.

(xii) The wage & salary payments must fulfils a wide variety of human needs, including the need for the
self actualization. It has been recognized that “money is the only form of incentive which is wholly
negotiated, appealing to the widest possible range of seekers. Monetary payments often act as motivators
& satisfiers interdependently of the other jobs factors.”

(xiii) Wage policy should be developed keeping in view the interests of the employer, the employees, the
consumers & the community.

(xiv) Wage policy should be stated clearly in writting to ensure uniform & consistent application.

(xv) Wage & salary plans should be consistent with the overall plans of the company.

(xvi) Wage & salary plans should be sufficiently flexible or responsive to changes in internal & external
conditions of the organisation.

(xvii) Management should ensure that employees know & understand the wage policy of the company.
Workers should be associated formulation & implementation of wage policy.

(xviii) All wage & salary decisions should be checked against the standards set in advance in the wage
policy.
(xix) Wage & salary plans should be simplify & expedite administrative process.

(xx) An adequate database & a proper organisational set up should be developed for compensation
determination & administration.

22.5. Essential of Sound Wage & Salary Administration:

The main requirements of a sound structure of base compensation are as follows:

22.5.1. Internal Equity: It implies a proper relationship

between wages paid for different jobs within the company. Internal Equity
Pay differential should be related directly to differentials in
job requirements. Fair pay differentials between jobs can be
established with the help of job evaluation. “Job Evaluation
helps to determine relative worth of a job. It is useful in External Competition
eliminating widely varying wages for jobs of equal
difficulty. It also minimises wage differentials on the basis
of sex, religion, caste etc. Thus the relationship of wages &
salaries paid for different jobs is just as important for good Built in Incentives
personnel relations as is the firm’s general level of wages.”

22.5.2. External Competitiveness: Wages & salaries in the Link with Productivity
organisation should be in line with wages & salaries for
comparable job in the other organisations. Otherwise the
organisation may not be able to attract & retain competent
personnel. Data relating to pay levels in other organisations Maintain Real Wages
can be collected through wage & salary survey.

22.5.3. Built-in Incentives: Wage or salary plan should

contain a built-in incentive so as to motivate employees to Increments
perform better. Such an incentives can be developed
through performance based payment. A part of the total
payment should be linked to individual or group
performance.
Rewards

22.5.4. Link with Productivity: Some part of the total pay

should be linked to productivity. Such linkage is necessary Legal Compliance
because workers expect a share in productivity gains. Thus
will also helps to control labour costs.

22.5.5. Maintain Real Wage:- At least a part of the increase in the cost of living should be neutralised so
as to protect the wages of labour Dearness allowances is used in India for this purpose.

22.5.6. Increments: Compensation policy can be good motivates, if pay increases are linked with merit.
But annual increments should partly be linked to seniority or years of service. The logic for seniority
based increaments is that as a person accumulates experience his skills get sharpened & his efficiency
tends to increases.
22.5.7. Reward for Desired Performance & Behaviour: pay levels should be fixed in such a way that
they reward the employees adequately whenever they come up with the targeted performance levels &
behaviour. They should also be capable of sustaining the employees willingness to continue with the
same performance & behaviour in the future too.

22.5.8. Legal Compliance: The pay structure of an organisation must be in compliance with the
prevailing laws & regulations of the country. It should also implement the recommendations of the
statutory wage boards in a time bound manner. The organisation should incorporate the relevant
provisions of the Minimum Wages Act 1948, Payment of Wages Act 1936, Industrial Dispute Act, 1947,
Equal Remuneration Act, 1976 & other relevant acts in its compensation policy.

22.5.9. Reconciling Individual & Organisational Interest:- The pay structure should serve not only the
interests of the employees but also the organisational interest. There must be due regard for the long-term
interest of the organization while fixing the pay scale of the employees. The pay structure must have the
capacity to attract the right employees at a reasonable cost of the organisation. To reduce the financial
burden of the organisation, a good portion of the employee’s pay may be linked to their performance &
productivity.

22.6. Factors affecting Compensation (Wages & Salary) Administration:

Fig 22.1. Factors influencing compensation administration

22.6.1. External Factors:

The external factors remain outside the purview of an organisation & yet influence its compensation
administration. In fact, most of the factors influencing compensation administration are external.

