WAGE CONCEPTS

Wage : Remuneration paid by the employer for the services of hourly ,weekly & fortnightly
workers doing manual or physical work. Usually given to unskilled workers .It may also be
defined as the compensation paid to blue collar employees.

Salary:It refers to the remuneration paid to the office employees,foremen,managers,professional

and technical staff on a monthly basis.

In the Indian context, soon after the independence, Government of India set up a Committee on
Fair Wages in 1948 which has defined various concepts of wages which govern the wage
structure in the country specially in those sectors which can be termed as underpaid and where
workers do not have bargaining power through unions. These concepts are: minimum wage,
living wage, and fair wage. Later, the concept of need based minimum wage was added.

1. Minimum Wages

A minimum wage is one which has to be paid by an employer to his workers irrespective of his
ability to pay. According to the above committee, “Minimum wage is the wage which must
provide not only for the bare sustenance of life, but for the preservation of the efficiency of the
workers. For this purpose, minimum wage must provide some measure of education, medical
requirements and amenities. “ Minimum Wages Act. 1948. does not define the concept of
minimum wages but empowers the Central Government as well as State Governments to fix
minimum wages from time to time. Wherever this Act applies, the payment of minimum wages
is mandatory. In 1957, Indian Labour Conference elaborated the concept of fixation of minimum
wars which were termed as need-based minimum wages

GUIDELINES

The standard working class family should be taken to consist of three consumption units for the
earner; the earnings of women, children and adolescents should be disregarded.

The minimum food requirements should be calculated on the basis of the net intake of 2.700
calories per adult.

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The clothing requirements should be estimated at a per capita consumption of 18 yards per
annum per person.

In respect of housing the norms should be the minimum rent charged by the Government in any
area for houses provided under subsidized housing scheme for low-income groups.

Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the
total minimum wage

2. Fair wage

The concept of fair wage is linked with the capacity of the industry to pay.

The Committee has defined fair wage as follows: “Fair wage is the wage which is above the
minimum wage but below the living wage. The lower limit of the fair wage is obviously the
minimum wage: the upper limit is to be set by the capacity of the industry to pay. “ Thus, fair
wage depends on different variables affecting wage determination.

Such factors are :

• labour productivity prevailing wage rates

• the level of national income and its distribution

• the capacity of industry to pay

At present, the concept of fair wages is followed by the most business organizations

3. Living Wage

Along with the minimum wage the Committee on Fair Wages has given the concept of living
wage which has been defined as follows: “A living wage is 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 ill-health,
requirements of essential social needs and a measure of insurance against the more important
misfortunes including old age. “ Living wage is more than the concept of minimum wage. Such a
wage is determined keeping in view the national income and paying capacity of industrial sector.
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The Committee also observed that since the national income did not support the payment of
living wage. It should be implemented in three phases. In the initial stage the wages to be paid to
the entire working class were to be established and stabilized. In the second phase fair wages
were to be established in the community and industry. In the final phase the working class was to
be paid the living wage.

TYPES OF WAGES

 Nominal Wages : Wages expressed in terms of money are called nominal wages  It is an
evaluation of the wage without considering its current purchasing value . Nominal wages
are written down in contracts between the employee and the organization

 Real Wages - The amount of goods and services that the money will buy.  The term real
wages refers to wages that have been adjusted for inflation.

Wage Policy

Wage Policy‟ refers to the legislation or Government action undertaken to regulate the structure
of wages, for the purpose of achieving specific objectives of social & economic policy. It
involves all systematic efforts of the government in relation to a national wage and salary
system, legislations, and so on to regulate the levels or structures of wages and salaries with a
view to achieving economic and social objectives of the government.

A tool of economic policy used to promote: Internal Price stability Worker efficiency Effective
distribution of worker force International competitiveness of the economy Investment Influx of
foreign capital

Objectives

 Establish good labour relations

 Decide on appropriate wages
 Decide wages based on the individual’s capability
 Develop a pre-determined scheme for payment of wages
 Establish linkages of wage payment with performances

