Lesson 1 - Introduction to Wage and Salary Administration

Right after college, most of you will find an employer to kickstart your career. One of the most important
decision involved in this activity is your asking salary. Do you know how much can you ask for job offer
and how does the companies identify the amount of wage they will be providing to you? These
questions will be answered by this course in wage and salary administration.

Definition of Important Terms

Wage - Is the reward to the employees for their contribution to the organization

Wage and Salary Administration - Definition of its Function: “the management of affairs concerned with
the payment of compensation to employees”.

Factors in Developing Wage and Salary Structure

 The formulation and consistent interpretation of policy relating to wages and salary
 The development and administration of pay structure
 Fringe benefits, and the determination of employee performance appraisal of his overall
contribution and of course the evaluation of program as a whole

Factors Affecting Wage Plans

 External Competitiveness
 Internal Competitiveness

Ideas from the Experts

D.W. Belcher

“The greatest influence on wage and salary level is probably the level of wages and salaries paid in the
area or industry for comparable work.”

Paul Mullock

“Easily the most powerful and pervasive of wage determination is the comparison standard”

Lawrence Lovejoy

“Community surveys have now become a style and a way of life in compensation
administration”.
Impact of Wage Level

Low wages = poor labor quality

High wages = equally undesirable

Factors in Formulating Wage Levels

1. Legal requirement
2. Going wage rates
3. Relative strength of labor in collective bargaining
4. Company profits and ability to pay high wages
5. Productivity of labor
6. Supply of labor
7. Amount required for a living wage

Labor Market - Wages at any given time or place are influenced not only by the existing but also by the
potential possibilities with in the labor market by the presence or absence of competitive kinds of labor.

Factors Governing Supply of Labor

1. Size of labor force

2. Attractiveness of the job
3. Degree of natural skills and ability required
4. Length of training

Demand for Labor – number of workers whose services are wanted in a given market at a specific price.

Factor Affecting the Demand for Labor

1. Labor is a derived Demand

2. Marginal productivity of wages
3. Replacing labor with capital

Labor Unions – considered indispensable to labor since through united and concerted efforts, labor is
able to obtain concession and benefits which they could not do in its absence.

Minimum Wage - It ought to be clear that a minimum wage is a weapon for combating the evil of low
wage.
Lesson 2 Wages and Their Significance

This lesson will further explain the rationale why compensation administration is needed in corporate
world. This will help you understand the underlying concepts on how human resource professionals
manages the trade offs of wage and

Labor – refers to any effort of man directed towards production.

Wages – is broadly defined as the remuneration of labor production. It is his reward for his contribution
in production.

Kinds of Wages

Monetary wage

Real wage

Significance of Wages

To the Workers

“The level of living thus depends upon the amount of money which the workers take home in
their pay envelops”.

Levels of Living

“Goods and services which can be bought with the money earned”.

Paul H. Douglas classifies four different levels of living

The poverty level

The minimum of subsistence

Minimum health and decency

Minimum of comfort standards

Wages as a Cost of Production

Wages are the price which the entrepreneur must pay for the service of labor. In other words,
they are a cost of production and a major one.

CHAPTER 3

Theories of Wages

The Iron Law of Wages by David Ricardo

According to the classical “iron law” the price of labor is determined by the mechanical forces of
supply and demand, and like the price of any other commodity its value is ultimately based on its cost of
production.

Wage Theory of St. Thomas Aquinas

Wage which permitted the recipient worker to live in a manner in keeping his position in society.

Wages Fund Theory by John Stuart Mill

It holds the idea that the working capital of a nation provides fund from which wages can be
paid. The amount of the wage payment cannot rise above the amount of the fund.

Bargaining Theory by John Davidson

For practical purpose, labor is commodity whose price is wage. The price of labor is determined
by a bargaining process between buyers and sellers.

Marginal Productivity Theory by Johann Heinrich von Thunen

The supply of labor in any given economy on the whole depends upon the total number of
individuals who want to work and available to work, efficiency of said workers and the hour of work.

Purchasing Power Theory by John Maynard Keynes

 The smaller an individual’s income is, the greater the proportion of it that goes to consumption.
The higher the wages are, the greater is consumer demand.

Labor Theory of Value by Karl Marx

Labor is the source of all value and should therefore be entitled to all it produces. The capitalist
system takes the difference between the value which is created by labor and that which is received by
labor.

