Unit I: Introduction to Wage

Wages in the widest sense mean any economic compensation paid by the employer under
some contrast to his workers for the services rendered by them. Wages, therefore, include
family allowance, relief pay, financial support and other benefits. But, in the narrower Sense
wages are the price paid for the services of labor in the process of production and include
only the performance wages or wages proper.

They are composed of two parts - the basic wage and other allowances.
The basic wage is the remuneration, by way of basic salary and allowances, which is paid or
payable to an employee in terms of his contract of employment for the work done by him.
Allowances, on the other hand, are paid in addition to the basic wage to maintain the value
of basic wages over a period of time. Such allowances include holiday pay, overtime pay,
bonus and social security benefits. These are usually not included in the definition of wages.
However, in India, different Acts include different items under wages, though all the Acts
include basic wage and dearness allow come under the term wages.
For example, under the Workmen’s Compensation Act, 1923, Section 2 (m), “wages for
leave period, holiday pay, overtime pay, bonus, attendance bonus, and good conduct bonus”
form part of wages. Under the payment of wages act, 1936 section 2 (VI) “any award of
settlement and production bonus, if paid, constitutes wages.” But under the Payment of
Wages Act, 1948, “retrenchment compensation, payment in lieu of notice and gratuity
payable on discharge constitute wages.”
The following type of remuneration, if paid, do not amount to wages under any of the Acts:
(i) Bonus or other payments under a profit-sharing scheme which do not form a part of the
contract of employment.
(ii)Value of any house accommodation, supply of light, water, medical attendance, traveling
allowance; or -payment in lieu thereof or any other concession.
(iii) Any sum paid to defray special expenses entailed by the nature of the employment of a
workman.
(iv) Any contribution to pension, provident fund, or a scheme of social security and social
insurance benefits.
(v) Any other amenity or service excluded from the computation of wages by a general or
special order of an appropriate governmental authority. A wage level is an average of the
rates paid for the jobs of an organization, an establishment, a labour market, an industry, a
region or a nation. A wage structure is a hierarchy of jobs to which wage rates have been
attached.

- Wage concepts, Theories of Wages

Theory of wages There are two key theories that explain why salaries are the way they are in
a particular field. These two theories are:

1. Traditional Theory of Wage Determination In this theory the law of supply and demand
dictates salary. These days programmers are in short supply and are in great demand thus
they will command a higher salary. Likewise doctors and lawyers whose specialized skills
people need command a high wage. If you looked at the bill my electrician gave me you
would know he is in demand!
2. Theory of Negotiated Wages Those employees who work in unions where the union
negotiates salary on behalf of all workers fit into this theory. Since I am a teacher my salary
is set by collective bargaining with my union. I may be the best teacher in the world sought
after by many students and parents but it wouldn’t matter. However, different methods of
wage payment are prevalent in different industries and in various countries. There may be
payment by time or payment by results, including payment at piece rates. Wages are fixed
mainly as a result of individual bargaining, collective bargaining or by public or State
regulation. How wages are determined has been the subject of several theories of wages.
The main elements in these theories may be summed up as follows:
Below is mentioned the theory of Wages:
(1) Subsistence theory
(2) Wages fund theory
(3) The surplus value theory of wages
(4) Residual claimant theory
(5) Marginal productivity theory
(6) The bargaining theory of wages
(7) Behavioural theories Now let us discuss the theory of Wages in detail:
(1) Subsistence theory This theory, also known as ‘Iron Law of Wages,” was propounded by
David Ricardo (1772-1823). This theory (1817) states that: “The laborers are paid to enable
them to subsist and perpetuate the race without increase or diminution.” The theory was
based on the assumption that if the workers were paid more than subsistence wage, their
numbers would increase as they would procreate more; and this would bring down the rate
of wages.