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  Maintain parity of wages with other organizations
 Provide for incentive payment
 Provide for neutralization of price rise
 Develop wage structures that can attract talent.
 To abolish malpractices & abuses in wage payment
 To set minimum wages for people having weak bargaining power as they are unorganised
or inefficiently organised, followed by separate measures to promote the growth of trade
unions & collective bargaining.
 To abolish malpractices & abuses in wage payment
 To see that the workers get a just share of the fruits of economic development.
 To brig about a more efficient allocation & utilisation of manpower.
Indian Wage Policy
The policy statements in the successive five-year plans provide useful insight into the
Indian Wage Policy.
 The 1st five year plan recommended that:- Wages in public sector not less favourable
than in private enterprises Permanent wage boards with tripartite composition to be set up
 The 2nd five-year plan (1956 – 1961)stressed improvement in wages through increased
productivity, improved layout of plants & improvement in management practices
 The fifth plan(1974 – 1979) recommended that the reward structure of industrial
employees in terms of wage & non-wage benefits must be related to performance records
in industrial enterprises.
 The sixth plan(1980 – 1985) stressed the need to bring about a greater rationalisation in
the wage structure & to link wages to Labour productivity
 The eighth plan(1992-1997) laid focus on formulation of a wage policy relating to child
labour,rural labour ,women labor & interstate migrant labour. e) The eleventh plan (2007
– 2012) aims at generation of productive and gainful employment, with decent working
conditions.

Wage policy Act in India

The enactment of
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  Payment of wages Act 1936
 The Industrial Disputes act 1947
 The minimum Wages Act 1948
 The Equal Remuneration Act 1976
 Constituted Wage Boards that are tripartite in nature
 Pay Commissions at the central and state level

Criteria for Wage Fixation

(1) The organizations ability to pay: Wage increases should be given by those organizations
which can afford them. Companies that have good sales and, therefore, high profits tend
to pay higher those which running at a loss or earning low profits because of higher cost
of production or low sales.
(2) Supply and demand of labour: The labour market conditions or supply and demand
forces operate at the national, regional and local levels, and determine organizational
wage structure and level. If the demand for certain skills is high and supply is low, the
result is a rise in the price to be paid to these skills. When prolonged and acuter, these
labour market pressures probably force most organizations to reclassify hard to fill jobs at
a higher level”.
(3) Prevailing market rate: This is known as the ‘comparable wage’ or ‘going wage rate’,
and is the widely used criterion. An organization compensation policy generally tends to
conform to the wage rate payable by the industry and the community. This is done for
several reasons
 Competition demand that competitors adhere to the same relative wage level.
 Various government laws and judicial decisions
 Trade union practice.
 Functionally related firms in the same industry requires essentially the same
quality of employees.
(4) The cost of living: The cost of living pay criterion is usually regarded as an automatic
minimum equity pay criterion. This criterion calls for pay adjustments based on increases
or decreases in an acceptable cost of living index. In recognition of the influence of the

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 cost of living.” escalator clauses” are written into labour contracts. When the cost of
living increases, workers and trade unions demand adjusted wages to offset the erosion of
real wages. However, when living costs are stable or decline, the management does not
resort to this argument as a reason for wage reductions.
(5) The living wage: Criterion means that wages paid should be adequate to enable an
employee to maintain himself and his family at a reasonable level of existence. However,
employers do not generally favor using the concepts of a living wage as a guide to wage
determination because they prefer to base the wages of an employee on his contribution
rather than on his need. Also, they feel that the level of living prescribed in a workers
budge is open to argument since it is based on subjective opinion.
(6) Psychological and Social Factors: These determine in a significant measure how hard a
person will work for the compensation received or what pressures he will exert to get his
compensation increased.
Psychologically, persons perceive the level of wages as a measure of success in life;
people may feel secure; have an inferiority complex, seem inadequate or feel the reverse
of all these. They may not take pride in their work, or in the wages they get.
Sociologically and ethically, people feel that “equal work should carry equal
wages”that“wages should be commensurate with their efforts,”that“they are not
exploited, and that no distinction is made on the basis of caste, colour, sex or religion.”
To satisfy the conditions of equity, fairness and justice, a management should take these
factors into consideration.
(7) Skill Levels Available in the Market: With the rapid growth of industries business trade,
there is shortage of skilled resources. The technological development, automation has
been affecting the skill levels at faster rates. Thus the wage levels of skilled employees
are constantly changing and an organization has to keep its level up to suit the market
needs.

Techniques of Wage Determination

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 Wage and salary determination process in an organisation is a multi dimensional task, the
steps of which have to be cleverly worked out in order to get a package satisfying both
the employee and the employer.
The ultimate goals of wage determination process is to establish & maintain an equitable
wage structure that enhances the employee commitment to the organisation

The Wage Determination Process

1. Job Analysis – This involves precisely identifying the required tasks, the knowledge & skills
for performing them & the conditions under which they are performed. Job Analysis basically
defines the duties, responsibilities & accountabilities of a job. Job Analysis basically defines the
duties, responsibilities & accountabilities of a job. It finalises the methods & equipments used &
the skills required for the successful completion of the job.

