UNIT 4

COMPENSATION MANAGEMENT
What is compensation?" In very simple terms, compensation is the results or rewards that the
employees receive in return for their work.

Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards and
sales commission, etc.

Compensation can also include non-monetary perks like a company-paid car, company-paid housing
and stock opportunities.

Compensation is a vital part of human resource management, which helps in encouraging the
employees and improving organizational effectiveness.

This includes:

 Direct financial compensation consisting of pay received in the form of wages, salaries, bonuses
and commissions provided at regular and consistent intervals

 Indirect financial compensation including all financial rewards that are not included in direct
compensation and understood to form part of the social contract between the employer and
employee such as benefits, leaves, retirement plans, education, and employee services

 Non-financial compensation referring to topics such as career development and advancement

opportunities, opportunities for recognition, as well as work environment and conditions

While employees tend to focus on direct financial compensation when contemplating their rewards,
according to the McKinsey Journal, for individuals who are relatively satisfied with their salary, it is the
non-financial rewards that tend to be more effective in contributing to long-term employee
engagement.

Examples of Financial & Non-Financial Compensation

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Objectives of Compensation Policy

The objectives of compensation policy are as follows −

 Allure suitable staff.

 Keep qualified personnel.

 Develop reward structures that are equitable with logical and fair pay relationships between
differently valued jobs.

 Manage pay structures to mirror inflationary effects.

 Assure that rewards and salary costs handle changes in market rates or organizational change.

 Appraise performance, duty, and loyalty, and provide for progression.

 Abide with legal requirements.

 Maintain compensation levels and differentials under review and control salary or wage costs.

Clearly, managing a firm's compensation policy is a complex task as it facilitates systematically

administered and equitable salaries, reconciles employees' career aspirations with respect to earnings,
aligns employees' personal objectives with those of the organization, and keeps the firm's costs under
control.

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To summarize, compensation management is a synchronized practice that includes balancing the work-
employee relation by facilitating monetary and non-monetary benefits for employees.

Importance of Compensation Management

A good compensation is a must for every business organization, as it gives an employee a reason to stick
to the company.

An organization gains from a structured compensation management in the following ways −

 It tries to give proper refund to the employees for their contributions to the organization.

 It discovers a positive control on the efficiency of employees and motivates them to perform
better and achieve the specific standards.

 It creates a base for happiness and satisfaction of the workforce that limits the labor turnover
and confers a stable organization.

 It enhances the job evaluation process, which in return helps in setting up more realistic and
achievable standards.

 It is designed to abide with the various labor acts and thus does not result in conflicts between
the employee union and the management. This creates a peaceful relationship between the
employer and the employees.

 It excites an environment of morale, efficiency and cooperation among the workers and ensures
satisfaction to the workers.

In short, we can say that compensation management is required as it encourages the employees to
perform better and show their excellence as well as provides growth and development options to the
deserving employees.

omponents of Compensation

Compensation as a whole is made up of different components that work as an aid for an employee after
retirement or in case of some accident or injury. Now we shall see the key elements or components that
make compensation.

Wages and Salary

Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It is
irrelevant of the number of hours put in by an employee working in the firm. These are subject to
annual increase.

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Allowances

Allowances can be defined as the amount of something that is allowed, especially within a set of rules
and regulations or for a specified purpose. Various allowances are paid in addition to basic pay.

Some of these allowances are as follows −

 Dearness Allowance − This allowance is given to protect real income of an employee against
price rise. Dearness allowance (DA) is paid as a percentage of basic pay.

 House Rent Allowance − Companies who do not provide living accommodation to their
employees pay house rent allowance (HRA) to employees. This allowance is calculated as a
percentage of salary.

 City Compensatory Allowance − This allowance is paid basically to employees in metros and
other big cities where cost of living is comparatively more. City compensatory allowance (CCA) is
normally a fixed amount per month, like 30 per cent of basic pay in case of government
employees.

 Transport Allowance/Conveyance Allowance − Some companies pay transport allowance (TA)

that accommodates travel from the employee’s house to the office. A fixed amount is paid every
month to cover a part of traveling expenses.