If the wages fall below the subsistence level, the number of workers would decrease - as
many would die of hunger, malnutrition, disease, cold, etc. and many would not marry,
when that happened the wage rates would go up. In economics, the subsistence theory of
wages states that wages in the long run will tend to the minimum value needed to keep
workers alive. The justification for the theory is that when wages are higher, more workers
will be produced, and when wages are lower, some workers will die, in each case bringing
supply back to a subistence-level equilibrium. The subsistence theory of wages is generally
attributed to David Ricardo, and plays a large role in Marxist economics. Most modern
economists dismiss the theory, arguing instead that wages in a market economy are
determined by marginal productivity
2. Wages fund Theory This theory was developed by Adam Smith (1723-1790). His basic
assumption was that wages are paid out of a predetermined fund of wealth which lay
surplus with wealthy persons - as a result of savings. This fund could be utilized for
employing laborers for work. If the fund was large, wages would be high; if it was small,
wages would be reduced to the subsistence level. The demand for labour and the wages that
could be paid them were determined by the size of the fund.
3.The Surplus value theory of Wages This theory owes its development to Karl Marx (1818-
1883). According to this theory, the labour was an article of commerce, which could be
purchased on payment of ‘subsistence. price.’ The price of any product was determined by
the labour time needed for producing it. The labourer was not paid in proportion to the time
spent on work, but much less, and the surplus went over, to be utilized for paying other
expenses. Marx himself considered his theory of surplus-value his most important
contribution to the progress of economic analysis (Marx, letter to Engels of 24 August 1867).
It is through this theory that the wide scope of his sociological and historical thought enables
him simultaneously to place the capitalist mode of production in his historical context, and
to find the root of its inner economic contradictions and its laws of motion in the specific
relations of production on which it is based.
4.Residual claimant Theory Francis A. Walker (1840-1897) propounded this theory.
According to him, there were four factors of production/ business activity, viz., land, labour,
capital and entrepreneurship. Wages represent the amount of value created in the
production, which remains after payment has been made for all these factors of production.
In other words, labour is the residual claimant.
5.Marginal productivity Theory This theory was developed by Phillips Henry Wicksteed
(England) and John Bates Clark (USA). According to this theory, wages are based upon an
entrepreneur’s estimate of the value that will probably be produced by the last or marginal
worker. In other words, it assumes that wages depend upon the demand for, and supply of,
labour. Consequently, workers are paid what they are economically worth. The result is that
the employer has a larger share in profit as has not to pay to the non-marginal workers. As
long as each additional worker contributes more to the total value than the cost in wages, it
pays the employer to continue hiring; where this becomes uneconomic, the employer may
resort to superior technology.
6. The bargaining theory of wages John Davidson propounded this theory. Under this
theory, wages are determined by the relative bargaining power of workers or trade unions
and of employers. When a trade union is involved, basic wages, fringe benefits, job
differentials and individual differences tend to be determined by the relative strength of the
organization and the trade union.
7. 7.Behavioural theories Many behavioral scientists - notably industrial psychologists and
sociologists like Marsh and Simon, Robert Dubin, Eliot Jacques have presented their views or
wages and salaries, on the basis of research studies and action programmes conducted by
them. Briefly such theories are:
 The Employee’s Acceptance of a Wage Level This type of thinking takes into
consideration the factors, which may induce an employee to stay on with a company.
The size and prestige of the company, the power of the union, the wages and benefits
that the employee receives in proportion to the contribution made by him - all have
their impact.
 The Internal Wage Structure Social norms, traditions, customs prevalent in the
organization and psychological pressures on the management, the prestige attached to
certain jobs in terms of social status, the need to maintain internal consistency in wages
at the higher levels, the ratio of the maximum and minimum wage differentials, and the
norms of span of control, and demand for specialized labour all affect the internal wage
structure of an organization.
 Wage and Salaries and Motivators Money often is looked upon as means of fulfilling
the most basic needs of man. Food, clothing, shelter, transportation, insurance, pension
plans, education and other physical maintenance and security factors are made
available through the purchasing power provided by monetary income - wages and
salaries. Merit increases, bonuses based on performance, and other forms of monetary
recognition for achievement are genuine motivators. However, basic pay, cost of living
increases, and other wage increases unrelated to an individual’s own productivity
typically may fall into maintenance category

, Importance, Wage Policy,

The term “Wage Policy” refers to legislation of government action undertaken to

regulate the level or structure of wages or both for the purpose of achieving specific
objectives of social and economic policy.
The social and economic aspects of wage policy are normally inter-related measure
inspired by special considerations; inevitably have economic effects and action
designed to achieve specific economic result has social implications.

The wage policy of any country should be sound and rational from economic and social
point of view.

A sound wage policy maintains industrial peace, satisfies both the

employers and the workers, increases the output of the firm and
efficiency of workers, reduces costs and maximizes profits.

An unsound or irrational wage policy is always condemned from social and

humanitarian point of view. Such a policy leads to the negation of the basic principles of
social justice to the working community.

Even from the economic point of view, an unsound wage policy is condemned because
it will affect the efficiency of the workers.

Principles which act as guidelines to determine a wage structure are

called as wage policies. In the beginning as an economic issue it was primarily the
concern of the employer while state was adopting laissez faire policy. But, with the
industrial progress and subsequent industrial balance between employers, employees,
wage bargain has become a matter for three folds concern of the employer, employee
and the state.

The pressures of rising prices have encroached on the living standards of employees;
the demand for higher wages and better working conditions create prices, market and
production problems for the management; and the final burden of finding a solution to
the problems of wage policy ultimately falls on the government.

Some rational wage policy has to be woven into the socio-economic texture that
reflects the objectives and aspirations of the people of a particular country. It cannot be
dealt with on purely economic considerations in isolation from the social policy and
political culture of that particular community.
lthough an organisation can take some guidelines from the public policy, while formulating
its wage policy and subsequent strategy, an organisation has to take care of a number of
factors such as ongoing rates of wages in the market, its ability to pay, internal and external
relativities, controlling of labour costs, motivation of workers and rate of productivity.