2. Job Evaluation:- This is the formal process used to assign wage & salary rates to jobs. This is
a systematic technique used to determine the worth of a job. Once the worth is finalised, it
becomes much easier to fix a wage structure that is fair and remunerative

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3. Conduct a Wage Survey: To build a competitive wage structure, a knowledge of the prevailing
rates for similar jobs in the same industry in that area is a must. Recognising pay trends in the
market, hiring & retaining competent ,motivated employees & thus to survive & grow.

4. Preparation of the wage structure: A job’s relative worth is determined by its ranking through
job evaluation and by what the labour market pays for a similar job.To get the right pay level,the
internal rankings & the survey wage rates are combined through the use of a graph and the wage-
trend line is plotted.

5. Designing pay ranges :The pay range reflects the approximate differences in performance or
experience the employer wishes to pay for a given level of work. A range maximum sets the lead
on what is the most the employer is willing to pay for that work & the minimum sets the floor.

Wage Fixation Machinery

There are different methods for fixing the wages of employees.

1.Legal Framework: The different legislations that govern the payment of wages are :

a)Payment of Wages Act,1936:The purpose of the act is to ensure regular & prompt payment of
wages & to prevent exploitation of the earner by prohibiting unauthorised fines & deductions.

b)The Minimum wages Act,1948:This act requires the concerned authority to fix minimum rates
of wages payable to employees c)The payment of bonus act,1965:This act is to for payment of
Bonus to persons employed in certain establishments.

d) The equal remuneration act,1976:- The main objective is to provide equal remuneration to
men & women engaged in same or similar work. It stipulates stringent punishments for
contraventions of the Act‟s provisions.

2)Unilateral Pay Fixation: Majority of the wages in the unorganised sector is unilaterally
determined by the management. Workers in most cases get less than the minimum wages &
benefits stipulated under law,but also have to face discrimination in befits between one set
ofworkers from another.

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3) Collective Bargaining: It is a technique by which an attempt is made to reconcile the needs
and objectives of workers and employers and is therefore an integral part of an industrial society
Collective Bargaining is a process whereby standards are created to govern labour relations
including wages & working conditions.

 Sectoral bargaining

 Industry-cum-Region-wide agreements

 Decentralised firm/Plant level Agreements

4) Pay Commissions:-The pay structure of the central government employees are based on the
recommendations of the pay commissions set up by the central government. Certain state
governments also follow the recommendations of the pay commissions & few other states have
set up their own pay commissions.

 Government of India has so far set up 5 pay commissions, the reports of which were
submitted in 1947,1959,1973,1984 & 1996

 The pay commissions function non-statutorily, study the problems ,have their own
procedures for data collection & makes recommendations to the government.

 The ultimate responsibility as to whether to accept, modify or reject the recommendations

lies with the central government.

4) Wage Boards:-The primary function is to determine the wages payable to the employees .
The first wage board was set up by the government in 1957 in the cotton textile industry. The
wage boards are set up to provide better climate for industrial relations, to represent
consumers/public interests, to standardize the wage structure throughout the industry concerned
& to align the wage settlements with the social & economic policies of the government.

Constitution of wage Boards:-These are tripartite in nature, consists of a chairperson ,an equal
number of representatives of employers & employees(2 members each) and two independent
members(an economist & a consumer‟s representative) nominated to the board.

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Functioning of the Wage Board:-

a) Designs questionnaires to collect information on the prevailing wage rates & other related
issues

b) Analysing the results & making an assessment of the views of the parties

c) Recommendations are aubmitted to the governmnet which can be modified if necessary.

d) The wage structure recommended is in operation for 5 years.

5.Job Evaluation: This is an orderly and systematic technique which aims at determinig the
relative worth of jobs. Once the worth of jobs are determined, It becomes easier to fix the wage
structure that is fair and equitable It can also be stated as a formal system of determining the
base compensation of jobs.