Incentives and Performance Based Pay

Incentive compensation is performance-related remuneration paid with a view to encourage employees

to work hard and do better.

Both individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing,
commissions on sales are some examples of incentive compensation.

Fringe Benefits/Perquisites

Fringe benefits include employee benefits like medical care, hospitalization, accident relief, health and
group insurance, canteen, uniform, recreation and the likes.

In recent years, a great deal of attention has been directed to the development of compensation
systems that go beyond just money. We can say that all the components of compensation management
play a very important role in the life of an employee.

In particular, there has been a marked increase in the use of pay-for-performance (PrP) for management
and professional employees, especially for executive management and senior managers. Compensation
is a primary motivation for most employees.

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Wage
Money that is paid or received for work or services, as by the hour, day, or week.

Difference Between Salary and Wages

The term salary and wages is often confused by people and is used interchangeably. But the truth
is that both these terms differ from each other and hold different meanings. Salary is a fixed
amount paid or transferred to the employees at regular intervals for their performance and
productivity, at the end of the month whereas wages are hourly or daily-based payment given to
the labour for the amount of work finished in a day.

The main difference between salary and wages lies in the fact that salary is fixed, i.e. it is
predetermined and agreed between the employer and employee, while wages are not fixed, as it
varies depending on the performance of the labour. This article presents you the important
differences between salary and wages in tabular form.

Comparison Chart

BASIS FOR
SALARY WAGE
COMPARISON

Meaning A fixed pay that an individual A variable pay that an individual

draws for the work done by him draws on the basis of hours spent in
on an annual basis. completing the certain amount of
work.

Skills Skilled personnel Semi-skilled or unskilled

Type of cost Fixed Variable

Rate of payment Fixed rate Wage rate

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BASIS FOR
SALARY WAGE
COMPARISON

Payment cycle Monthly Daily

Basis of payment Performance basis Hourly basis

Paid to whom Employees Labor

Nature of work Administrative-office work Manufacturing-process work

KRA Yes No
(Key resultant area)

Extra pay for extra No Yes

hours

Piece Rate System and Time Rate System

The success of a concern largely depends upon the efficiency of labor and the efficiency of labor
is considerably affected by amountof wages paid to them. Some persons are of the view that the
profit of a concern can be maximized only by reducing the wage rates payable to the workers.
But, this view is not correct. It should be noticed that low-paid workers are usually inefficient
that leads to wastage of materials, frequent breakdown of machinery, less economic use of tools
and loss of time, as a result of which the cost of production goes up.

Reasonable and fair wage rates allowed to the workers to ultimately lead to a more economic use
of machines, tools, materials, and time. Therefore, the importance of the method of wages
payment should never be under-estimated.

Methods or systems of wage payment must possess the given below characteristics:

 It should be simple to operate and easy to understand.

 It should guarantee a minimum wage to each and every worker.

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  It should be acceptable to the employer and the employee.

 It should be flexible enough so that changes may be made in future according to the
requirements.

 It should ensure the establishment of industrial peace.

The principal methods of wage payment are as follows:

1. Piece Rate System

2. Time Rate System

Time Rate System

Under this system, the amount of remuneration or the total wages outstanding to the workers depends on

the time for which he is employed. This is a simple and common method of wage payment. In this

method, the workman is paid an hourly, daily, monthly or yearly rate of wages.

Thus, the worker is paid on the basis of time but not on his/her performance or unit of output. A number

of wages payable to a workman under this method is to be calculated as follows:

Total wages = Actual time took x time rate

or, Total wages = Total hours worked x Wages rate per hour.

Illustration:

A worker is paid Rs. 15 per hour and he spent 400 hours during a particular month in a factory. What is

his total earning of that particular month?

Solution:

Total Wages = Total hours Worked * Rate of Wage per hour = 400 hrs * Rs. 15 = Rs. 6000

Thus, the total earning of the worker is Rs. 6000

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Advantages of Time Rate System

The following are the advantages of time rate system,

 Simplicity: It is really easy to understand and simple to calculate the earnings of workers under
this method.

 Guarantee of minimum wages: It guarantees minimum wages to the workers.

