IE Unit-V
IE Unit-V
Unit –V
Wages and Salary Administration
Wages and Salary Administration
• Types of Wages and salary administration
• Meaning principles in wage fixation, Techniques used of wage fixation
• Method of Job evaluation
• Steps involved in merit rating of employee
• Various Methods of wage payment
• Types, Advantages and disadvantages of Incentive scheme
• Productivity base incentives
• Case Example of Evaluation of incentive scheme
• Importance of Environmental pollution and control
Types of Wages and salary administration
• Wage and salary administration is a collection of practices and procedures used
for planning and distributing company-wide compensation programs for
employees.
• A ‘wage’ (or pay) is the remuneration paid, for the service of labour in
production, periodically to an employee/worker. “Wages” usually refer to the
hourly rate or daily rate paid to such groups as production and maintenance
employees (“blue-collar workers”).
Wages – paid to blue-collar employees; paid daily, weekly or monthly; paid to jobs
which can be measured in terms of money’s worth.
Compensation – a comparative term; includes wages and all other allowances and
benefits. (e.g. allowances, leave facilities, housing, travel, and non-cost such as
recognition, privileges, and symbols of status)
• In a salary administration, the employer should not feel that the employees
are paid more than they deserve and the employees should not feel that they
are underpaid.
• One of the most important functions of Human Resources is the payment of the
proper salaries and the wages to all company employees.
• The pay that the employees receive from their employer is the very reason for
their being in the job.
• The function of the payroll in a company is usually the wage and salary
administration and it is carried out by the Human Resources Department.
Wage and Salary Administration
Nature and Characteristics
Nature:
1. The basic purpose of wage and salary administration is to establish and
maintain an equitable wage and salary structure.
2. It is concerned with the establishment and maintenance of equitable labour
cost structure i.e. an optimal balancing of conflicting personnel interest so that the
satisfaction of the employees and employers is maximized and conflicts are
minimized.
3. The wage and salary administration is concerned with the financial aspects of
needs, motivation and rewards.
4. Employees should be paid according to the requirements of their jobs i.e.
highly skilled jobs are paid more compensation than low skilled jobs.
5. To minimize the chances of favoritism.
Wage and Salary Administration
Nature and Characteristics
Characteristics:
1. Payment of wages is in accordance with the terms of contract between the
employer and the worker.
2. The wages are determined on the basis of time-rate system or piece-rate
system.
3. Wages change with the change in the time spent by the labourer.
4. Wages create utility.
5. Wages may be paid weekly, fortnightly, hourly, or on monthly basis.
6. Wage is the reward paid to the workers for the services rendered by them.
7. Wages can be paid in cash or in kind.
8. All kinds of allowances are included in wages.
Wage and Salary Administration
Nature and Characteristics
Objectives:
i. To compare or draft company HR policy
ii. To find out the income level and return ratio of similar industries
iii. To understand wage differentiations
iv. To examine the competitiveness of entry level employees
v. To establish hiring rates favorable to the community
vi. To keep abreast wage and salary rates with production cost
vii. To minimize labour turnover due to pay disparity
viii.To increase employee’s satisfaction and morale
ix. To learn about the trend of perks and benefits in the market
x. To resolve existing labour problems concerning compensation.
Wage and Salary Administration
Direct, Indirect, Financial, Nonfinancial – better
Factors affecting wage structure
working condition, promotion schemes, job security,
1. Cost of living
training and employee improvement programmes,
2. Demand and supply
housing and other medical facilities
3. Ability to pay
4. Bargaining capacity of trade unions Other allowances
Disadvantages:
1. Efficient workers not paid any incentives, they loose interest.
2. Productivity is less because workers may not work hard.
3. More supervision is needed
4. Rate of output will be varying, so it is difficult to fix the production schedule.
5. Overhead cost increases
Payment by results (Piece Rate System)
2) Piece Rate System:
• The worker is paid proportional to his output.
• Workers will get a minimum guaranteed wage , irrespective of the output.
• Standard output is fixed.
• When worker produces more than the standard output, will be paid additional called incentive.
