CHAPTER 7
Bargaining Theory of John Davidson
THE ROLE OF HR IN THE PAYMENT OF SALARIES
• One of the most important functions of the HR is the payment of
the proper salaries and wages to all company employees.
• The rate of pay indicates their status in the company.
• The most important duty of HRD is to set wage scales high
enough to attract better employees and contribute to level of
profitability that will sustain continuous profitable operations.
• The level of pay must not impair profits.
THEORIES OF WAGES – deal with the payment of labor employed in
competitive enterprises.
1. Classical wage theory
▪ Based upon the fundamental concept that labor is a
commodity and we have to pay the price according to
supply and demand.
▪ When the labor supply is greater than the demand, the
lower is the price and when there is greater demand the
higher the price.
2. The just wage theory of St. Thomas Aquinas
▪ Describe as wage which permits the recipient worker to live
in a manner in keeping with his position in society.
▪ The workers cost of living should be considered first in the
cost of production.
▪ This theory is the basis in the implementation of minimum
wage laws.
3. The wage fund theory
▪ By John Stuart Mill and his followers is based on the
Malthusian theory of population and the law of diminishing
returns.
▪ This theory holds the idea that the working capital of the
nation provides a fund from which wages can be paid.
4.
▪ Labor is a commodity like anything that could be bought at
a price by the user.
▪ The labor sets the limit of the value of their services as
conditioned by the utility of reward.
▪ Labor unions
5. The marginal productivity theory
▪ This theory offers the best explanation of the wages in
modern industry.
▪ The supply of labor in any given economy on the whole
depends upon the total number of individuals who want to
work and available for work.
6. The purchasing power theory
▪ Tries to establish the relationship between wages and the
economic activity.
▪ The level of economic growth is dependent upon the
savings generated because the increase in wages creates
a surplus that propels growth.
7. Labor theory of value
▪ Karl Marx
▪ It emphasizes that the labor is the source of all product and
that without this important component, there could be no
goods for human consumptions.
8. The standard of living theory of wages
▪ The wages should be based on the cost of living.
▪ The government, labor and management that must sit
together to determine the level of living wages if possible,
by industry and by region.
WAGE AND SALARY SURVEYS
▪ A major factor in making the determination is the wage survey.
▪ Informal surveys – may be conducted through telephones and
informal interviews.
 ▪ Formal survey – prepares a set of questionnaires incorporating
common jobs present in the company and is compatible with
other jobs in other industries.
PROCEDURE IN CONDUCTING WAGE AND SALRY SURVEYS
1. Defining the labor market
2. List of key job positions
3. Detailed descriptions of jobs
4. Collection of salary data
5. Results of survey
THE FOLLOWING ARE THE STEPS IN CONDUCTING THE
SURVEY:
1. Defining the labor market. Establishing the boundaries of the
pertinent labor market is the most critical step in the survey procedure.
It involves the selection of the industry, the region or area or the firm to
be included in the survey.
2. List of key jobs and positions common to most firms in the survey.
This will ensure a representative sampling of the jobs that will be
selected as universal for a particular wage or salary survey.
3. A detailed description of the key jobs and positions that are to be
included in the survey and that is common to most firm or industries.
Key jobs are labor grades that are comparatively stable in duties and
responsibilities. These are occupations that are common in most
industries and scattered through the ladder of labor classification and
commonly familiar to most people in the industry.
4. Collection of accurate wage and salary data. This may be done
through a set of questionnaires and supplemented by interviews to get
the accurate information. The information must be able to pinpoint the
problem area that has to be addressed by the compensation level,
compensation structure and the terms of payment plan.
5. A compilation of the wage and salary data for each job. The data
gathered will provide management with the opportunity of arriving at the
arithmetical average, the median and the range or rate paid and the
supplementary wage data.
6. Presentation of the results of the survey. The results are properly
evaluated and HRD prepares the corresponding recommendations to
the management of the most appropriate action to take relative to the
revision of the current wage structure. Participating companies are also
provided with the summary of the findings to foster continuous
cooperation.
After the organization completes the salary survey and finds out
what he prevailing salaries are in the community for comparable
jobs, it must then make several decisions:
1. Whether the company should pay salaries above, below or at the
same level, as the others in the same industry in the community are
paying for the same jobs.