In this regard, the major factors that may affect the wage policy of an organisation and
which need to be paid due attention at the time of formulation of organisational wage policy
are as follows –

1. Internal equity

2. External equity

3. Productivity
4. Cost of living

5. Motivation level of workers

6. Pay vis-a-vis performance

7. National wage policy

8. Statutory obligations

9. Labour market conditions

10. Present rate of attrition of employees.

Obviously, the wage policy may differ from one organisation to another depending on
the status and context of the organisation concerned.

The main objectives of wage policy are as under:

1. Economic Objectives:

An important objective of an effective wage policy is to achieve maximum economic

welfare.

This requires:

(i) Maximised National Income.

(ii) The national income should be divided equally among all the members of the
economy.

(iii) There should be a fair amount of stability in the national income.

In general, economic welfare will be maximised in case the highest and most stable
standard of living possible for each section of the community is attained.

To secure this, the following must be achieved:

(i) Maximum income security for all sections of the community. The major objectives of
wage policy must be priority to attain these conditions.

(ii) Full employment.

(iii) Optimum allocation of all resources.

(iv) The highest degree of economic stability consistent with an optimum rate of
economic progress.
2. Social Objectives:

Both the social and economic objectives have close inter-relation. Measures inspired by
social considerations inevitably have economic effects, and those designed for the
achievement of specific economic results have social implications.

For example, the raising of wages through fixing a statutory minimum wage will
normally affect production and employment in the organisation; and if organisations
take measures to keep costs of production at a competitive level, it may frustrate the
aspirations of the employees.

A wage policy must be instrumental in achievement of the following:

(i) Elimination of exceptionally low wages.

(ii) Establishment of fair labour standards.

(iii) Protection of wage earners from the effects of rising prices.

(iv) Incentive for workers to improve their productive performance.

ifferent concepts of wages have been put forth for the purpose of framing a sound
wage policy.

These concepts of wages have been briefly explained below:

Concept # 1. Minimum Wages:

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It is commonly accepted that workers should be give atleast minimum wages to enable
them to lead a minimum standard of living. Then a question arises – What is a minimum
wage? It is however difficult to define “minimum wage’’. However, it may be defined as
a wage which is just sufficient for the worker to keep his body and soul together.

The committee on fair wages defined the minimum wage as irreducible (minimum)
amount considered necessary for the sustenance of the worker and his family and for
the preservation of his efficiency at work. The Fair Wages Committee considered that “a
minimum wage must provide not merely for the bare subsistence of life but for the
preservation of efficiency of the worker. For this purpose, the minimum wage must also
provide for some measure of education, medical requirements and amenities”.

Such a minimum wage may be fixed by an agreement between the employer and the
workers but it is generally determined by legislation.

The workers generally demand that the minimum wage should be based on the
standard of living but the employers argue that it should be based on the productivity
of labour and the capacity of the industry to pay. But it should be noted that while
fixing the minimum wage, the worker’s family should also be taken into account.

The wage should be sufficient not only to maintain himself but also his family in a
reasonable standard of living. Then a question arises – What is the size of the worker’s
family? It is now generally accepted that a worker’s family consists of five person – the
worker and his wife and three children. The minimum wage must be fixed in such a way
that it is sufficient to provide a reasonable standard of living to the worker and his
family.

Thus, while fixing the minimum wage, three principles should be taken into account –
the living wage, the fair wage and the capacity of the industry to pay. While fixing the
minimum wage, the capacity of the industry should be taken into account. If particular
industry is not able to pay the minimum wages to its workers, then it has no right to
exist in the business.

The objectives of a minimum wage are as follows:

1. To prevent the sweating of workers in organised or unorganised industries.

2. To prevent the exploitation of workers and to enable them to obtain wages according
to their productive capacity.

3. To maintain industrial peace.

In the organised industries where the trade unions are powerful, the employers
generally yield to the demands of the workers for fixing a proper wage. But in the
unorganised industries where the trade unions are not found, the government
interference and legislation become essential to ensure that the labour is not exploited
and is paid atleast the minimum wage.

Concept # 2. Fair Wages:

Fair wage is another important concept used in a wage policy. There are no two
opinions for the payment of wages which are considered as “fair”. But it is very difficult
to define and determine what a fair wage is. The encyclopaedia of Social Science
describes a fair wage as “one equal to that received by workers performing work of
equal skill. Difficulty or unpleasantness”.

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According to Pigou, there are two degrees of fairness for deciding fair wage. In a narrow
sense. Trade and in the neighbourhood for similar work. In a broader sense, a wage is
fair if it is equal to the predominant rate for similar work throughout the country and in
the generality of trades.

Thus, a fair wage is one which can be fixed only by comparison with an accepted
standard of wages. Such a standard can be determined in relation to those industries
where. Such a standard can be determined in relation to those industries where labour
is well organised and is able to bargain well with employers.
According to the minimum Wages Fixing Machinery of the I.L.O., regard should be
primarily given to the rates of wages being paid for similar work in trades where the
workers are adequately organised and have concluded effective, collective agreements,
or if no such standard of reference is available in the circumstances, to the general level
of wages prevailing in the country or in the particular locality.

