The term ‘wage’ can be defined as the payment made to workers for placing their skill and energy at the disposal of an employer, the method of use of that skill and energy being at the employer’s discretion and the amount of payment being in accordance with the terms stipulated in a contract of employment of service. Wage forms the basis for the calculation of the compensation of an employee.
Wage means economic compensation paid by employers to employees for the services rendered by the latter. The committee on Fair Wages (1948) and the 15th Session of Indian Labour conference (1957) propounded certain wage concepts such as Minimum Wage, Fair Wage, Living Wage and Need-based Minimum Wage.
Learn about:- 1. Definitions of Wages 2. Concepts of Wages 3. Components 4. Factors Influencing 5. Components of Industrial Wage Structure in India 6. Factors that Determine the Level of Wages to be Paid to the Employees 7. Methods of Wage Fixation in India 8. Systems 9. Theories.
Wages: Definitions, Concepts, Factors Influencing, Structure, Components, Wage Fixation Methods, Systems of Wage Payment and Theories
Wages – Definitions and Meaning
Labour is one of the most important factors of production. Labour expects fair wages for the services it renders to the process of production. The term wages refer to payments for services, whether manual or mental, based on hours of work or quantity of output. Normally, the term wages is used to refer to payment made for services given by manual labour or non-supervisory and non- clerical staff. It refers to the hourly or daily rate paid to production and maintenance employees, i.e., blue collar employees.
ADVERTISEMENTS:
According to Berham, “Wages mean the amount paid to the labour for his services to the employer”.
According to P.M. Stohank, “Wages is the labour’s remuneration which creates utility”.
The term salary is defined as the remuneration paid to clerical and managerial personnel employed on a monthly or annual basis. Nowadays, all categories of employees are treated as human resources and the terms wages/salary are used interchangeably. Wages/salary is the direct remuneration paid to an employee compensating his services to an organisation.
Section 2 (vi) of the Payment of Wages Act defines wages as all remuneration capable of being expressed in terms of money which would, if the contract of employment express or implied, were fulfilled, be payable whether conditionally upon the regular attendance, good work or other behaviour of the person employed or otherwise to a person employed in respect of his employment or of work done in such employment and includes any bonus, or other additional remuneration of the nature aforesaid, which would be so on termination of his employment, but does not include-
ADVERTISEMENTS:
a) Value of house accommodation, supply of light, water, medical attendance or other amenity;
b) Any contribution to pension fund or provident fund;
c) Any travelling allowance or the value of any travelling concession;
d) Any sum paid to defray special expenses entailed on him by nature of employment; and
ADVERTISEMENTS:
e) Any gratuity payable on discharge.
The above definition can be split into three portions. Firstly, wage means all remunerations, which would if the terms of the contract of employment express or implied, were fulfilled, be payable to a person employed in respect of his employment. Secondly, wage includes any bonus or other additional remuneration. Thirdly, the term ‘wage’ includes any sum payable to a person by reason of termination of his employment.
The term ‘wage’ can be defined as the payment made to workers for placing their skill and energy at the disposal of an employer, the method of use of that skill and energy being at the employer’s discretion and the amount of payment being in accordance with the terms stipulated in a contract of employment of service.
Wages – Concepts: Minimum Wage, Living Wage, Fair Wage, Direct and Indirect Compensation and Time Rate and Piece Rate System
Wage means economic compensation paid by employers to employees for the services rendered by the latter. The committee on Fair Wages (1948) and the 15th Session of Indian Labour conference (1957) propounded certain wage concepts such as Minimum Wage, Fair Wage, Living Wage and Need-based Minimum Wage.
ADVERTISEMENTS:
Type # 1. Minimum Wage:
A minimum wage is a compensation to be paid by the employer to his employee irrespective of his ability to pay. The minimum wage must provide not only for the bare necessities of life but also for preservation of efficiency of the worker namely education health, other requirements and amenities.
Type # 2. Living Wage:
A living wage is a compensation which enables the earner to provide himself and his family with not only the barest necessities of life like food, shelter, and clothing but also a measure of frugal comfort including education for children, protection against ill health, demands of social needs, insurance against misfortunes and old age needs. This wage ensures standard of living.
ADVERTISEMENTS:
Type # 3. Fair Wage:
It represents the average of minimum wage and living wage. It is above the minimum wage and below the living wage. The wage is linked with the capacity of the industry to pay. It depends on factors like labour productivity, wage prevailing in the same and neighbouring localities, the level of national income and its distribution and the place of industry in the economy of the country.
Type # 4. Direct and Indirect Compensation:
Direct compensation refers to monetary benefits offered to the employees for the services rendered by them to the organisation. The monetary benefits include basic salary, HRA, conveyance, leave travel allowance, medical reimbursements, bonus, gratuity, PF, etc. Indirect compensation includes non-monetary benefits such as leave, insurance, holiday homes, hospitalisation, etc.
ADVERTISEMENTS:
Type # 5. Time Rate and Piece Rate System:
In time rate system, wages are paid based on the time spent by the employees in the factory. The production by workers is not considered. In piece rate system, the payment is related to the output given by the worker. The wage rate is fixed for piece of work or for certain quantity of production.