 Quality production: Since, a number of wages rate is not linked to the quantity of output, this
method ensures production of better quality due to the careful attention of the workers.

 Unity among workers: Under this system, all workers falling under a particular category are
paid at an equal rate without any calculation of their quantity of output. It encourages a feeling of
equality among workers on account of which this method is also favored by trade unions.

 Economical: It involves less critical work and detailed records are not necessary. Since, the
output is not the criteria for identification of wages, tool and materials are handled carefully and
wastages are also minimized.

Disadvantages of Time Rate System

This method has the following disadvantages:

 No incentive to the efficient workers: It lacks incentive to efficient workers since all workers
are paid equally and no distinction is made between efficient and inefficient workers. So, effort
and rewards are not correlated.

 Go-slow policy: The worker in order to earn more wages may try to perform the work slowly
which leads to increase in labor cost per unit.

 Dissatisfaction among the efficient workers: The efficient workers are paid wages at the rate
equal to those payable to inefficient workers, which creates dissatisfaction among the efficient
workers.

 Payment for idle time: Under this method, the idle time of the workers is also paid that increases
the cost of production.

 The high cost of supervision: Since, there is no direct link between the quantity of output and
wages, wastage of time on the part of the workers is common and the negligence of which
requires considerable supervision leading to increased costs.

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2. Piece Rate System

In this method, wages are paid to the employees after completion of work. Under it, a worker is paid on

the basis of output not the time taken by him. This is one of the simplest and most commonly used

systems of wage payment. In this system, the wage rate is expressed in terms of per unit of output, per job

or per work-order. A number of wages payable to a workman under this method is to be calculated as

follows:

Total wages = Total output x Rate per Unit of Output.

Illustration:

A worker is paid Rs. 20 per unit and he produced 50 units in 8 hours. What is his total earning?

Solution:
Total Wages = Total Output * Wage Rate per Unit of Output = 50 units * Rs. 20 = Rs. 1000

Thus, the total earning of the worker is Rs. 1000.

This system is suitable in the following cases:

 Where a work is of a repetitive nature.

 Where the measurement of work is simple.
 Where the accuracy and quality of output are not very important.
 Where strict supervision is not possible.

Advantages of Piece rate system

The advantages of piece rate system are given below:

 Simplicity: Just like time rate system, the piece rate system is also simple to calculate and easy to
understand. It does not involve tedious calculations.

 The incentive to workers: This system provides an incentive to the workers to work hard as the
wages are paid on the basis of the quantity of output, not on the basis of time. So, efforts and
rewards are correlated.

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  Ascertainment of accurate labor cost: Piece rate system wages are paid on the basis of output,
the exact cost of labor per unit of output or job can be ascertained.

 No payment for idle time: Under this rating system, no payment were made to the worker for
the idle time as a result of which the cost of supervision is not considerable.

 Proper care and use of machines and tools: The workers take proper care of their machines and
tools since the breakdown of machines and tools means a decrease in output resulting in less
remuneration to them.

Disadvantages of Piece Rate System

This system has the following disadvantages:

 Less attention to quality: As the payment of wages is made on the basis of output, the workers
would try to produce more quantity of products and not focus on the quality of products which
results in production of less quality products.

 Inefficient use of machines and materials: Since, the wages are paid on the basis of the quantity
of output, an excessive wastage of materials and frequent breakdown of machinery may be
caused by the workers due to their efforts to obtain maximum output.

 No guarantee of minimum wages: Since, there is a direct relationship between quality of output
and wages, the workers suffer if they fail to work efficiently. There is no guarantee of minimum
daily wages to workers.

 Dissatisfaction among inefficient workers: The inefficient workers, who work slowly, become
dissatisfied by reason of lower wages as compared to the wages paid to their efficient
counterparts.

 Adverse effect on worker’s health: The workers may try to work abnormally to earn more
which has an adverse effect on their health and efficiency. So, this method is not accepted by a
trade union.

Differences between Time Rate and Piece Rate System of Wage Payment

Bases of Differences Time Rate System Piece Rate System

Wage is calculated on the basis of time spent by Wage is calculated on the basis of output or
The basis of wages
the workers on the jobs. production.