2. Whether the company should pay a single rate for each job, or slot
the jobs into ranges or grades which would provide room for merit
increases.
3. How many pay grades or salary ranges to use, and how wide each
pay grade should be (from the minimum of the grade to the maximum).
4. What is the range of the amount in terms of money value that should
be allotted for each salary grade levels?
Although there are no set rules for making these decisions, one tool
that is often used to simplify the process is the use of two-dimensional
graphs, also known as data trend graph. When the graph is used with
the point system, the values of the points for key jobs in the industry
are plotted with the lowest pay at the bottom. The survey data for any
job is then plotted according to the evaluation points and grades.
Eventually all the pay survey data should be plotted.
An examination of the graph will indicate the trend of the data
plotted. A line is drawn to indicate this trend, using one of the
following techniques:
1. Eye Inspection - The line is drawn freehand so that about the same
number of data points fall above the line. It follows the general trend of
the data. This technique is the least scientific and reliable as this does
not require scientific computations. It is more of a judgmental analysis
that is used only by experts in the field of job evaluation.
2. The Least Squares - This uses the statistical formula; the trend line
will normally follow a straight path. It presents more accurately the
relationships between the peso or money value and the points for the
key jobs.
3. The Second-Degree Curve – Using another statistical formula; the
trend line will normally take the form of a curve and may more
accurately indicate the trend of the data.
The trend line should correctly reflect the trend of the data
collected so that competitive pay rates and ranges will hold throughout
the structure. If the ranking method is used, the rank number or grade
can be substituted for points on the horizontal of the graph.
A similar graph should then be drawn to reflect the relationship
between internal existing rates and job rating points. A trendline should
be established and drawn. This trend line should be compared with the
outside-survey trend line. In this way management can see how
salaries compare with those outside the company. Then the decision
will have to be made whether to pay below the survey trend line, meet
it on pay above it.
In deciding whether to match a survey trend line, management
faces a conflict between personnel and economic forces. If the
company pays above the survey trend line, its ability to compete may
be endangered as the labor cost will be higher than the same industry,
thereby added cost of production will be added to the cost of the
product. If the company pays below the trend line, its ability to hire
capable employees may be affected or this will cause personnel tum
over. To reconcile these two conflicting forces, management may
decide its own slope line that should be about the same as the result of
the survey.
Another important decision is whether hourly paid occupations
should be assigned a single rate or a range of rates. For production or
maintenance workers, most organization pays one standard rate for all
jobs in the same grade. That is especially true when an operation is so
standardized that it is difficult to determine accurately the contribution
of workers, A single rate for each job has the advantage of eliminating
favoritism.
THE DEVELOPMENT OF WAGE AND SALARY STRUCTURE
The design and operation of wage and salary structure is the concern
of management and employees. Wage and salary structure is the
hierarchy of jobs to where the pay rate is attached. The positions are
allocated in pay grades according to the job evaluation results and its
relations with the pay system derived from the results of the salary
survey. The jobs are ranked in ascending to descending order
according to their importance and based on the points or ranked earned
in the job evaluation program conducted by the HRD and the committee
created for the development of a more responsive pay system.
The following are the advantages of the wage and salary structure:
1. It affects the workers' earning and standard of living.
2. It eases the recruitment and maintenance of an effective labor force.
3. It develops employee morale and increases work efficiency.
4. It represents cost and competitive advantage in the industry
5. It helps in preparing budgetary allocations and eases computation of
salary adjustments and as an aid in short term and long-range plans.
6. It eliminates pay distortions and inequities in employee
compensation
7. It establishes an equitable salary range for various jobs.
WAGE STRUCTURE DESIGN
The design of the wage and salary structure is the
establishment of the job classes and rate ranges. All jobs within a class
are treated in the same way for purpose of economical administration.
Pay structure ranges should be used in developing a schedule for both
rank-and-file employees, technical managerial positions. In some
companies, they have a separate structure for hourly and daily paid
employees and separate salary structure for regular monthly paid jobs.
The managerial pay systems are separated, based on rank depending
on their assignments and contributions to the company’s' profitability
index.
