Everything you need to know about the factors influencing wage and salary administration. ‘Wage and Salary Administration’ refers to the establishment and implementation of sound policies and practices of employee compensation.
It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organisational problems, development and maintenance of wage structure, establishing rules for administering wages, wage payment incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items.
Wages and Salaries represent a significant portion of the total costs in most of the organisations. So the control of wage and salary levels is of paramount importance even though the amount of control which can be exerted may vary among organisations and within an organisation from time to time.
The responsibility of wage and salary administration usually lies with the top management of the company. The chief executive is expected to develop policies and procedures which will accomplish the company’s objectives.
The Personnel Manager plays an important role in developing the wage policies and procedures. In many organisations, this task is entrusted to Wage and Salary Committee composed of line and staff executives.
The factors influencing wage and salary administration in an organisation are:-
1. The Organisation’s Ability to Pay and the Sustaining Strengths 2. Supply and Demand of Labour and Levels of Skills 3. The Prevailing Market Rate Government Legislation on Wages 4. The Cost of Living Inflation Rate 5. Living Wage Concept
6. Productivity 7. Trade Union’s Bargaining Power and Judicial Directions 8. Job Requirements, Working Conditions 9. Managerial Attitudes 10. Psychological and Sociological Factors 11. Levels of Skills Available in the Market.
Factors Influencing Wage and Salary Administration: Organisation’s Ability to Pay, Productivity and a Few Others
Factors Influencing Wage and Salary Administration – 8 Major Factors: Supply and Demand Factors in the Economy, Ability to Pay, Job Content and a Few Others
Organisation expects efficient performance from their employees in order to contribute to the attainment of organizational objective. It is possible only when employees are paid remuneration in accordance with their contribution. Many people regard compensation as a yardstick for measuring their success in the world of employment.
‘Wage and Salary Administration’ refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organisational problems, development and maintenance of wage structure, establishing rules for administering wages, wage payment incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items.
The responsibility to properly manage always lies with top management.
This task is given to Wage and Salary Administration, which follows the following guidelines:
i) A broad policy to determine manner in which the programme of job evaluation and job description is evolved and approved.
ii) All activities of the salary administration group must be properly checked against the existing company policies.
iii) Recommendations of top management about the wage policies for the administration of wage programme are given.
iv) To recommend changes in wage policies and wage level.
v) To review wages and salary schemes department-wise.
vi) Proper recommendation to top management for executives above a specified limit need to be given.
Let us briefly examine these factors:
Factor # 1. Supply and Demand Factors in the Economy:
These factors in the demand for labour due to new technology, impact of economic growth, and other factors. The supply aspect is created through the growth of educational institutions and students coming out of schools, vocational institutions, colleges, and universities.
Factor # 2. Ability to Pay:
In order to draw the best employees, companies are offering better salaries and benefits. Those who can afford to pay competitive wages and salaries are able to draw the best talent.
Factor # 3. Provide Promotional Opportunities:
The companies which provide good training and development facilities end up getting better employees. Such employees upgrade themselves and make use of promotional opportunities offered by the company. When they get promoted they enjoy better compensation and benefits.
Factor # 4. Performance Assessment Outcome:
Performance assessment carried out in organizations annually or semi-annually has impact on compensation. Some companies place heavy stress on the outcome of performance assessment in determining the following year’s salary or wage levels. The increments given for an employee who performs well, puts him or her in a different category.
Factor # 5. Job Content:
The job makes an impact on the wage and salary levels of certain unusual jobs in an organization. Such jobs may carry high risk. Besides content, there may be other factors which may place them in special categories.
Factor # 6. Budget Limitations:
Due to poor economic conditions or market situation, companies may experience financial difficulties and this poses problems in being leaders in employee compensation. Some organizations make provisions for such economic problems in their budgets.