Wage = Number of units produced x Rate per unit
EXAMPLE: If per unit rate Rs. 10/- , If a worker produces 10 units then find wage of the
worker? Sol: Wage = 10 x 10 =Rs. 100/-
Important systems of Payment by results:
1. Straight piece rate system
2. Standard hour system
3. Halsay’s 50% plan
4. Rowan’s plan
5. Emerson’s 66 2/3 % efficiency plan
Payment by results (Piece Rate System)
Advantages:
1. Encourages workers to produce more
2. Productivity increases
3. Efficient workers are paid more, got satisfied
4. Production cost is less, Less supervision required
5. Workers take care of their tools and equipment , so that their earnings are not affected.
6. Slow workers are not affected because there is minimum wage.
Disadvantages:
1. Workers work in a hurry, so quality of product will be poor. So more inspection is needed.
2. Workers over strain themselves to earn more, will affect their health.
3. Material wastage increases
4. Leads to more accidents.
5. Clerical work for calculating the incentive increases.
6. Because of difference in wages , there will be jealousy among workers.
Payment by results (Piece Rate System)
Basics for good payment by results:
1. There should be good industrial relations climate
2. There should be sound recruitment, promotion and training policies.
3. The scheme should be well understood by workers and all levels of management.
4. The scheme should be started only after the plant has achieved art least 70% of the rated
output
5. The scheme should be based on work study
6. It should lead to cooperation among employees
7. The payment should be made as soon as possible after job is completed
8. The performance standard fixed should be equal to the average performance of employees.
9. It should be flexible to take care of technological development's
10. It should not be costly to workout – minimum records and minimum calculations
Straight Piece Rate System
1. Straight Piece Rate System:
• The worker is paid at a certain piece rate for the number of pieces produced by
him.
• Standard output quantity is fixed.
• Workers will get a minimum guaranteed wage , irrespective of the output.
• When worker produces more than the standard output, will get proportional to the
number of pieces produced.
Ex. Standard output / day of 8 hrs. = 16 pieces, guaranteed minimum wage Rs24,
the piece rate is Rs1.50 per piece
• If a worker produces less than 16 pieces , will get guaranteed minimum wages
Rs24
• If he produces more than 16 pieces, ex 20 pieces , will get 20 x 1.5 = Rs30.
Standard hour system
2. Standard hour system:
• Similar to piece rate system
• Standard output quantity is fixed in terms of standard hours
• Workers will get a minimum guaranteed wage , irrespective of the output.
• When worker produces more than the standard output, will get the wages proportional to the
standard hours of work produced by him.
• This system is used when a worker does different types of work
Ex. Assume standard time set for a job is 30 minutes , hourly wage is Rs3. Minimum wage per
day of 8 hrs. is Rs.24.
• If a worker produces 12 pieces in 8 hrs., its equal to 12x30=360 minutes , equal to 6 hrs, will get
minimum wage Rs.24
• If produces 20 pieces in 8 hrs., its equal to 20 x 30 = 600 minutes , equal to 10 hrs, will get 10 x
3 = Rs.30
Halsay’s 50% plan
3. Halsay’s 50% plan Advantages:
• Gain due to extra output by the worker 1. Guaranteed minimum wage
is shared equally by the worker and employer 2. Employer also gets 50 % of the savings
• Standard time is fixed for each work 3. Simple and easy to understand and calculate
• Workers will get a minimum guaranteed Disadvantages:
wage , irrespective of the output. 1. Workers get only 50% of the savings
Total Earnings, E = Ha R +((Hs – Ha) / 2) x R 2. Workers are not satisfied
Ha – Actual hours taken by the worker for the
job
Hs – Standard hours allowed for the job
R – Wage rate per hour
Workers are not satisfied , because they are
not given the full benefit for their extra effort
Rowan’s plan
4. Rowan’s plan Advantages:
• Standard time is fixed for each work 1. Guaranteed minimum wage
• Minimum wage is guaranteed for each worker 2. Workers get more incentives than the Hasley plan
• Workers will get a minimum wage , irrespective of3. Employer also get share in the savings
the output. 4. Workers get more incentive than what the employer gets
Total Earnings, E = Ha R +((Hs – Ha) / Hs) x Ha R Disadvantages:
Ha – Actual hours taken by the worker for the job 1. It’s slightly difficult to understand
Hs – Standard hours allowed for the job 2. Workers cannot calculate their incentives easily
R – Wage rate per hour 3. Incentives for the very high producers are not
proportional to their output
• In this system the time saved is expressed as a
fraction of standard time. This is multiplied by
the wage for the actual hours worked. Will give the
incentive to be paid
• Full benefit of the workers extra effort is not given
to them.
