WAGE DIFFERENTIAL

UNIT-2

By-Prof.Preeti Dwivedi
BY-Prof.Preeti Dwivedi
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INTRODUCTION
Compensation is what employees receive in exchange for their contribution
to the organization. Generally speaking, employees offer their services for
three types of rewards
        Base pay
        Variable pay
        Benefits

The most important objective of any pay system is fairness or equity, generally
expressed in three forms
 Internal equity: where more difficult jobs are paid more
 External equity: where jobs are fairly compensated in comparison to
similar jobs in labour market
 Individual equity: where equal pay is ensured for equal work
BY-Prof.Preeti Dwivedi
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Equity And Pay Rates

Equity in pay rates could be achieved through five steps

Ensuring equity in pay rates

 Find the worth of each job through job evaluation
 Conduct a salary survey through the following methods
 Key job matching
 Key class matching
 Occupational method
 Job evaluation method
 Broad classification method
 Group similar jobs into pay grades(pay grades are groups of jobs within a
particular class that are paid the same rate
 Price each pay grade by using wage curve(curve in a scatter diagram
representing the relationship between relative worth of jobs and wage rates)
 Fix a pay rage for each grade (like pay for officer category I, II, III etc)

BY-Prof.Preeti Dwivedi
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Components of Pay Structure

The two essential components of pay structure are; basic wages and
dearness allowance .the basic wage rate is fixed taking the skill
needs of the job, experience needed, difficulty of work, training
required, responsibilities involved and the hazardous nature of the job.
Dearness allowance it paid to employees in order to compensate
them for the occasional or regular rise in the price of essential
commodities.
Components of pay structure in India
 Under the Workmen's Compensation Act
Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus
and good conduct bonus
 Under the Payment of Wages Act
Retrenchment compensation, payment in lieu of notice , gratuity payable on
discharge

BY-Prof.Preeti Dwivedi
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Wage differentials

Differences in wage rates are inevitable in any industry and the

reasons are fairly obvious

Reasons for wage differentials

W a g e d iffe r e n tia ls R e a s o n s

I n t e r p e r s o n a l d i ff e r e n t i a l s D iffe r e n t ia ls in s e x , s k i ll s , a g e , k n o w l e d g e , e x p e r i e n c e

I n t e r - o c c u p a t i o n a l d i ff e r e n t i a l s V a r y i n g r e q u i r e m e n ts o f s k i l l , k n o w l e d g e , d e m a n d - s u p p l y s i t u a t i o n

I n te r - a r e a d iffe r e n ti a l s C o s t o f li v in g , a b il ity o f e m p lo y e r s to p a y, d e m a n d a n d s u p p l y s i tu a ti o n , e x te n t

o f u n io n i s a ti o n

I n t e r - f ir m d i ff e r e n t i a l s A b ility o f e m p lo y e r to p a y, e m p lo y e e s b a r g a in in g p o w e r, d e g re e o f
u n i o n is a t io n , s k i ll n e e d s , e t c .

BY-Prof.Preeti Dwivedi
 Wage differential
The committee on fair wages recommended that wage
differentials should be established on the basis of
certain considerations:
 The degree of skill
 The strain of work
 The experience involved
 The training required
 The responsibility undertaken
 The mental and physical requirement
 The disagreeableness of the task
 Hazards
 Fatigue involved
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Choices In Designing A Compensation System

The compensation that is followed by a firm should be in tune with

its own unique character and culture and allow the firm to achieve
its strategic objectives. A variety of choices confront a firm here:
 Internal and external pay
 Fixed vs. variable pay
 Performance vs. membership

BY-Prof.Preeti Dwivedi
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Choices In Designing A Compensation System

Guidelines for effective performance based pay

stems
To be fair to employees, organisations should keep the following guidelines in mind
while instituting merit-pay systems
 Establish high standards of performance, so that only the truly outstanding
employees emerge as winners.
 Develop accurate performance appraisal systems. The focus must be on job-
specific, results-oriented criteria as well as employee behaviours.
 Train supervisions in the mechanics of carrying out appraisals and offering
feedback to employees in a proper way.
 Tie rewards closely to performance.
 Use a wide range of increases. Also, make pay increases meaningful.

BY-Prof.Preeti Dwivedi
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Choices In Designing A Compensation System

 Job vs. individual pay

Suitability of job based vs. knowledge based pay

systems
A job based-pay system is suitable
when:
 Jobs do not change often
 Technology is stable
 Lot of training is required to learn a
given job
 Turnover is relatively how
 Employees are expected to move
up through the ranks over time
 Jobs are fairly standardised within
the industry
Individual-based pay system is suitable
when:
 The firm has relatively educated
employees with both the ability and
willingness to learn different jobs
 The firm's technology, processes are
subject to frequent change
 Vertical growth opportunities are
limited
 Opportunities to learn new skills
exist
 Teamwork and employee
participation are encouraged

BY-Prof.Preeti Dwivedi
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Choices In Designing A Compensation System

    Below market vs. above market compensation

 Open vs. secret pay

BY-Prof.Preeti Dwivedi