Wages tend to be unfair in the following circumstances:

1. Where the supply of labour in relation to demand is abundant and it is immobile.

2. Where the workers are ignorant of the rates prevailing in other trades or areas or
where they are not so well organised.

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3. Where the employers in a particular locality have entered into an agreement to the
effect that they should not compete among themselves for labour.

Therefore the removal of these causes is essential, if fair wages are to be established.

Concept # 3. Living Wages:

Living wage is a step higher than fair wage. It may be defined as the wage that would
enable the worker to provide a measure of comfort for himself and his family, in
addition to the essentials of life. The concept of living wage was first defined by Justice
Higgins of the Australian Commonwealth Court of Conciliation in 1907.

He defined the living wage as “one appropriate for the normal needs of the average
employee regarded as human being living in a civilized community. He further pointed
out that living wage should be sufficient not merely to provide bare necessities of life
but also a condition of frugal comfort estimated by current human standards.”

He further held that, “treating marriage as the usual fate of adult man, a wage, which
does not allow of the matrimonial condition and the maintenance of about five persons
in a home would not be treated as a living wage”.

The committee on Fair Wages laid down that the living wage should enable the male
earner to provide for himself and his family not merely the basic essentials of food.
Clothing and shelter but a measure of frugal comfort. The items included in the frugal
comfort are such as provision of education to the children. Protection against ill- health,
requirements of essential social needs and a measure of insurance against the more
important misfortunes like the old age.

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Thus, from the above discussion it is clear that a living wage is a wage – (1) which
should provide absolute essential needs like food, clothing and shelter, (2) which should
be sufficient for the worker and his family to live in a frugal comfort; (3) which should
provide an insurance against future risks, and (4) which should be according to the
special skill of the worker, if any.

Now-a-days, the concept of living wage has been widely accepted. If there is any
difference of opinion, it is regarding the details of its calculation and not regarding the
concept.

Criteria for Wage Fixation,

Besides the basic factors provided by job description and job evaluation, there are some
other criteria also which is taken in to consideration while fixing the wage and salaries, those
are…

1. The organization’s ability to pay

2. Supply and demand of labour
3. The prevailing market rate
4. The cost of living
5. Living wage
6. Productivity
7. Trade union’s bargaining power
8. Job requirements
9. Managerial attitudes
10. Psychological and sociological factors
11. Levels of skills available in the market

The Organization’s Ability to Pay

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 organizations
(like hospitals and educational institutions) pay relatively low wages because of low or no
profits. 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 wages then
those which running at a loss or earning low profits because of the high cot of production or
low sales.

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 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
organizations 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.

The supply and demand compensation criterions 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.”

Prevailing Market Rate

This is also known as the ‘comparable wage’ or ‘gain wage rate’, and is the most widely used
criterion. An organization’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 organization’s competitors, it will not be able to attract and
maintain a sufficient quantity and quality of manpower.

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 organizations pay lower wages because
economically they have to, or because by lowering hiring requirements they can keep jobs
adequately manned.

The Cost of Living

The cost-of living pay criterion is usually regarded as an auto minimum equity pay criterion.
This criterion calls for pay adjustments based on increases or decreases in an acceptable cost
of living index. 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 Living Wage

This criterion states that wages paid should be adequate to enable-an employee to maintain
himself and his family at 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.

Productivity
It is another criterion, and is measured in terms of output per man- hour. It is not due to
labour efforts alone. Technological improvements, better organization 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.

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.

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 organization is to be
ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job
conditions required.

Managerial Attitudes

These have a decisive influence on the wage structure and wage level since judgment 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. 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.

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 care
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 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,”
That “wages should be commensurate with their efforts,” that “they are not exploited, and
that no distinction is made on the basis of caste, color, sex or religion.” To satisfy the
conditions of equity, famines and justice, a management should take these factors into
consideration.

Please note that people and institutions both have a hand in designing jobs and wage
structures.

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 a faster
rate. Thus the wage levels of skilled employees are constantly changing and an organization
has to keep its level up to suit the market needs

It is clear that organizations determine the pay for jobs by taking a number of considerations
into account. Furthermore, they have considerable choice as to how much emphasis to place
on various determinant

Techniques of Wage Determination,

Wage determination is a complex process.
The steps involved in determining wage rates involves performing job analysis, wage
surveys, analysis of relevant organizational problems, forming wage structure, framing rules
of wage administration, explaining these to employees, assigning grades and price to each
job and paying the guaranteed wage.
The process of determining wages involves a series of interrelated steps.