Emerson’s 66 2/3 % efficiency plan
5. Emerson’s 66 2/3 % efficiency plan
Efficiency = Standard hours allowed for the work / Actual hours taken by the workers
• Minimum wage is guaranteed
• If the efficiency is 66 2/3 % and below, no bonus is given, only minimum wage is given
• For 100% efficiency a bonus of 20% is given
% of efficiency % of bonus % of efficiency % of bonus
66 2/3 Nil 101 21
67 1 102 22
71 2 103 23
76 4 104 24
81 6 105 25
86 8 - -
90 10 - -
95 15 - -
100 20 120 40
Emerson’s 66 2/3 % efficiency plan
5. Emerson’s 66 2/3 % efficiency plan
Total Earnings, E = Ha R +p x Ha R
Ha – Actual hours taken by the worker for the job
p – % of bonus
R – Wage rate per hour
Incentives paid to the workers is proportionally more than the output
Efficiency of the worker is calculated on monthly basis, and incentives also given on monthly basis, will make the
workers to work steadily throughout the month.
Advantages:
1. Guaranteed minimum wage
2. Worker with less than standard output gets bonus
3. High producers get high rate of incentives
4. More beneficial to workers as the employers gets no share from the savings
Disadvantages:
1. It’s very much difficult for the workers to understand
2. It’s difficult to calculate the earnings
Wage Fixation
Halsey System:
Example:
Suppose a worker gets his wages @ 60 paisa per hour. He finished his work in 15 hours for standard hours. Thus he saves 5
hours. How much total wage he gets?
Sol:
Wages for 15 hours @ 60 paisa = Rs. 9.00
Wages for 5 hours (the time worker saves) @ 50% of the usual hourly rate = Rs. 1.50
Total = Rs. 10.50
He will get Rs. 10.50 and will also earn something more by utilizing the time saved i.e. 5 hours.
Rowan Premium Plan:
Example:
If the worker finished the job in 15 hours for standard time of 20 hours and the hourly rate of wage is 60 paise, then how
much the worker will get?
Sol:
Wages for 15 hours @ 0.60 paise per hour = Rs. 9.00 Premium or bonus (5 x (15/20) x 0.60) = Rs. 2.25 Total = Rs. 11.25
Wage Fixation
Balance or Debt Method:
Example: Suppose the time rate is Rs. 250 per week and the piece rate is Rs. 2 per unit. The
wages of a worker, who produces 150, 100, 125 units in 3 weeks, will be calculated as follows.
Sol:
Given
Time Rate = Rs. 250/- per week
Piece Rate = Rs. 2/- per unit
Note: In this method of wage calculation the maximum value (time rate or piece rate which one is
higher) is given to the worker.
Theories of Wages
1. Classical Wage Theory : This theory is based upon the fundamental concept that
labor is a commodity, and we have to pay the price according to supply and demand.
2. The Just Wage Theory of St. Thomas Aquinas :A just wage is described as wage
which permits the recipient worker to live in a manner in keeping with his position in
the society.
3. The Wage Fund Theory :This theory is expounded by John Stuart Mill and his
followers based on the Malthusian theory of population and the law of diminishing
returns.
4. Bargaining Theory of John Davidson :This theory proposes that the labor is a
commodity like anything that could be bought at a price by the user
Theories of Wages
5. The Marginal Productivity Theory :This theory offers the best explanation of
wages in modern industry.
6. The purchasing Power Theory :This theory tries to establish the relationship
between wages and the level of economic activity.
7. Labor Theory of Value :It emphasizes that labor is the source of all the products
and that without this important component, there could be no goods for human
consumption.
• Once the worth of a job has been established, using one of the job ratings systems,
the actual salary to be paid for each job must be determined.
• A survey of employers in the same industry and the same area showing the
wages and salaries they pay to their employees.
• Wage and salary surveys are useful because they show the prevailing
compensation in a given city or other place, which may result in employers
making upward or downward adjustments.
760
Methods of Job Evaluation
3. Factor comparison method
Rs. Skill Mental Effort Physical Effort Responsibility Physical
condition
40 J1 J2
80 J4 J3 J(E) J(E) J3
120 J2 J(E) J4 J1 J2
160 J3 J2 J2 J4
200 J1 J3 J3 J1
280 J4
320
Methods of Job Evaluation
3. Factor comparison method
Advantages:
• It is a systematic method. detailed step by step procedure is available
• The value of the new job is determined by comparing with the existing wage rate
• It finds the wages directly
• It is more accurate and acceptable
Disadvantages:
• It is a complicated method. it is not easily understood
• Costly procedure
• If a job with incorrect wage structure is selected as key job, it will lead to error in job
evaluation
• Different persons may allot different monetary value for each factor of the job (Evaluation based
on individual judgment)
Methods of Job Evaluation
4. Points method
• The point method is an extension of the factor comparison method.