The number of pay ranges in pay structure depends on the
company and on the number such structures in the company. If a
company has a single salary structure then, there should be many pay
grades. If the organization has one wage structure for hourly workers,
another for office regular workers and still another for supervisors and
managerial employees, then there should be a moderate number of pay
grades in each structure. There is no standard number of pay grades
per structure for any industry or company. This depends on the number
of job classes and the number of employees in the company. The
greater the differences in job classes the greater the number of pay
grades in the salary structure to give credence to differences in duties,
responsibilities and other factors of variances as determined by the job
evaluation program.
The same could be said for the width of the salary grade. There
is no standard guide as to the spread of pay grades. For hourly jobs,
the spread from the minimum to maximum may vary from ten percent
(10%) to twenty (20%), while for salaried jobs, the spread may vary
from 15% to 75%. The typical spread of salaried jobs is 3% from the
minimum to the next to step. (See Sample computation)
Once the pay structure has been determined, the next step is
to assign employees to their proper job classifications. If the jobs are
properly evaluated and were developed before the implementation of
any structure, most existing salaries should fall within the salary range
established for their jobs. When employees' salaries fall below the
minimum of the pay grade for the job, then it is called green circle rate.
When that occurs, the decision to bring salaries to the minimum of the
grade should be based on the employees' performance. If the
employees are on training stage, their salaries should perhaps be
below the minimum of the grade until they can fully meet the
requirements then they are brought up to at least the minimum of the
pay grade.
SALARY RANGE
It is the range of the salary that is paid to an employee doing similar
functions that has a minimum and maximum pay and a series of step
adjustments. It is to provide adjustment in pay for performance
evaluation without distorting the salary pay plan
SALARY ADJUSTMENTS WITH HIGH SENIORITY
Another reverse situation is when the employee with high seniority, is
either so competent or has received so many increases that his salary
is above the maximum of the pay grade. This is called red circle rate,
which can be handled in two ways:
1. Review the performance of the employee. If the employee is doing
superior work and is capable of performing higher tasks or
responsibilities and has displayed potentials for promotion, then he
has to be promoted and given the salary grade corresponding to the
new assignment. He should be under probation in the new
assignment for at least 3 months before he assigned to the new pay
grade.
2. If the performance review reveals that the employee is not worthy
to be promoted and such salary increase was discreetly earned or
some obvious reasons, then the employee will not get normal merit
increase due to the implementation of the new structure. As the range
moves up due to cost-of-living index and the salary plan is revised
accordingly, then his salary probably will still fall within the range and
then he could be entitled to future adjustments if deemed necessary.
In order to remain competitive, a salary structure should be reviewed
every two or three years depending on the inflation rate prevailing in
the country brought by economic factors or internal factors such as
improved productivity and profitability.
METHODS OF WAGE PAYMENT
The main purpose of a formal wage and salary management plan is to
have a systematic method of payment to ensure that employees
receive a fair wage and salary for the work they perform Up to this point,
we have examined how these wages are determined or how much the
employees should be paid for the work they perform. Now we will
examine the methods of determining how salaries, are paid. Two
organizations may have similar salary structures for their jobs, yet may
use different methods in computing the employees' salaries. Salaries
may be the same but one company may pay on hourly basis plus
piecework. There are two methods of paying salaries:
1. By the Time Worked - earnings do not fluctuate with the amount
of work performed or with the quality of output. In this method,
wages are compute din terms of unit of time. It is common to pay
workers by the day and the term day-work was adopted. Day-
work methods of pay usually include weekly, or biweekly or
monthly bases. Paying by the time worked is called Non-
incentive wage plan because the method of calculations will not
immediately result in more money. No matter how hard an
employee works during an hour, the pay will be computed by the
hourly rate and no more. Wages under this plan are computed
by multiplying the number of hours worked by the rate per hour,
as follows:
H x R =W In which H - Hours actually worked R - Rate per hour
in pesos W - Total wages earned
Payment on the basis of time worked is more satisfactory under
the following conditions:
1. Employees have little or no control over how much work they
produce.
2. There is no clear-cut relationship between the effort made to
produce the work and he amount of work produced.
3. Work delays occur often and are beyond the employees'
control.