6.Arbitration & Adjudication:- When collective bargaining and conciliation attempts fail to
resolve a dispute between the labour and management, the cases are decided through voluntary
arbitration or compulsory adjudication Voluntary arbitration implies that the two contending
parties, unable to compose their differences by themselves or with the help of the mediator or
conciliator, agree to submit the conflict/dispute between them to be resolved by an impartial
authority, whose decision they are. In others words, under voluntary arbitration, the parties to
the dispute can and do themselves refer voluntarily any dispute to arbitration before it is
referred for adjudication. This type of reference is known as a “voluntary reference”, for the
parities volunteer themselves to come to a settlement through an arbitration machinery.

The essential element in voluntary arbitration is: -the voluntary submission of dispute to an
arbitrator; - the subsequent attendance of witness and investigations; -The enforcement f an
award may not be necessary and binding because there is no compulsion. But generally, the
acceptance of an arbitration implies the acceptance of its award-be it favorable or unfavorable;
and -voluntary arbitration may be specially needed for disputes arising under agreements.

It is the Govt. that decides to send the case for adjudication, it is referred to either Labour Court
or Industrial Tribunal. Decision of Industrial Tribunal/ Labour Court can be challenged only in

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High Court. The employee or employer can not directly go to the Industrial Tribunal/ Labour
Court except in some cases where direct monetary loss can be proved.

Wage Differentials

Wage differentials refer to differences in the average levels of pay for group of workers that can
be classified according to the industry or location in which they work or according to the
occupational or social group to which they belong.  Wage differentials perform important
economic functions like labour productivity, maximising productivity, attracting employees
from different jobs & labour productivity.

1)Occupational Differentials: This wage differential arises due to varying levels of

occupational proficiencies. The jobs vary according to the skills required and the degree of
responsibility attached to it, This induce the person to undertake more demanding & more
challenging jobs, encourage workers to develop their skills & motivate employees for T & D
program

2)Inter-firm Differentials: This reflects the relative wage levels of workers in the same area &
occupation. The factors can be differences in the quality of labour employed by different firms,
differences in the efficiency of equipment, supervision,firm size, financial capabilities etc.

3) Inter-area or Regional Differentials:-This arises when workers in different geographical

area, but in the same industry or occupation are paid different wages. This is the result of the
prevailing working conditions in different parts of the country, disparities in the cost of living
and availability of manpower. Sometimes regional disparities are used to encourage planned
mobility of labour.

4) Inter-industry Differentials:- When workers in the same occupation and same areas but in
different industries are paid different wages. This is the result of varying skill requirements,
level of unionisation, nature of the product market, ability to pay ,labour-capital ratio and the
stage of development of the industry.

5)Interpersonal Differentials:- This differential arises between workers in the same occupation
and plant but with different age & other personal characteristics Wage diifferential based on sex
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is another important wage differential. The principle of „Equal pay for Equal work‟ is only
preached , not practiced

Challenges of Remuneration

People who administer wage and salary face challenges which often necessitate adjustments to a
remuneration plan. The more important of the challenges are skill-based pay, salary reviews,
pay secrecy, comparable worth, employee participation, egalitarianism, below market or above
market rates, and marketing versus non-marketing rewards.

Skill-Based Pay : In the skill based system, workers are paid on the basis of number of jobs they
are capable of doing, or on depth of their knowledge. The purpose of this system is to motivate
employees to acquire additional skills so that they become more useful to the organization.

Skill based pay systems worth work well when the following conditions exits:

 A supportive HRM philosophy underpins all employment activities. Such a philosophy is

characterized by mutual trust and the conviction that employees have the ability and
motivation to perform well.
 Other programs such as profit sharing, participative management, empowerment, and job
enrichment complement the skill-based pay system.
 Technology and organizational structure change frequently.
 There are to learn new skills
 Employee turnover is relatively high.
 Workers value teamwork and opportunity to participate.

Pay Reviews : Pay, once determined, should not remain constant. It must be reviewed and
challenged often, but how often becomes a relevant question. Pay reviews may be made on
predetermined dates, anniversary dates or there could be flexible reviews. In the fixed-date
reviews, wages and salaries of all employees are reviewed and raised on a specified date each
year. In the anniversary-date review, salaries may be reviewed at twelve-month intervals from
the date of the employee’s anniversary date of hire. Using variable timing ensures flexibility. In

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addition, high-performing employees, who are low on their salary ranges, can be rewarded more
frequently.

In organized industrial establishments, pay review take place once in three years. Managements
enter wage and salary agreements with labour unions and the agreements will be valid for three
years. Pay negotiations will take place on the expiry of the three-year period and new records are
signed after conclusion of the talks.

In Government departments, pay revisions take place once in ten or fifteen years. Revisions will
depend on the recommendation of the pay commission.