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 There is a possibility of excessive idle time in There is a less chance of idle tome in this
Idle Time
this system. system.

There is a lack of incentive for the efficient and It encourages motivated workers to
Incentive
honest workers. produce more and earn more.

Control and supervision are needed as the Control and supervision of the workers are
Control and supervision
workers may not work properly. required.

The quality of works may not be good

The quality of work is good as there is no
The quality of work because of pressure to produce more
pressure to produce more goods.
goods.

FEATURES OF GOOD PAYMENT SYSTEM OF WAGES

The features of goods system of wages of payment are mentioned below:

1. Suitable for both employer and employee.

2. Simple to understand and easy to apply.
3. Economical system.
4. Guaranteed minimum wages.
5. Assure the equal wages for the similar job.
6. Encourage the competent workers.
7. Accepted by a trade union.
8. In accordance with the law of the country.
9. Flexible

Fringe benefits

Fringe benefits are benefits in addition to an employee’s wages, like a company car, health
insurance, or life insurance coverage. Any benefit you offer employees in exchange for their
services (not including salary) is a fringe benefit.

Fringe benefits are a type of compensation provided to an employee outside of his normal wage
or salary. Many years ago, employers began to understand that potential employees give
great consideration to the wage or salary offered. In an effort to tempt a qualified individual to

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accept employment with the company, rather than going to a competing company, many
employers began offering non-wage compensation in addition to the actual salary offered.

These fringe benefits, often in the form of employer-paid life and health insurance policies,
retirement benefits, and other things that might aid in the recruitment of top quality, skilled
workers. In fact, fringe benefits play a large role in keeping workers motivated to do quality
work and increase production. Some fringe benefits may be classified as taxable income by the
IRS.

Types of Fringe Benefit

Many employers offer employees an array of fringe benefits in addition to their salaries. Also
considered “job-perks,” these benefits cost employers, who pay for such perks, and are therefore
considered a portion of the employees’ salaries on their books, even if the benefits are not in the
form of money, such as bonuses. There are many types of fringe benefit, and which types are
offered often depends on the type of employer, and value of the employee’s position.

Non-Taxable Fringe Benefits

There are many types of non-taxable fringe benefits that may be offered to employees without
increasing their tax burden. Some of the most common tax-free types of fringe benefit provided
to employees by private and public businesses include:

 health insurance (up to certain dollar amounts)

 accident insurance

 disability insurance

 Health Savings Accounts

 dependent care assistance

 educational assistance

 group term life insurance coverage—limits apply based on the policy value

 qualified employee benefits plans, including profit-sharing plans, stock bonus plans, and
money purchase plans

 employee stock options

 lodging on your business premises

 achievement awards

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  parking expense assistance (tax free to employees, but not deductible by employers
during 2018 through 2025)

 commuting benefits (tax-free to employees, but not deductible by employers during 2018
through 2025)

 employee discounts on the goods or services the employer sells

 supplemental unemployment benefits

 de minimis (low-cost) fringe benefits such as low value birthday or holiday gifts, event
tickets, traditional awards (such as a retirement gift), other special occasion gifts, and
coffee and soft drinks

 cafeteria plans that allow employees to choose among two or more benefits consisting of
cash and qualified benefits, and

 working condition fringe benefits--that is, property and services provided to an employee
so that the employee can perform his or her job.

Taxable Fringe Benefits

According to the IRS, any fringe benefit provided by an employer may be taxable, unless it is
specifically excluded from taxation.. Some of the fringe benefits that may be taxable under
certain situations often include payment of, or reimbursement for, things in an excessive amount.
These include:

 Excessive Moving Expenses – if an employer reimburses or pays for an employee’s

moving expenses, when the move was less than 50 miles from the employee’s current
residence, may be taxed.

 Excessive Mileage Reimbursement – employer reimbursement for business-related

driving of the employee’s private vehicle may be taxable if the total exceeds the IRS’
standard mileage rate.

 Expense Reimbursement – expense amounts reimbursed to an employee with the

employee’s sufficient accounting, may be taxable.