4. Quality of work is very important.
5. Units of work produced cannot be distinguished and cannot
be measured.
2. By the Amount of Work Produced- earnings depends on how
much work the employee completes or on a related factor, such as the
quality of work. This method of paying wages is called an incentive
wage plan. The most common of incentive plan is called piecework.
Piecework salaries are determined by the number of pieces produced
or completed and each piece is assigned a piece value that is called
piece rate. Time study sets the acceptable number of pieces an
employee can produce at a given time taking in to consideration the
acceptable quality of work performance. An industrial engineer studies
jobs and he is tasked to develop methods of performance revising the
flow of work, changing materials and equipment so that better work
systems are developed.
There are times that rates are based on past experiences on
similar jobs or on guesswork. The formula for computing salaries
under piecework is as follows:
N x U = W In which N =Number of units produced U =Rate per unit in
pesos W =Wages earned per day or per week
Guaranteed piecework occurs when employees are paid their days' –
work when the work distortion is not caused by the employees' lack of
power or some other factors beyond the control of the workers.
PAYMENT BY PIECEWORK IS SATISFACTORY UNDERTHE
FOLLOWINGCONDITIONS:
1. When a unit of completed work can be measured easily;
2. When there is a clear relationship between a workers' effort and the
results of his efforts;
3. When the quality of work is less important than quantity or when
quality standards are uniform and measurable;
4. When the flow of work is regular, breakdowns are few and jobs follow
a standard procedure, with few interruptions.
WAGE AND SALARY POLICIES
The company or any organization must have a clear-cut wage and
salary policy. These policy guidelines will help the organization have
better relationships with employees and develop a more
comprehensive employee financial planning program. The wage and
salary must appeal to all employees and stimulate them to greater
efforts. These characteristics include the following:
1. The wage and salary plan must be easily understood. Every
worker wants to know how his company wage plan works. To keep
employees in the dark as to how their earnings are determined could
lead to distrust on the management and fear that they are not getting
paid for what they have earned.
2. Salaries in the wage plan should be easily computed. Most
employees like to compute from to time what they are earning and to
make sure that the salaries are correct. Therefore, a wage payment
plan should be simple enough to allow quick calculations. The method
of wage payment must be explained during the orientation program and
employees must be made to understand that wages are related to
employees' effort and productivity and based on a wage plan that
relates to duties and responsibilities of the positions and other factors
considered in the job evaluation program.
3. Salaries must be made relevant with efforts. Standards should be
set and can be reached by good workers. Standards should be set so
as to challenge a worker making him reach the extra effort. Once he
has achieved the standard, he should be rewarded for his effort with
increased earnings.
4. Incentive wage plans should provide payment for incentive
earnings to employees soon after they have been earned for
efforts exerted to reach the standards. In this way, the reward or
penalty is fixed in their minds in relation to the work they do. Obviously,
it would be too costly and unwieldy to prepare a payroll every day. A
weekly payment of wages is most reasonable.
5. The method of payment should be stable and unvarying.
Frequent changes in wage payment plan may lead worker to think that
management is trying to confuse and or even cheat them. It is important
to choose a plan that will fit the eliminated needs of the organization so
that the necessity off frequent subsequent changes eliminated.
MORALE RENEWAL IN THE WORKPLACE
1. Know that leaders have limitations. Steve Berglas of the
Harvard Medical School believes that “people who achieve great
heights but lack the bedrock character to sustain them through
the stress are headed or disaster. He predicts that one or more
of the four could result when a leader does not have the requisite
character - arrogance, aloneness, adventure-seeking or adultery
2. Choose character. John C. Maxwell is right in his observation
that. "We have no control over a lot of things in life. We don't get
to choose our parents. We don't select the location or
circumstances of our birth and upbringing. We don't get to pick
our talents and IQ. But we do choose our character. In fact, we
create it every time we make choices." In the workplace, you can
create your own character. Do you want easy money or work for
it? Do you keep the right company? Do you stand by your
principles? You can, if you choose to.
3. Walk the talk. Integrity is important in the workplace. In fact,
many employers prefer to have employees with integrity first,
then skills second. Skills can be taught but integrity is innate in
ones' character.