Factor # 7. Trade Union Pressure:
Trade Unions place heavy pressure on companies to raise wage and salary levels and benefits which put constraints on their budget allocations. Generally we see Bank Unions going on strike, if their demands are not met. The unions in most of the essential services exercise greater pressure on organizations for higher wages and salaries.
Factor # 8. Public Image:
In order to maintain a good public image of being the best pay-master, some companies always maintain higher wage levels than other companies in the industry or in a community. Microsoft, Infosys, and other leading companies in Information Technology field can be cited as some examples.
The strategy of an organization takes some of the above factors into consideration in determining the wage levels for their employees. That may be one of the reasons for being leaders in their industries and communities. When they maintain such an image, potential employees prefer to work for such companies. When such companies experience economic and market difficulties, the wages and salaries are not the first things to be axed.
Factors Influencing Wage and Salary Structure and Administration – 9 Basic Factors
The wage policies of different organisations vary somewhat Marginal units pay the minimum necessary to attract the required number and kind of labour. Often, these units pay only the minimum wage rates required by labour legislation, and recruit marginal labour. At the other extreme, some units pay well above the going rates in the labour market. They do so to attract and retain the highest caliber of the labour force. Some managers believe in the economy of higher wages.
They feel that, by paying high wages, they would attract better workers who will produce more than the average, worker in the industry. This greater production per employee means greater output per man hour. Hence, labour costs may turn out to be lower than those existing in firms using marginal labour. Some units pay high wages because of a combination of favourable product market demand higher ability to pay and the bargaining power of a trade union.
But a large number of them seek to be competitive in their wage programme, i.e. they aim at paying somewhere near the going rate in the labour market for the various classes of labour they employ. Most units give greater weight to two wage criteria’s, viz. job requirements and the prevailing rates of wages in the labour market. Other factors, such as changes in the cost of living, the supply and demand of labour and the ability to pay are accorded a secondary importance.
A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents.
Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
(i) The organisation’s ability to pay and the sustaining strengths;
(ii) Supply and demand of labour and levels of skills;
(iii) The prevailing market rate government legislation on wages;
(iv) The cost of living inflation rate;
(v) Living wage concept;
(vi) Productivity;
(vii) Trade Union’s Bargaining power and judicial directions;
(viii) Job requirements, working conditions;
(ix) Managerial attitudes; and
(x) Psychological and Sociological factors.
(xi) Levels of Skills available in the market.
(i) The Organisation’s Ability to Pay:
Wage increases should be given by those organisations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher wages than those which are running at a loss or earning low profits because of the high cost of production or low sales. In the short run, the economic influence on the ability to pay is practically nil.
All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important.
During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profits.
(ii) Supply and Demand of Labour:
The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organisational wage structure and level.
If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labour-market pressures probably force most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive.
Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. Mescon says- “The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors.”
(iii) Prevailing Market Rate:
This is also known as the ‘comparable wage’ or ‘going wage rate’, and is the most widely used criterion. An organisation’s compensation policies generally tend to conform to the wage-rates payable by the industry and the community. This is done for several reasons. First, competition demands that competitors adhere to the same relative wage level.
Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated.
Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates.
Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organisation’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe- “Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organisations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned.”
(iv) 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 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. The cost of living index at certain places is higher than other cities or centres.
(v) Living Wage Concept:
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 favour using the concept 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 worker’s budget is open to argument since it is based on subjective opinion.
(vi) Productivity:
Productivity is another criterion, and is measured in terms of output per man-hour. It is not due to labour efforts alone. Technological improvements, better organisation and management, the development of better methods of production by labour and management, greater ingenuity and skill by labour are all responsible for the increase in productivity.
Actually, productivity measures the contribution of all the resource factors men, machines, methods, materials and management. No productivity index can be devised which will measure only the productivity of a specific factor of production.
Another problem is that productivity can be measured at several levels job, plant, industry or national, economic level. Thus, although theoretically it is a sound compensation criterion, operationally many problems and complications arise because of definitional measurement and conceptual issues.
