Wage policy

Wages Policy Meaning, Objective of Wage Policy, Wages Determination,Theories of Wages, Factor Affecting Wages Determination, Component of Wages Rate.

1. Employee Compensation Wage Policy Prepared by Ms. Shery Asthana Asst. Prof. (Greater Noida Institute of Management)

2. Wage Policy – Meaning 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. Wage Policy – 3 Main Concepts: Minimum Wages, Fair Wages and Living Wages Minimum Wages:- It is commonly accepted that workers should be give at least 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. Fair Wage: -  Fair wages is an adjustable step that moves up according to the capacity of the industry to pay, and the prevailing rates of wages in the area of industry. Living Wage:- Justice Higgins developed his concept of living wage as one which should not only provide for food, clothing and shelter but for some frugal comfort of life, good education to children, some amusement and provision for sickness and old-age including some measure of social security.

3. Wage Policy – Objectives of Sound Wage Policy A sound wage policy promotes industrial relations, protects against price rise, and serves many more purposes: 1. Establish good labour relations 2. Decide on appropriate wages 3. Decide wages based on the individual’s capability 4. Develop a predetermined scheme for payment of wages 5. Establish linkages of wage payment with performance 6. Maintain parity of wages with other organizations 7. Provide for incentive payment 8. Guarantee minimum wages 9. Provide for neutralization of price rise 10. Develop wage structures that can attract talent.

4. Wage determination . When an industrial tribunal established an appropriate  wage  level for workers, rather than letting workers and their employer work it out themselves through enterprise bargaining then it is called  wage  fixation and this process is called  wage determination . Some of the most important theories of wages are as follows: 1. Wages Fund Theory:- This theory was developed by Adam Smith (1723-1790). His theory was based on the basic assumption that workers are paid wages out of a pre-determined fund of wealth. This fund, he called, wages fund created as a result of savings. According to Adam Smith, the demand for labour and rate of wages depend on the size of the wages fund. Accordingly, if the wages fund is large, wages would be high and vice versa. 2. Subsistence Theory:- This theory was propounded by David Recardo (1772-1823). According to this theory, “The labourers are paid to enable them to subsist and perpetuate the race without increase or diminution”. This payment is also called as ‘subsistence wages’. The basic assumption of this theory is that if workers are paid wages more than subsistence level, workers’ number will increase and, as a result wages will come down to the subsistence level.

5. On the contrary, if workers are paid less than subsis­tence wages, the number of workers will decrease as a result of starvation death; malnutrition, disease etc. and many would not marry. Then, wage rates would again go up to subsistence level. Since wage rate tends to be at, subsistence level at all cases, that is why this theory is also known as ‘Iron Law of Wages’. The subsistence wages refers to minimum wages. 3. The Surplus Value Theory of Wages:- This theory was developed by Karl Marx (1849-1883). This theory is based on the basic assump­tion that like other article, labour is also an article which could be purchased on payment of its price i e wages. This payment, according to Karl Marx, is at subsistence level which is less than in propor­tion to time labour takes to produce items. The surplus, according to him, goes to the owner. Karl Marx is well known for his advocation in the favour of labour. 4. Residual Claimant Theory:- This theory owes its development to Francis A. Walker (1840-1897). According to Walker, there are four factors of production or business activity, viz., land, labour, capital, and entrepreneurship. He views that once all other three factors are rewarded what remains left is paid as wages to workers. Thus, according to this theory, worker is the residual claimant.

6. 5. Marginal Productivity Theory: This theory was propounded by Phillips Henry Wick-steed (England) and John Bates Clark of U.S.A. According to this theory, wages is determined based on the production contributed by the last worker, i.e. marginal worker. His/her production is called ‘marginal production’. 6. The Bargaining Theory of Wages: John Davidson was the founder of this theory. According to this theory, the fixation of wages depends on the bargaining power of workers/trade unions and of employers. If workers are stronger in bargaining process, then wages tends to be high. In case, employer plays a stronger role, then wages tends to be low. 7. Behavioural Theories of Wages: Based on research studies and action programmes conducted, some behavioural scientists have also developed theories of wages. Their theories are based on elements like employee’s acceptance to a wage level, the prevalent internal wage structure, employee’s consideration on money or’ wages and salaries as motivators.