 Clothing Reimbursement – employer reimbursement for clothing that is not strictly for
work on the job, but which is suitable for everyday street wear, is taxable.

 Working Condition Benefits – any equipment or supplies purchased by an employee

that is used for work purposes exclusively, it is tax free. If the item is used for any
personal purpose at all, it is taxable.

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  Excessive Education Expenses – Educational assistance for education that is not job-
related, or which the amount exceeds the IRS allowable amount is taxable.

 Awards and Prizes – Employee awards and prizes that are given in cash, are taxable,
unless they are given to charity in the employee’s name. Valuable non-cash awards may
also be taxable, unless the value is minimal.

Retirement Plan Contributions

Retirement plan contributions are an important and popular fringe benefit offered to employees.
While some companies match the employee’s contribution, made directly from his paycheck,
others contribute a specified amount to the plan without requiring the employee to do so himself.
Most people consider employer retirement plans to be a vital tool for planning their later lives.

Wage Policy
Wage Policy are principles acting as guidelines for determining a wage structure.

Initially as an economic issue it was mainly 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 fold concern of the
employer, employee, and the state.

In India it is built around certain cardinal principles:

• Equal pay for equal work

• Living wages for all workers so that they lead a decent life
• Payment of wages on appointed dates without unauthorized deductions
• Resolving wage related issues through collective bargaining
• Payment of statutory bonus at 8.33 percent as per legal provisions
• Ensuring a fair, equitable wage plan for various employees without significant wage
differences.
• The capacity to pay(according to supreme court ruling- ‘an employer who cannot pay minimum
wages has no right to exist’
• Determining fair wages over and above minimum wages with due regards to (i) the
productivity of labour (ii) the prevailing level of wages (iii) the level of national income and
distribution (iv) the place of industry in the economy of the company.
• To compensate for the rise in cost of living

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Economic Objectives of Wage Policy:
• Full employment and optimum allocation of all resources
• The highest degree of economic stability consistent with an optimum rate of economic progress
• Maximum income security for all sections of the community

Social Objectives of Wage Policy:

• The elimination of exceptionally low wages
• The establishment of ‘fair’ labour standards
• The protection of wage earners from the effects of rising prices
• The incentive for workers to improve their productive performance

Wage Policy is a democratic set up so it cannot be enforced by the Govt alone. Its
implementation has to be secured through employers and employees organizations at bargaining
table i.e. by consensus

Limitations of Wage Policy:

• Socio-economic setup of our society
• Enforcement in unorganized sector
• Lack of unity among unions
• Prices rise almost beyond Govt’s regulatory capabilities
• Wages lag far behind labour productivity
• Lesser number of workers in organized sector take away bulk of wages than unorganized
• Wage incomes are consumption oriented rather than savings oriented so increased wages would
mean increased consumption. Therefore economic growth may not be affected positively as it
depends upon rate of investment possible through savings.
• Ever increasing addition to workforce yet dearth of skilled labour
• High wages may force employer to shift towards capital intensive methods
• High wages reduce capital for growth

Wage Policy in India

First Five Year Plan (1951-56) suggested:

• Pre-war levels of real wages be restored as a first step towards ‘living wages’ through increased
productivity
• Reduction of disparities in income
• Reduction of gap between existing and living wages
• Standardization and maintenance of wage differentials to provide incentives

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Second Five Year Plan (1956-61) stressed:
• Improvement in wages through increased productivity
• Improved layout of plants, working conditions
• Application of system of payment by result
• Improvement in management practices
• Recommended settlement of industry wise wage disputes through tripartite wage boards

Third Five Year Plan (1961-66) reinforced:

• Wage policy of preceding two plans
• Rationalization of work load/ work methods and functions of management

Three Annual plans (1966-69) aims at framing Wage Policy after taking considering:
• Price level
• Employment level
• Social Justice
• Capital required by firm for future growth

Fourth Five Year Plan (1969-74) emphasized:

• Price stability
• Extension of system of payment by results

Fifth Five Year Plan (1974-79) recommended:

• That the reward system in terms of wages and
non-wage benefits must be related to performance records
• A wage structure to narrow down disparities within the organized sector itself.
• Govt. to intervene in setting up of wages & prices