(vii) Trade Union’s Bargaining Power:
Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most powerful weapon used by it.
Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation. However, for those remaining on the pay roll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power.
(viii) Job Requirements:
Generally, the more difficult a job, the higher are the wages. Measures of job difficulty are frequently used when the relative value of one job to another in an organisation is to be ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job conditions required.
(ix) Managerial Attitudes:
These have a decisive influence on the wage structure and wage level since judgement is exercised in many areas of wage and salary administration including whether the firm should pay below average, or above average rates, what job factors should be used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level of wages are bound to be affected accordingly.
These matters require the approval of the top executives. Lester observes “Top management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in management’s wage-policy decisions.”
(x) 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. Therefore, these things should not be overlooked by the management in establishing wage rates. Sociologically and ethically, people feel that “equal work should carry equal wages,” which “wages should be commensurate with their efforts,” that “they cure 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.
(xi) Skill Levels Available in the Market:
With the rapid growth of industries, business trade, there is shortage of skilled resources. The technological development, automation have been affecting the skill levels at a faster rates. Thus the wage levels of skilled employees are constantly changing and an organisation has to keep its level up to suit the market needs.
Factors Influenced Wage and Salary Administration – Top 7 Factors: Ability to Pay, State Regulation, Labour Unions, Demand and Supply of Labour, and a Few Others
Wages and Salaries represent a significant portion of the total costs in most of the organisations. So the control of wage and salary levels is of paramount importance even though the amount of control which can be exerted may vary among organisations and within an organisation from time to time.
The general objectives of compensation management or wage and salary administration are as follows:
i. Control of cost.
ii. Establishment of fair equitable structure of remuneration.
iii. Utilisation of wages and salaries as an incentive to greater employee productivity.
iv. Maintenance of a satisfactory public image.
The responsibility of wage and salary administration usually lies with the top management of the company. The chief executive is expected to develop policies and procedures which will accomplish the company’s objectives. The Personnel Manager plays an important role in developing the wage policies and procedures. In many organisations, this task is entrusted to Wage and Salary Committee composed of line and staff executives.
The main factors which influenced wage or salary structure are:
Factor # 1. Ability to Pay:
An organisation’s ability to pay its employees is an important factor in the determinant of wage level. It is basically depends upon the profit-earning capacity of the organisation. A multinational company pays higher salaries due to their higher profit earning.
Factor # 2. State Regulation:
Wage policy and laws of the government exercise a significant influence on wage levels. Government has enacted laws to protect the interest of the working class. And no organisation can violate laws relating to minimum wages, payment of bonus, dearness allowance and other allowances, equal pay for equal work etc.
Factor # 3. Labour Unions:
A well organised trade union give pressure for higher wages and allowances. This pressure is exercised through collective bargaining, strikes and other methods. Salary levels in commercial banks are relatively high due to higher bargaining power of bank unions.
Factor # 4. Demand and Supply of Labour:
Further, demand and supply of labour determines the wage level. Where supply of labour is more, or there is no scarcity of labour, wage rates are low. On the other hand, executive salaries have increased in India after liberalisation, due to rise in demand for professionally trained managers.
Factor # 5. Prevailing Wage Rates:
While fixing wages, prevailing wages in the particular industry are taken in to account. This is necessary to retain and attract qualified workers.
Factor # 6. Productivity:
Where there is higher productivity, due to qualified and hardworking employee, wage rate are increased in comparison to lower productivity.
Factor # 7. Job Requirement:
Further, wages depend largely on the physical and mental effort required in a particular job. A dangerous and hazardous job requires higher wages than other job.
These above factors influence the general wage rates. In addition some factors influence the individual differences in wages rates.
These specific factors are as follows:
(a) Work experience
(b) Hazards involved in the job
(c) Demand for the product
(d) Worker’s age and potential
(e) Industry’s role in the economy
(f) Educational qualifications
(g) Promotion possibilities
(h) Stability of employment