Pay Secrecy : The process by which a remuneration plan is designed and administered is critical
for any organization. One challenge facing HRM concerns the availability of information about
remuneration to employees. The tendency among most firms is to maintain pay secrecy as this
would help avoid pay comparisons likely to be made by employees.

Just how much and what types of information about pay should be provided to employees is a
question that troubles HR managers. This is a difficult question to answer. Much has been
written about the effects of pay secrecy on employee behaviors and attitudes.

Firms in the organized sector and public sector enterprises disclose full information about wages
and salaries. Similarly most union contracts spell out wages and grades of pay. As stated earlier,
most firms, particularly family-controlled organizations tilt towards maintaining pay secrecy.

The goals of achieving equity and employee satisfaction would seem to call for telling
employees about pay policies and levels. For merit pay systems to have a motivating effect, an
employee needs to know how efforts translate into rewards. Information about maximum and the
average raises should be made available each year. Each employee should be told what the mid
point is for his her job, as well as the pay range. In addition, the organization should explain how
it arrived at the pay structure. Allowing employees to see where their jobs are located in the
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wage structure should not create significant problems for an employer that has a well-designed
job evaluation plan.

Comparable Worth : One of the popular principles in employee remuneration is equal pay for
work. Infact, this principle has been the inspiration behind the enactment the Equal
Remuneration Act. Under the act, male and female nurses are to be paid the same if their merit
and seniority match, but a female and a male electrician could be paid different rates.

Beyond the concept of equal wages for equal work, is the idea of comparable worth which
implies that if both a nurse and an electrician receive the same number of points under a point-
ranking method of job evaluation, they have to be paid the same, subject, of course, to seniority
and merit differences.

Any bias in the job-evaluation process is sure to render comparable worth unworkable. Bias is
bound to occur in job evaluation because of the tendency to assign higher number of points for
jobs traditionally held by women.

Employee Participation : When employees are involved in designing a remuneration plan, they
exhibit little resistance in accepting it. Such a plan is much more likely to be a successful
motivator than the one imposed by the management.

It is appropriate to involve employees in many phases of a reward system. For example, a wide
variety of employees should serve in job evaluation committees. If a point- ranking method is a
adopted, it is reason able to involve employees in identifying the compensable factors to be used
and the weight to be assigned to each factor. Employees are also likely to have a good insight in
identifying competitor firms that should in included in a wage survey.

There are several mechanisms for employee involvement. At the broadest level the employees
can be surveyed to learn about their preferences. Employee task forces can help integrate these

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preferences into system. Such groups are usually an excellent way to involve employees in any
decisions associated with a reward system.

The decision to involve employees in designing or asministering a remuneration plan should not
be made in haste. Employee participation is unlikely to work well unless the organization has
already established an overall philosophy of participative management, as well as a reasonable
climate of organizational trust. Participation tasks considerable time- if time and trust as limited ,
a more traditional, top-down approach might be more appropriate.

Eliticism Versus Egalitarianism : Firms become egalitarian when they place most of their
employees under the same remuneration plan. The plan becomes elitist when the organizations
establish different remuneration schemes. In some firms only the CEO is eligible for stock
options. In order, even the lowest paid workers are offered stock options. In some other
companies only one category of employees is offered incentive schemes but in others all
employees are covered by pay-for-performance schemes.

Egalitarianisms gives organizations more flexibility to deploy employees in different areas

without having to change their pay levels. It can also reduce barriers between people who need to
work together. Egalitarian remuneration systems are found mainly in highly competitive
environments where companies frequently take business risks and try to expand their market
share by continually investing in new technologies, ventures and products.

Below Market Vs. Above Market Remuneration : Remuneration involving decisions relating
to below market or above market pay structure has two implications. First a firm’s ability to
attract talent from others depends on employee’s pay relative to attractive employment
opportunities. Second, the choice has an important cost component. Decisions to above going
rate obviously adds to the cost. However in general above market pay policies are prevalent
among larger companies in less competitive industries, such as utilities and among companies
that have been performance well and have the ability to pay more. In additional, companies

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desirous of growing fast in a tight labour market need to pay above ,market rates. Unionized
firms also need to pay higher rates.

Monetary Vs. Non-monetary Rewards : The issue relating to monetary and non-monetary
rewards has primarily tax implications. Many non-monetary rewards such as medical benefits
and housing are fully or partially exempted from taxes. Employees and even employees prefer
non-monetary benefits than monetary rewards.

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