Some Current Thoughts on Wages

“Equal Pay for Equal Work”

Fair Day’s Work – fair day’s pay for fair day’s work

Standard of Living Theory on Wages – “living-wage”

CHAPTER 4

Incentive Schemes

“Wage must not be increased arbitrarily in response to union pressure or political expediency to prevent
closure of business firms and the loss of thousands of jobs

Types of Incentives

Financial or Monetary

Non-financial

Financial Incentives

Simple Incentives Plan – these plans can be based either on a price per piece for a unit of output or
straight time worked.

Premium System – provide for a particular piece or time rate of wages but change the rate or make
additional payment for production beyond a specified output or savings in time.
Point Premium Plan – quite similar to the standard hour plan and was originally used to a percentage-
sharing arrangement between labor and management and usually established a high task standard.

The Scanlon Plan – also called “value-added” plan in that the incentives formula develops a percentage
relationship between total sales value and total payroll.

Group Incentives – it would appear that the output of each worker is measurable in terms of his output
so that premiums could be computed on the basis of each individual’s production.

Bonus – any method used to increase the laborer’s production by giving him extra pay for more than the
standard quantity of work.

Fringe Benefits – those services which would serve to improve the “condition” of the workers.

Non-financial Incentives

This includes record of achievement and employee recognition, opportunity for advanced
training, opportunity for promotion, and other similar influences which stimulates performance.

CHAPTER 5

Management Incentives

Characteristics of Professional and Managerial Employee

They are highly intelligent

They have analytical frame of mind and a preference for deductive reasoning

More creative and imaginative as a group

Independent and self-conscious

As a group, they tend to be idea- and thought-oriented rather than people oriented

Economically advanced

Highly mobile

Management’s Low Productivity

Management’s low productivity is often caused by the lack of understanding of the relationship
between performance and money.
Influence of Rewards Decisions – rewards decision have an influence that is broader, their impact upon
the individual employee, manager, and organization involved in the immediate decision.

Designing Management Incentives – there is a growing recognition that incentives focus a manager’s
attention on results, while encouraging individuals initiative, innovation and efficiency.

Incentives Plan

Any company which seeks to make incentives plans work must take into account the following:

Cost / benefit analysis

Company analysis

Participation

Plan structure

Substantial reward

Sharing rate

No-bonus zone

Payout provisions

Emphasis on long term results

CHAPTER 6

Significant Factor Affecting Compensation

Studies tend to show that there are number of factors that exert a profound bearing on the
issue of compensation. Among these factors are the following:

Supply and Demand for employee skills

Labor Organization

The firm’s financial condition

Productivity of the firm and the prevailing condition of the economy

Cost of living

Government

Compensation Principle
Principle of Economics. To the company, compensation is payment to employee for service rendered; to
the employee, it is a means of satisfying basic needs for establishing a place in society.

Principle of a Living Wage. The individual’s compensation should be substantial enough that he can
obtain a reasonable standard of living.

Principle of Compensation. Compensation should provide employees with the means to live reasonably
well.

Principle of Significant Differences. Compensation can tell an individual how well he is appreciated.

Principle of Contribution. Among the basic human needs are belonging, opportunity, security, and
recognition.

Principle of Change. A compensation plan cannot attract, hold and motivate competent employees, if it
cannot change in improvements of its people.

Principle of Status Symbolism. Earnings provide the individual with a yardstick to measure his place in
society

Compensation Administration

Essentially, compensation administration consists of the following interrelated steps:

Determining the relative value of position

Grouping positions into classes or grades

Deciding upon general compensation levels

The company’s relative ability to pay

Devising the range of compensation for the class

Establishing criteria for advancement through the range

Evaluating the individual

CHAPTER 7

Wage Supplements

“Extra payments and benefits can be considered as supplements to regular wages”. Some of the
major types of extra remuneration or benefits received by employees are pay for vacation and holidays
wherein work was not rendered.

Profit Sharing by Edme Jean Leclaire

‘An arrangement Formal or informal) freely entered into by which employees receive a share
fixed in advance of the profits.

Two Basic Conceptions that Contradict by Profit Sharing

Control is not in proportion to risk in that workers share in the risk without having control over most of
the risk they have to incur.

To the extent that profits are devoted to labor, the return to capital does not represent its “natural”
reward

Types of Profit Sharing Schemes

Profit sharing alone

Profit sharing with co-partnership

Profit sharing with some kind of co-partnership through ownership of shares in the company by
employees