• Each factor is then divided into levels or degrees which are then assigned points.
• Each job is rated using the job evaluation instrument.
• The points for each factor are summed to form a total point score for the job.
• Jobs are then grouped by total point score and assigned to wage/salary grades
so that similarly rated jobs would be placed in the same wage/salary grade.
Methods of Job Evaluation
4. Points method – Procedure
Step 1 Select jobs to be evaluated We choose what job division that will be evaluate.
Step 2 Input the job information. As with all job evaluation approaches, the jobs must
be analyzed and job descriptions/specifications prepared.
Step 3 Select compensable factors. Just as with other methods or other job evaluation
methods, the point method generally uses a set of factors like skill, effort, responsibility
and job conditions.
Step 4 Define compensable factors After we know the compensable factors from the step
3, we must define one of them and make it specifically.
Step 5 Define Factor Degrees After that, we must define how many degrees that will
used and make the points for each degrees. Don’t forget to make the factors that will be
analyzed, like job knowledge, mental, training accountability and so on.
Step 6 Determine the total point of degrees From the degrees that we have, we calculate
total points for each factors in degrees.
Methods of Job Evaluation
4. Points method – Procedure
Step 7 Assign points to degree within factors or sub factors. Make a clear
calculating of the degrees with separate the job to sub factors points.
Step 8 Evaluate the Jobs If the problem is with a key job, you return to Step 1; if it
is with a compensable factor, return to Step 3.
• Done to validate the job evaluation; the wage rate (for example, mean, median)
used for comparison with the hierarchical order is not important.
• Once fit between the market rates and key job evaluation rates is established, the
job evaluation plan is validated and should not be changed until the jobs and
compensable factors for those jobs are changed.
Methods of Job Evaluation
Step 9 Write the job evaluation manual
• The results of the committee's activities must be written up in a job evaluation
manual.
• Without a well documented job evaluation plan, the plan is not usable except by
the original committee.
• Documentation of the committee's work should include the rationale for the
factors chosen, the rationale for weighting the factors, the rationale and procedures
for assigning points to factor degrees, and, finally, a description of the factors, sub
factors, and the degrees assigned to each.
Methods of Job Evaluation
4. Points method
Advantages
• The value of the job is expressed in monetary terms.
• Can be applied to a wide range of jobs.
• Can be applied to newly created jobs.
• Minimized human error, More accurate and reliable
Disadvantages
• The pay for each factor is based on judgments that are subjective.
• The standard used for determining the pay for each factor may have built-in biases
that would affect certain groups of employees (females).
• It needs skill and experience
• Costly and time consuming
Methods of Job Evaluation
4. Points method
Factor Weightage Grade I Grade II Grade III Grade IV
• Normally the employees are ranked in the order from best to worst.
• The limitation of this method is that it cannot indicate specific strengths and
weaknesses.
Basic forms of incentives Bonuses Merit Commission for sales people Salary plan
Commission plan Combination of both
Incentive scheme
Bonus
• Incentive payment that is supplemental to the base wage for cost reduction,
quality improvement, or other performance criteria.
Merit Pay Program (merit raise)
• Lump-sum Merit Program under which employees receive a year-end merit
payment, which is not added to their base pay.
Classification of Incentives Plans
• Profit sharing
• Co-partnership
• Gain-sharing
• ESOPs
• Stock Options
• Incentives plans
• Output-based
• Individual Time-based
• Organization- wide Group, Time-based
Incentive scheme
Time based incentive plan
– Under time based plan, per hour wage rate is determined & incentives paid on the
bases of time saved.
Time based incentives plane is divided in four different ways.
• Hasley plan,
• Rowan plan,
• Emerson plan,
• Bedeuax plan.
– This all plan more or less follow same method i.e. (pay bonus on the basis of
timed saved by employee), but with different formula.
Incentive scheme
Output based incentive plan
– Under output based plan, per piece wage rate is determined & incentives paid on
the bases of output produced. i.e. more output in standard time OR standard output
in less time.
• Taylor plan,
• Merrick plan,
• Gnatt plan.
Incentive scheme
Profit sharing
– Profit sharing is an arrangement by which employees receive in addition to wages, a share is
fixed in advance in profit of the enterprise.
– It is an agreement between employer & his employee.
– According to International Labour Organization, “Profit-sharing is a method of industrial
remuneration under which an employer undertakes to pay to employee, a share in net profit of the
enterprise in addition to regular wages”
Co-partnership
– Co-partnership is an extension of profit-sharing.