22.6.1.1. Labour Market Conditions: The difference between the demand for specific categories of
employees & their supply in the labour market influences the compensation administration decisively.
When the demand for labour exceeds its supply, there would be a labour shortage. In such a situation, the
organizations are forced to offer higher rates of compensation to get the required number of suitable
employees. This is because the people possessing the required skills should obviously demand more
compensation for their services.
22.6.1.2. labour Legislations: labour laws & regulations normally
have a specific influence on the wage & salary administration of
an organisation. Generally, the legislation enacted by the central
& state governments regulates the minimum wages & bonus
payable to the employees, the workloads & the working hours.

Source: http://www.mbanetwork.co.za/human-resources/functional-
articles/human-resources/amendments-to-labour-legislation

22.6.1.3. Comparative Pay Scale: Organisations should consider

the wages paid by similar organisation in the industry for similar
jobs. When an organisation pay less than the prevailing wages to its employees, its workforce strength
would erode due to the high labour turnover.

22.6.1.4. Cost of living:- At times of living prices, the cost of living emerges as a major factor in
determining the salary levels of the employees. When there is an upward the movement in the cost of
living, the real wages decline, affecting the purchase power of the employees. Due to the changes in the
cost of living, organisations usually keep a portion of the employee’s
compensation (such as dearness allowance) in a variable form.

22.6.1.5. Collective Bargaining: The strength of the unions is one of

the important influencing factors in compensating administration.
When the unions in an organisation are strong, the wage agreements
are usually concluded in favour of the employees. This is because
these unions exert strong pressure on the employers, both internally
& externally, during the wage negotiations.

Source: http://www.citeman.com/15862-collective-bargaining.html

22.6.1.6. Technology: The level & sophistication of the technology available in the industry can also
influence compensation administration. When the manually performed jobs are easily & effectively
replaceable with the existing technology, the organisation may not be inclined to offer higher wages for
such jobs.

22.6.1.7 Geographical Location: The location of the organisation is

also a major factor influencing compensation administration. When
the organisation is located in cities or urban areas, it may have to
hire employees for higher wages due to the high cost of living
prevailing in these areas.

22.6.1.8. Globalization: It has brought in several multinational

companies to the country. The compensation policies &
philosophies of these globalised companies have begun to influence
& shape the HR & wages practices of the Indian

Source: http://www.sociologydiscussion.com/globalisation/globalisation-social-dimensions-of-globalisation-explained/977

companies. As a result, domestic firms are now offering several innovative compensation schemes on a
par with foreign companies to attract & retain the efficient employees.
22.6.2. Internal Factors:

The internal factors influencing the compensation administration are also significant in number.

22.6.2.1. Capacity of the organisation to Pay: Organisations may have the willingness to pay more
compensation to their employees but they may not have the financial ability to do so. Understandably, the
financial strength of the organisation is one of the highly critical factors that determine compensation
administration.

22.6.2.2. Corporate Policies & Philosophy: Corporate

Philosophy, mission & vision statements provide overall
directions to the entire organisation & this include its
compensation administration. Organisations may deliberately pay
the industry’s best wages & salary to attract & retain the high
caliber employees.

Sources: https://www.gotmar.com/en/about-us/corporate-policy/

22.6.2.3. Human Resource Policies & Strategies: The HR policies of an organisation which deal with
various aspects of human resource management also influence compensation administration. They usually
form the basis for the terms & conditions of the employment.

22.6.2.4. Performance Evaluation Report: Compensation administration is also influenced by

performance evaluation results, job evaluation report, job description & job specification statement. The
employees performance assessed through performance evaluation techniques may be used for
determining the wage levels of the employees.

Summary:

Employee compensation is a vital issue in human resource management. Compensation consists of base
pay and supplementary remuneration. Wages and Salary administration seeks to provide justice to both
employer and employees. The principles of wages and salary administration are the basic guidelines.

Internal Equity, external competitiveness, built in incentives, link with productivity, maintenance of real
wages and suitable increments are the essentials of a sound wages and suitable increments are the
essentials of a sound wage and salary structure.