Wage determination Process The wage determination process consists of the following
steps:
1. Job analysis First of all the contents and requirements of a job are analyzed. The data
collected through job analysis is used to prepare job description and job specification. On
the basis of these statements standards of job performance are laid down.
2. 2. Job evaluation The relative value of every job is determined through job evaluation.
The relative job value is then converted into money value so as to fix basic wage for the job.
3. 3. Wage survey Wage or salary surveys are conducted to find out wage/salary levels
prevailing in the region or industry for similar jobs. Other organizational problems such as
recruitment policy, fringe benefits etc. are also considered.
4. 4.Developing wage structure On the basis of foregoing steps an equitable wage structure
is prepared. While determining such a structure several points need to be considered:

i. Legislation relating to wages

ii. Payments equal to, more or less than prevailing wage rates
iii. Number and width of pay grades
iv. Jobs to be placed in each pay grade
v. Provisions for merit increases
vi. Differentials between pay plans and
vii. Dealing with wages/salaries that are not of line with the structure

5. Wage administration rules Rules are required to determine the degree to which advance
will be based on length of service rather than merit, the frequency with which pay based on
length of service rather than merit, the frequency with which pay increments will be
awarded, the rules that will govern promotions form one pay grade to another, and the way
control over wage/salary costs can be maintained. Once the rules are framed these should
be communicated to the employees.
6. 6. Employee appraisal In order to reward merit and performance, it is necessary to
evaluate the performance of individual employees. Some differentials in pay are maintained
on the basis of employee’s performance. This is necessary to provide incentive for hardwork
and superior performance is evaluated against predetermined standards of performance.
The technique of wage curve is often used to develop rate changes. A minimum and
maximum rate for each grade (e.g. 10% below and above the wage line) may be decided.
The minimum and maximum lines are drawn in the curve. Some overlapping between rate
ranges is allowed. Thus, a person who has worked for several years on the job may earn
more than a new employee on the next higher pay scale.
7. 7. Broad banding It is the practice of combining many previously discrete job titles, ranks
and pay grades into much wider categories.

Wage Fixation Machinery

Institutions Engaged in Wage Fixation | Labour

The managerial prerogative of setting terms and conditions of

employment is increasingly being limited due to either the
emergence of trade unions or active intervention by the state.

As a result of the growth of unionism, collective bargaining has

become an important method of wage fixation, even though
state intervention, adjudication machinery and wage boards
retain their primacy in the wage system.

(I) Adjudication:

The government labour policy supports compulsory adjudication

system.
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Its rationale for doing so is based on the following

arguments:

(i) It was feared that collective bargaining might result in work

stoppages and slowing down industrialization.

(ii) It was held that strikes should be used as a weapon by the

politically motivated trade unions disrupting the industrial
relations system.

(iii) It was assumed that the trade unions were still weak at the
plant level and therefore, collective bargaining may not result in
an equal trial to strength between the unions and the
management.:

(iv) It was felt that in the absence of compulsory adjudication

the state would be handicapped in maintaining industrial peace.

(v) It was hoped that compulsory adjudication would result in

terms and conditions of employment which may be considered
fair and objective by both workers and employers.

The system of adjudication has led to the enunciation of

important principles of wage determination of India.

While adjudication has helped in evolving socially desirable

concepts of wage determination, it cannot be said that it has
been able to arrive at just solutions to problems of industrial
relations. First, it is doubtful whether the courts possess
competence in rule-making although they might have been
useful in the interpretation of the rules themselves.

Second, because of compulsory adjudication a litigatory

approach is being adopted towards wage determination. This
has cost a lot both to unions and management, and it has eroded
the scope for constructive relationship between them at the
plant level.

Work stoppages continue both before a dispute is referred to the

court and after the award has been received. Consequently, one
of the supposed advantages of compulsory adjudication has
really not materialized. This phenomenon can perhaps be
explained by the fact that compulsory adjudication does not
impose a responsibility on both unions and the management for
developing a constructive relationship and honouring the
awards pronounced by the courts.

The argument that the trade unions are still weak to undertake
successful collective bargaining is belied by the emergence of
trade unions in important sectors of the economy. Lack of
government’s enthusiasm to encourage collective bargaining
may, in fact, have perpetuated the weakness of trade unionism
in the country rather than curbed some trade unions from
agitating for bargaining rights.

(II) Wage Boards:

Government of India sets up tripartite Wage Boards on industry

wise basis to fix and revise pay. These Boards are set up on
adhoc basis on the demand of trade unions and employers as
there is no law providing for their establishment.

A Wage Board consists of an impartial chairman, two

independent members, and 2 or 3 representatives of workers
and employers each. The recommendations of Wage Boards are
first submitted to the government. The Government may accept
modify or reject the recommendations. Once accepted, the
parties are requested to enforce the recommendations.

While determining wages, Wage Boards take into

account the following factors:

(i) Various wage legislation

(ii) Level of income and its distribution

(iii) Place of the industry in the economy

(iv) Needs of industry in a developing economy

(v) Requirements of social justice

(vi) Need to provide incentive for improving productivity

(vii) Need-based minimum wages

(viii) Industry’s capacity to pay

(ix) Productivity of labour

(x) Prevailing rates of wages

Wage Boards have been helpful in standardisation of wage

structures. But they suffer from several weaknesses.