7. Factors influence the Determination of Wage rate 1. Ability to Pay:- The ability of an industry to pay will influence wage rate to be paid, if the concern is running into losses, then it may not be able to pay higher wage rates. A profitable enterprise may pay more to attract good workers. During the period of prosperity, workers are paid higher wages because management wants to share the profits with labour. 2. Demand and Supply: The labour market conditions or demand and supply forces to operate at the national and local levels and determine the wage rates. When the demand for a particular type of skilled labour is more and supply is less than the wages will be more. One the other hand, if supply is more demand on the other hand, is less then persons will be available at lower wage rates also. 3. Prevailing Market Rates: No enterprise can ignore prevailing wage rates. The wage rates paid in the industry or other concerns at the same place will form a base for fixing wage rates. If a unit or concern pays low rates then workers leave their jobs whenever they get a job somewhere else. It will not be possible to retain good workers for long periods.

8. 4. Cost of Living: In many industries wages are linked to enterprise cost of living which ensures a fair wages to workers. The wage rates are directly influenced by cost of living of a place. The workers will accept a wage which may ensure them a minimum standard of living. Wages will also be adjusted according to price index number. The increase in price index will erode the purchasing power of workers and they will demand higher wages. When the prices are stable, then frequent wage increases may not be required 5. Bargaining of Trade Unions: The wage rates are also influenced by the bargaining power of trade unions. Stronger the trade union, higher will be the wage rates. The strength of a trade union is judged by its membership, financial position and type of leadership. 6. Productivity: Productivity is the contribution of the workers in order to increase output. It also measures the contribution of other factors of production like machines, materials, and management .Wage increase is sometimes associated with increase in productivity. Workers may also be offered additional bonus, etc., if productivity increases beyond a certain level. It is common practice to issue productivity bonus in industrial units.

9. 7. Government Regulations: To improve the working conditions of workers, government may pass a legislation for fixing minimum wages of workers. This may ensure them, a minimum level of living. In under developed countries bargaining power of labour is weak and employers try to exploit workers by paying them low wages. In India, Minimum Wages Act, 1948 was passed empower government to fix minimum wages of workers. Similarly, many other important legislation passed by government help to improve the wage structure .

10. Wages and Salary Administration with Major Component The wage or salary components of Indian employees depend on various factors such as paying capacity of employers, conditions of labour market and legal provisions. The major components of an employee’s wage are: 1. Basic Pay 2. Dearness Allowance (D.A.) 3. Incentive 4. Fringe benefits 5. Annual statutory bonus 1. Basic Pay: It is a wage paid over a period of time to the employees. Period of time could be monthly or fortnightly. The principles of various methods of regulation of pay serve as guidelines in determining basic pay. Besides these, the nature of job, experience needed and specific skill required to perform a particular job are also considered during the course of fixing of basic pay.

11. 2. Dearness Allowance (D.A.): D.A. is the second important component of wage packet paid to the employee which compensates the rise in prices of essential commodities. In other words, D.A. is paid to neutralize the effects of inflation. Now a days, the payment of D.A. has become an integral and essential part of the organizational wage system in India. Generally three methods are applicable for the computation of D.A. in India: (i) All India Consumer Price Index (AICPI) – The Labour Bureau Shimla, compute the AICPI from time to time considering the base 1960 = 100 points. (ii) Time Factor – D.A. is linked to the rise in the AICPI is a related period instead of linking it to fortnightly or monthly fluctuations in index. (iii) Point Factors – D.A. rises in line with a rise in the number of index points above a specific level. 3. Incentive:- Incentive plans are applicable to all the employees of the organisation but payable to only efficient and performer employees. Employees of higher skill and energy can earn extra wages by extra effort. Incentives are designed to stimulate human effort over and above the current efforts. It gives the employees a feeling of security, fair dealing and also ensures higher productivity and high wages. Both employer and employees share the benefit of time saved. It is the best example of win-win situation.

12. 4. Fringe Benefits: T his refers to the extra amount paid to employees in addition to the normal wage or salary. They are applicable to all employees of the organisation and are not directly related to the performance of employees. Now a days, these fringe benefits become important part of a compensation package of employees. These are house rent allowance, city compensatory allowance, medical allowance, home travel concession, medical and educational facilities, transport benefit, paid holidays, subsidies loan facilities such as – house construction and vehicle loan, provident funds, gratuity and pension funds and other benefits. 5. Bonus:- Bonus is a very important earning component of employees, besides wage or salary. The dictionary meaning of bonus is an addition payment amount of the employees beyond the normal wage or salary. According to Corpus Juris Se cundum, “Bonus is an allowance in addition to what is usual, current or stipulated; a sum given or paid beyond what is legally required to be paid to the recipient; something given in addition to what is ordinarily received by or strictly due to the recipient.” It means bonus carries an idea of something uncertain and indefinite in addition to the normal wage or salary, paid to the employees after the close of financial year; under. The payment of bonus act, 1965, it has secured the legal right of the employee.