– Under this method worker’s share in company’s profit is paid in the form of share by which they
become entitled to participate in decision-making process.
Incentive scheme
Gain-sharing
– This method aims at increasing productivity & decreasing labour cost & sharing the result gains
wit employee.
– It is based on a mathematical formula which compares a standard perform with actual
performance during given period.
– When actual performance exceed the standard performance, shaving are shared with employees.
ESOPs (Employee Stock Option Plans)
– This method is originated in the USA in early 90s.
– Under this plan, the eligible employee are allotted company’s share below the market
price.
– The term “stoke option” implies the right of eligible employee to purchase a certain
amount of stoke in future at an agreed price.
– The eligibility criteria may include length of service, contribution to the department
etc…
Incentive scheme
Stock Options
A stock option is an incentive offered to employees that want to invest their money
into the company stock by purchasing stock with pre-tax money.
According to HR Guide, employees that participate in a stock option incentive plan
are able to defer paying income tax on the gains realized by their stock purchases
until the stock is sold.
The company itself does not get any kind of tax break by offering a stock option
incentive, but it does reap the benefits of selling more stock.
Group based or team-based incentives plans reward all team members equally
based on overall performance of the team member.
Under group based incentive plan, individual out put can’t be measured.
Incentive scheme
• So team performance is evaluated on the basis of time taken rather than output
produced, if team complete their target in well advanced to standard time the
team member are eligible for incentives.
• Payment to team members may be made in the form of cash bonus or in the
form of non-cash reward such as pleasure trip, times off or luxury items.
• Team based incentives foster cohesiveness among tem members.
• Methods for team based incentives plans are – Preistman’s production plan –
Rucker plan – Scalon plan – Town plan and so on…
Incentive scheme
Non-Financial (Non-Monetary) Incentives
Status
• It is one’s social or professional position. In an organization, this refers to the
position in the hierarchy of the organizational chart.
• Management-level employees have more authority, responsibility, recognition,
salary, etc., than those of the rank-and-file employees.
• The level of authority and responsibility determine the status of an employee in
an organization. Status increases the self-esteem, confidence, and psychological
needs of an individual resulting in a motivated attitude at work.
Incentive scheme
Non-Financial (Non-Monetary) Incentives
Organizational Climate
• Organizational climate refers to the environmental characteristics of an
organization as perceived by its employees.
• It conveys the impression that people have towards the internal environment of
the company within which they work and have a key influence on their
performance.
• This differs from one organization to another.
• Several factors may influence the organizational climate of a company, such as
organizational structure, individual responsibility, risk and risk-taking, warmth,
and support within the company, its tolerance and conflict, and more.
• A positive organizational climate tends to increase the efficiency of employees at
work.
Incentive scheme
Non-Financial (Non-Monetary) Incentives
Career Advancement Opportunity
• Organizations have to establish the appropriate skill and career development
programs, and even a sound promotion policy for their employees, that serves as
a booster for them to perform well and get promoted.
• Upward progress in one’s career, such as promotion, shows recognition and
appreciation of an employee’s work, motivating him to do better.
Job Enrichment
• It refers to the designing of jobs in such a way that it involves challenging and
variety of tasks, requiring a higher level of knowledge and skill, more autonomy
and responsibility, and more growth opportunities and thus, could also increase
employees’ pay.
Incentive scheme
Non-Financial (Non-Monetary) Incentives
Job Security
• Job security offers future stability and a sense of security among the employees in an
organization.
• Not having to worry about the future gives a sense of enthusiasm at work.
• While there is an undesirable aspect of this incentive, like employees taking their jobs
for granted, the increasing rate of unemployment in our country makes this a great
work incentive.
Employee Recognition Programs
• The organization adopts this to raise employee morale, attract and retain key
employees, elevate productivity within an organization, and increase competitiveness.
• This pertains to employers’ initiatives to reward their employees for achievements,
new behaviors, anniversaries, and milestones unlocked during their stay in the
company.
Characteristics of a Good Incentive Plan
a. Simple and easy to understand
b. Lessor is not costly to operate
c. Must be discussed with employees before implementation
d. Assist in supervision
e. Able to evaluate employee’s performance
f. Induce cooperation among the employees
g. Encourage workers to perform better
h. Acceptable to employee and employer
i. Ensure sufficient monetary compensation and recognition to employees
j. Ensure reduction in unit production cost
k. Standardized methods of implementation
l. Eliminate distrust between the employee and employer