(a) They take unduly long time in completing their task,

(b) Majority of their recommendations are not unanimous and

(c) Their recommendations have not been fully implemented as

these are not statutory.

The National Commission on Labour has recommended the

following measures to make Wage Boards more effective.

(i) A wage board should be required to submit its

recommendations normally within the year,

(ii) Unanimous recommendations should be made statutorily

binding,

(iii) The recommendations of a Wage Board should remain in

force for a period of five years, and

(iv) A manual of procedure for Wage Boards should be prepared.

(III) Pay Commissions:

Wages and allowances of Central and State Government

employees are determined through pay commissions. The
disputes arising out of pay commissions awards and their
implementation are decided by commissions of inquiry,
adjudication by tribunals and the Joint Consultative Machinery.

(IV) State Regulation of Wages:

India aims at rapid economic growth, industrial peace, price

stability, equitable distribution of income and progressively
rising standard of living for the working class.
In order to realise these objectives, the Government of India
regulates wage rates through the following methods of the
Minimum Wages Act is to prevent exploitation of labour through
payment of unduly low wages.

But the implementation of the Act has not been satisfactory.

Minimum wages have not been reviewed and revised for periods
longer than five years thereby leading to decline in real wages
due to inflation. The Act neither defines minimum wages nor
lays down norms for its determination.

(1) The Minimum Wages Act, 1948:

The Government realised that wages in ‘sweated’ trades cannot

be left to be determined on the basis of free play of demand and
supply in the labour market. Therefore, the government (central
and state) prescribes minimum rates of wages in certain sweated
and unorganized employments specified under the Minimum
Wages Act.

The Act also provides for regulation of overtime rate. The

minimum wages can be fixed by hour, day, month or such other
longer period. The Act provides for setting up of a tripartite
machinery (consisting of representatives of employers, unions
and the government) to advise the appropriate Government in
the fixation and revision of minimum wage rats.

(2) Section 529-A of the Companies Act, 1956:

This section aims to protect worker’s claim in the event of

insolvency of their employer. In case of winding up of a
company workers’ dues are to be paid in priority all other debts
in full. If the company’s assets are inadequate to meet these in
full, these dues and debts due to several creditors are to abate in
equal ratio.

(3) The Industrial Disputes Act, 1947:

ADVERTISEMENTS:

Under the Act conciliation is compulsory in all wage disputes in

public utility services and optional in other industrial
establishments. The Act also empowers the appropriate
Government to constitute one or more Industrial Tribunals or
National Tribunals and to refer a wage dispute to these
Tribunals for adjudication.

(4) The Payment of Wages Act, 1936:

The main object of this Act is to ensure regular and prompt

payment of wages and to prevent unauthorised deduction and
arbitrary fines from wages. It also regulates the rate of payment
for overtime work. The Act is applicable to persons employed in
factories/industrial establishments and drawing less than Rs.
1600/- per month.

(5) The Equal Remuneration Act, 1976:

The main object of this Act is to prevent discrimination in

remuneration on the basis of sex. Under the Act it is the duty of
the employer to pay equal remuneration to men and women
workers for the same work or work of a similar nature. No
discrimination is to be made against woman is recruitment and
in conditions of service unless provided for under any law for
the time being in force.

(V) Concept of Collective Bargaining:

Collective bargaining relates to group bargaining, as opposed to

individual bargaining about wages and salaries and conditions
of work in the broadest sense. The groups include trade unions
or federations of them on the one side and an employer or his
representatives or an employers’ association or federation on the
other side. The term ‘collective bargaining’ denotes a procedure
under which two parties, namely, workers and management,
reach an agreement about wage rates and basic conditions of
employment.

ADVERTISEMENTS:

Collective bargaining is a process in which representatives of

two groups (employers and employees) meet and attempt to
negotiate an agreement which specified the nature of future
relationship (pertaining to employment) between the two.
According to Beach, “Collective bargaining is concerned with the
relations between unions representing employees and employers
(or their representatives). It involves the process of union
organisation of employees; negotiation, administration, and
interpretation of collective agreements covering wages, hours of
work, and other conditions of employment; engaging in
concerted economic action; and dispute settlement procedures.”

According to Date Yoder, “Collective bargaining is the term used

to describe a situation in which the essential conditions of
employment are determined by a bargaining process undertaken
by representative of group of workers on the one hand and of
one or more employers on the other. In the words of Fillipo,
“Collective bargaining is a process in which the representatives
of a labour organization and the representative of business
organization meet and attempt to negotiate a contract or
agreement, which specifies the nature of employee employer-
union relationship.”

“Collective bargaining is a mode of fixing the terms of

employment by means of bargaining between organised body of
employees and an employer and association of employers acting
usually through authorised agents.