Sixth Five Year Plan (1980-85) stressed on:

• The need for bringing about a greater rationalization of wage structure and linking of wages at
least in some measure to labour productivity.
• Modernization in industry
• Evolve wage structure without restrictions on negotiations

Seventh Five Year Plan (1985-90) asserted that:

• There is a need for improvement in capacity utilization, efficiency and productivity

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Methods of Wage Payment

1. Minimum Wage Method: Under this method, the minimum amount of wage is paid to
the employee irrespective of the employer’s paying ability. It is based on the concept that
the wage is paid not for the bare sustenance of life, but for the preservation of the
efficiency of the worker.

Thus, the minimum wage must provide for education, medical requirements, and other essential
amenities.

2. Fair Wage Method: The wage is said to be a fair wage when its amount is similar to the
rate that prevails in the same industry in the neighborhood or the rate that prevails
throughout the country for the same kind of work.

A standard rate is maintained for the wage that prevails in the other similar industries, and this
rate is determined by the companies where exists an unionized labor and is in large numbers.

3. Living Wage Method: The living wage is slightly higher than the fair wage, in which the
worker not only fulfill his basic needs of life viz. food, clothing and shelter, but also avail
the frugal comforts such as education of children, insurance, protection against ill health,
essential social needs, etc.

The rate of the living wage is determined on the basis of economic condition prevailing in the
country. Therefore, these wage rates may differ from country to country.

Thus, the employers follow different methods of wage payment depending on their paying
capacity and the economic conditions prevailing in the country.

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A sound wage policy is to adopt a job evaluation program 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:

1. The Organization’s Ability to Pay

Organization decisions on job and wage structures represent a -balancing of the aforementioned forces.
But the strength of these forces varies by organization type and within organizations by job clusters.

Banks, insurance companies, department stores, and restaurants are organizations with primarily market-
oriented wage structures. Professionals are groups of employees whose jobs have been designed largely
by the educational process they have been through. This makes for a commonality between organizations
in the design of professional jobs.

Organizations having many specialized jobs, dealing in labor markets too disorganized to provide
adequate grading and pricing, and lacking unionization have primarily internally determined wage
structures. Product markets may influence such wage structures, but only if labor cost is high relative to
total cost. Internally determined wage structures result from management decisions and may range from
highly rational structures flowing from job evaluation to a system of personal rates.

Organizations in small towns, isolated locations, or nonunion communities provide examples, as do

unique organizations in -larger communities, and government employment. Most large, unionized
organizations have what might be called union-and-product-oriented wage structures. In these
organizations, wage structures represent management decisions -shaped and restrained by technology,
unions, and cost-price relationships, and the product market.

Technology provides some uniformity in job structures in organizations engaged in common lines of
production. Unions, through their insistence on traditional relationships,establish some key jobs and job
clusters and provide an upward thrust to the entire structure.

Cost-price relationships and the product market compel the organization to resist this upward push and to
make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total
cost and inelastic product demand, however, reduce competitive pressures on organizations.

Professional employees (such as engineers ) have salary structures that combine market orientation and
internal determination, regardless of the major activity of the organization. Managerial salary structures
are primarily internally determined except in very tight labor markets, without regard to organization
type.

2. Supply and Demand of Labor

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The labor 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 labor-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 labor
supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labor
expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low.
“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.”
3. 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.

4. 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.
In recognition of the influence of the cost of living, “escalator clauses” are written into labor 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.

5. The Living Wage

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

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his family at a reasonable level of existence However, employers do not generally favor 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.

6. Productivity
It is a criterion, and is measured in terms of output per man hour. It is not due to labor efforts alone.
Technological improvements, better organization and management, the development of better methods of
production by labor and management, greater ingenuity and skill by labor 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.

7. 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. Unions affect wage structure, but the differential effects of craft and
industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to
determine craft rates as well as the design of craft jobs for all organizations employing members of the
craft.

8. 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.

9. 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 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

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appear to be factors in management’s wage-policy decisions.

10. 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, the management in establishing wage rates should not overlook these things. 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.

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

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