4. Avoid compromising. While life is not black or white but shades
of gray, there are instances you have to choose between right or
wrong. A wrong can never be right even if a compromise is
reached. If workers really want straight leaders, they must be
vigilant and uncompromising in asserting their rights as well as
in performing their responsibilities. When compromises are
made, the rest of the organization, the buying public and the
society are affected.
5. Use the same measures on yourself. You want a leader who
is not immoral, corrupt or incompetent. Exact the same measure
or standards on yourself. Be as harsh on yourself as you are in
judging others. That you are just a follower is never an excuse
for being lazy, incompetent or immoral.
6. Face the mirror. If you want one less scalawag in the workplace,
reform yourself. Look for areas for improvement in your
character. If you have the guts, ask somebody you trust to tell
you what is wrong in your character. Take the feedback positively
as a gift for your improvement. Don't rationalize but instead work
at developing a better you.
7. Show the mirror to your leaders. If you want honest and
concerned leaders, you might just have to show them the mirror
too. Some of them might have blind spots and can't see their
mistakes, shortcoming and transgressions.
Remember that tyrants happen only when the led blindly accept
tyranny or do not do anything about it. To make leaders honest,
they must know that they are also being watched and evaluated
and that positions and possessions are only temporal and
ephemeral.
8. Don't just admit mistakes; correct them. People who do not
know that they are wrong cannot be corrected. The first step
towards any form of renewal is admission that there is a need
for correction. Humility to admit mistakes is great but not
enough. There must be correction. Even the Bible mains stiff-
necked after many rebukes will suddenly be destroyed without
remedy.
9. Have an improvement plan. Do not leave matter of improving
yourself. Moral renewal does not happen by accident. You must
exert deliberate effort to mend the crack in your character. Task
yourself to show improvement. Have reasonable milestones
that you must monitor and check regularly, then celebrate your
little victories. But do not boast about your achievement if
humility is a virtue you are trying to instill in yourself.
10. Rebuild and do not slide back. Set your mind toward the
future. Stop going back to your past, except to see how much
you have progressed. Let your guideposts be milestones in the
future and not how you were before. If you have improved in a
facet of your character, make sure that you don't slide back. Be
not like the dog that eats his own vomit. Never underestimate
what ordinary people can do, especially when they heed the call
of one leader who was killed in Dallas, almost our decades ago.
Ask not what your country can do for you; ask what you can do
to your country."
OTHER INFORMATION RELATED TO WAGES
LABOR AND WAGES
The type of job one does and the financial compensation he or she
receives are very important in our society. Job type is linked to status
as is wealth. While the type of job One performs is arguably more
important status wise then wealth, both are important to Americans. In
the past we used to use other descriptions to classify workers. The
terms blue collar or white-collar employees were used to describe the
type of vocation.
Blue Collar - Manual laborer
Pink Collar - Job associated with women like nursing Secretarial, etc.
This, being a rather sexist term, is no longer used.
White Collar - Office workers
Today we classify our work roles into three categories called
labor grades. These labor grades are described below:
1. Skilled Labor – these are workers who have received
specialized training to do- their jobs. They have developed and
honed a special skill and may or may not need to be licensed or
certified by the state. The examples of skilled laborers are:
carpenters, plumbers, electricians, business executives and
 managers, artisans, accountants, engineers, police, mechanics,
etc. These may be blue- or white-collar workers.
2. Unskilled Labor – These are workers who have received no
specialized training and have few specific skills. As our society
has grown into an increasingly technological one, the members
of this group have developed more and more skills. A
mechanic, for example, used to be considered unskilled labor.
Today that is no longer the case. Mechanics require a great
deal of skill and training to work with today's modern engines.
Examples of unskilled laborer are construction workers
sanitation and custodial workers, painters, factory assembly line
workers, etc. These are blue collar workers.
3. Professionals – Arguably the elite of the labor grades, these
are those workers who need an advanced degree to do their
job. The three primary groups of professionals are doctors,
lawyers and teachers. These are white collar workers.

These labor grades are often said to be non-competing labor

because workers rarely move from one grade to another and do not
compete salary wise with each other. These are reasons why they do
not compete with each other. The cost of education and training may
be significant obstacle. They might lack the opportunity to make such
a move and they might also have a lack of initiative.