A manual issued by the International Labour Office on 1960

defines collective bargaining as “negotiations about working
conditions and terms of employment between an employer, a
group of employers or one or more employers’ organisations, on
the one hand, and one or more representative workers’
organisations, on the other, with a view to reaching an
agreement.”

It also asserted that “the terms of an agreement serve as a code

defining the rights and obligations of each party in their
employment relations with one another, it fixes large number of
detailed conditions of employment, and during its validity none
of the matters it deals with can, in normal circumstances give
grounds for a dispute concerning an individual worker.”

According to a guide for union training issued by the

International Confederation of Free Trade Unions, collective
bargaining is “a workers Bill of Rights” and serves several
objectives of the union. These objectives include unit
recognition as an authority in the shop- floor, raised standards
of living of workers and greater share for them in the company’s
profit, due respect to the workers and their participation in
decisions influencing their working conditions, establishment of
practices to settle disputes arising in day-to-day situation in the
enterprise and workers interests throughout the country.

Collective bargaining is a technique for the accomplishments or

the objectives of employees as well as employers and is an
integral part of industrial society. “It implies agreement between
representatives of management and freely designated
representatives of employees relating to the solution of
industrial problems with minimum government dictates.” It is,
in fact, an extension of the principles and practices of democracy
to industry. Since it is a dynamic process, it is still in the process
of growth and is constantly expanding. As observed by Slitchter,
“Collective bargaining is the beginning of industrial
jurisprudence. It is a method of enforcing citizenship right in
industry, i.e., management should abide, by certain rules rather
than taking arbitrary decision.”

According to John 1, Dumop, the term Collective Bargaining has

multiple meanings.

Collective bargaining is:

(i) “A system which establishes revises and administers many of

the rules which govern the workers’ place of work;

(ii) A procedure which determines the quantum of compensation

which employees should receive and which influence the
distribution of economic ills;

(iii) A method of settling disputes during the pendency of

agreement and of determining, after its expiry, whether a
dispute should be reopened or whether a strike or a lock-out
should be resorted to or not.”

On the basis of structural arrangements, collective

bargaining may be classified into two broad categories:

(a) Single-employer bargaining and

(b) Multi-employer bargaining.

(a) Single-Employer Bargaining:

Single-employer bargaining take place between one company
and either one union, or more than one unions where there are
several unions at different plants.

(b) Multi-Employer Bargaining:

Multi-employer bargaining signifies collective bargaining

between the employers’ federation and the workers of an
industry represented by the federation of all the trade unions.
This type of bargaining may take place at local, regional or
industry level.

Wage Differentials

A wage differential refers to the difference in wages between people with similar skills
within differing localities or industries.
DIFFERENT TYPES OF WAGE DIFFERENTIALS
Imperfection-based wage differentials are caused by factors such as limited information
about job opportunities, obstacles to worker mobility, and time lags in the adjustment of
resource allocation. Examples include inter-industry, inter-firm, and geographical wage
differentials.
Social wage differentials are caused by social values and prejudices, such as those related to
sex, age, status, or ethnic origin. These differentials can be more persistent than economic
factors.
Occupational wage differentials would exist even if employment markets were perfect and
social prejudices were absent. They are caused by differences in the skills, training, and
experience required for different jobs, as well as the risks and unpleasantness associated
with different jobs.

Inter-industry wage differentials: Workers in some industries, such as finance and

technology, tend to earn higher wages than workers in other industries, such as agriculture
and retail.
Examples of wage differentials
Inter-firm wage differentials: Workers in different firms within the same industry may earn
different wages, even if they have similar skills and experience. This can be due to
differences in the firm's profitability, the firm's ability to attract and retain workers, and the
firm's bargaining power with unions.
Geographical wage differentials: Workers in some regions, such as major metropolitan areas,
tend to earn higher wages than workers in other regions, such as rural areas. This can be due
to differences in the cost of living, the productivity of workers, and the demand for labor in
different regions.
Social wage differentials: Women, younger workers, and workers from minority groups tend
to earn lower wages than men, older workers, and white workers, even when they have
similar skills and experience. This can be due to discrimination, occupational segregation,
and other factors.
Occupational wage differentials: Doctors, lawyers, and other professionals tend to earn
higher wages than teachers, nurses, and other workers with less education and training. This
is because these jobs require more skills and training, and they are often associated with
higher levels of stress and responsibility.

IMPORTANCE OF WAGE DIFFERENTIAL

Economic significance of wage differentials

Wage differentials play an important role in allocating labor resources efficiently and
promoting economic growth. They provide incentives for workers to acquire skills and
training, and to move to jobs where they are more productive. Wage differentials also help
to ensure that full employment is achieved
Social significance of wage differentials
Wage differentials can also have a significant impact on social welfare. They can affect the
distribution of income, the level of poverty, and the quality of life for individuals and
families.

Challenges of Remuneration

Remuneration, which refers to the total compensation an employee receives for their work,
can present various challenges for both employers and employees. Here are some common
challenges associated with remuneration:

Equity and Fairness:

Internal Equity: Ensuring that there is fairness and equity in the remuneration of employees
within the same organization. Disparities in pay for similar roles can lead to dissatisfaction
and demotivation.
External Equity: Maintaining competitiveness in the external job market to attract and retain
talent. If an organization's remuneration is not competitive with industry standards, it may
struggle to attract skilled professionals.

Cost Control:

Balancing the need to attract and retain talent with the organization's financial constraints.
Striking the right balance between competitive remuneration and controlling labor costs can
be challenging, especially for small or financially constrained businesses.

Changing Economic Conditions:

Economic fluctuations and uncertainties can impact an organization's ability to provide

consistent and competitive remuneration. In challenging economic times, organizations may
face pressure to cut costs, including employee compensation.

Globalization and Market Variances:

Operating in a globalized market can pose challenges in terms of setting remuneration
standards that are competitive on a global scale. Variations in living costs and cultural
expectations can complicate the establishment of a consistent remuneration strategy.

Complex Compensation Structures:

Developing and managing complex compensation structures, including bonuses, benefits,

and stock options, can be challenging. Ensuring that these structures align with
organizational goals and are communicated effectively to employees is crucial.

Retaining Top Talent:

Identifying and retaining high-performing employees can be challenging, especially when

there is intense competition for skilled professionals. Offering competitive remuneration
packages, along with other non-monetary benefits, becomes crucial for employee retention.

Transparent Communication:

Communicating the rationale behind remuneration decisions to employees can be

challenging. Lack of transparency may lead to misunderstandings and dissatisfaction among
employees, while clear communication can foster trust and understanding.

Legal and Regulatory Compliance:

Adhering to local and international labor laws and regulations is essential. Failure to comply
with legal requirements can result in legal issues, financial penalties, and damage to the
organization's reputation.

Employee Perception:

Employee perception of the fairness of remuneration is critical. Even if an organization's

remuneration is competitive, if employees perceive it as unfair, it can lead to low morale,
reduced productivity, and increased turnover.

Retention in the Face of Counteroffers:

As employees become more valuable to an organization, they may receive counteroffers

from competitors. Organizations must develop strategies to retain key talent in the face of
external offers that may include higher remuneration.
Challenges to Compensation Management
Compensation Management is not only an HR issue, rather a business process. There are
multiple challenges which are involved in managing compensation. Some of the major
challenges faced by compensation management executives are as follows:-
6.1. Multiplicity of Compensation System:- In India, Many organization employ temporary as
well as permanent employees. The former are basically employed for employment, flexibility
and they are mostly paid indirectly through agencies such as labour contracts. They are paid
minimum wages according to their skill set. Inequity prevails between permanent and
temporary employees in terms of compensation structure and level. For e.g.:- a carpenter
who is a permanent employ may be paid Rs 5000 per month whereas he may be only paid Rs
3000 per month, if he is employed on temporary basis. This leads to multiple compensation
mechanism which are difficult to design & administer effectiveness, social justice & equity. It
is important to dispense duality of structure level & systems.

6.2. Structural Inflexibility Talent Attraction:- In present era, organization which are based
on rigid compensation levels & systems find it difficult to attract & retain talented & efficient
employees since they demand higher levels of compensations and structures that are tax
friendly.

6.3. Compensation is More than Survey:- Unlike common belief which states that
compensation an only means salary or wages, it is a much wider concept. It includes all
monetary as well as non-monetary components. Because of this misconception,
organizations mostly end up focusing only on economic parameters of employee
compensation other vital components such as promotion; assignments & appreciation are
often neglected. Thus, organization must focus on developing reward systems that cater to
social, physical & psychological needs of individual employees.
6.4. Human Capital Perspective:- People working in an organization are an asset & major
source of competitive advantage owing to their knowledge, talent & competencies.
Compensation should be considered it as a cost and makes efforts to maintain it to bare
minimum. To keep product cost low, organization try to pay lowest possible wages &
salaries. This assumption is incorrect and possess a challenge in efficient management of
compensation.
6.5. Cultural Issues:- Cultural issues & warns have a direct impact on compensation
management. Compensation is considered as a matter of economics in some cultures
whereas in meeting psychological economic & social needs of the employees. MNC's have to
manage their compensation by considering norms of both home & parent country. Thus, It
becomes a herculean task for companies. Source:

6.6. Increased Benefits:- Another issue related to labours faced by organization is the
capacity to maintain a competitive package of benefits more specifically fringe benefits. In
today's competitive labour market, the ability to provide a strong benefits package can be
the most important & difficult factor in recruit want & retention of employees. 6.7. Lack of
Strategic Alignment:- For proper management of compensation it is essential to link it with
strategy. The strategy of the organization should determine how much to pay, when to pay
& How to pay. Such strategy is important for maintaining a motivated workforce