Wages – Components of a Sound Wage System
The components of a sound wage system are:
1. Fair standard – It must be based on a fair standard, after a careful time and motion study.
ADVERTISEMENTS:
2. Fairness to employer and employee – Both the employer and the employee should feel that the system is fair.
3. Unambiguity – The wage plan should be clear and unambiguous. Every employee should understand the mechanics of wage calculation.
4. Equity – Employees should experience individual, interpersonal and organizational equity. In other words, pay should be so devised that employees experience absolute equity i.e., o/i ratios is equal.
5. Annual increment – Annual increment should be part of his pay structure in recognition of his service.
6. Incentives – Pay should include an incentive component to reward the extra effort put in by high performers.
7. Cost of living – Dearness allowance should be a part of pay which compensates the employee against continuous hike in cost of living.
ADVERTISEMENTS:
8. Prompt payment – Pay should be released on the stipulated date so that employee’s plans are not upset.
9. Economic stability – Any wage plan should guarantee stable income for the employee. Piece based pay should guarantee element of a minimum but a fair fixed pay.
Wages – 10 Important Factors Influencing Wages
1. Wage policy of the company – The wage policy has a decisive influence on the structure and wage level. Example – Policy decisions on salary fixation based on length of service or performance or both, to pay below average or above average rates, to pay more to reduce employee turnover etc.
2. Prevailing wages in comparable industries – Wage rates are related to region and industry base. The organisation has to pay wages at least equal to prevailing rates for similar jobs in similar organisations.
3. Financial position of the company – Increase in wages are paid by companies who can afford to pay. Companies having good sales and profits tend to pay higher wages. Total cost of labour has to be considered in determining the ability to pay. During period of prosperity, companies pay higher wages and wages are reduced during period of depression.
4. Demand and supply of labour – The demand and supply of certain skills determine wage rates. Examples – High demand for IT professionals, financial analysts, scientists in pharma industry, etc., leads to higher wages. Similarly, oversupply of certain category of employees has resulted in steep fall in wages. Oversupply of management graduates and fall in wages.
5. Cost of living – When cost of living increases, the workers and union demand higher wages to offset the erosion of real wages. Many companies consider inflation rate, while working out salary increments.
6. Capacity of bargaining – A strong trade union is able to bargain and obtain higher wages for its members.
7. Nature of job – Jobs that require high levels of knowledge and skills, require high pay.
8. Government policy and intervention influence wage determination. Example – Payment of Wages Act (1936) and Minimum Wages Act (1948) assure proper payment of wages and avoiding all malpractices like non-payment, delayed payment and underpayment.
9. Personal traits of the employee such as education, experience, and training are considered while fixing wages.
10. Productivity – Here, worker’s wages are linked to their productivity level. Wages are paid based on job performance.
11. Psychological and social factors – Psychologically, a person considers level of wages as a measure of success in life. Sociologically, people feel that equal work should carry equal wages and there should not be any discrimination on the basis of religion, caste, gender etc.
12. The living wage – The wages should be adequate to enable an employee to maintain himself and family at a reasonable level of existence.
Wages – Components of Industrial Wage Structure in India
The industrial wage structure in India consists of various components such as a basic wage, a dearness allowance, an annual statutory bonus, and a host of fringe benefits and incentives.
1. Basic Wage:
The term ‘basic wage’ is ordinarily understood to mean that part of the price of labour which the employer must pay to all workmen belonging to all categories. The phrase is used ordinarily in contradistinction to allowances, the quantum of which may vary in different contingencies. The revisions in the basic wage has become progressively less frequent and insignificant because of the ever growing dearness allowance component.
2. Dearness Allowance:
The fixation of wage structure also includes within its compass the fixation of rates of dearness allowance. It is an additional payment made by the employer to his employees to compensate them to a certain extent for the rise in the cost of living. In the context of a changing pattern of prices and consumption, real wage of the workmen are likely to fluctuate greatly.
Ultimately, it is the goods and services that a worker buys with the help of wages that are important consideration for him. Thus, it serves as a device to protect, to a greater or lesser extent, the real income of wage-earners and salaried employees from the effects of a rise in prices.
The system of payment of dearness allowance varies from centre to centre, industry to industry, and even within the same centre and industry. In most industries it is linked to the consumer price index number. These different systems of dearness allowance have come into existence over a period of time during the last four decades as a result of ad-hoc decision taken either in the process of collective bargaining or awards given by the wage fixing authorities.
Some of the dearness allowance payment systems are as follows:
i. Flat Rate – Under this method, a fixed amount, says Rs. 200 per month, is paid to all categories of workers, irrespective of their wage scales. The main advantage of this system is that it is simple and it gives greater relief to the low-paid workers.
ii. Graduated Scale – It is a method of paying dearness allowance on a graduated scale according to slabs. Under this, workers are divided into groups according to different wage slabs. They are paid fixed amounts of dearness allowance on a graduated scale. After a limit, there will not be any increase in the amount of dearness allowance at all, however high the wage rate may be. This method of paying dearness allowance is popular because it is convenient and it is also considered to be equitable.
iii. Cost of Living and Consumer Price Index Number – The Consumer Price Index Number is a system of linking dearness allowance with the cost of living index. In this method, dearness allowance automatically increases and decreases with a rise or fall in the value of money.
The adjudicators have generally favoured the payment of uniform dearness allowance to factory operatives and clerical staff when they get the same pay. The method and extent to which neutralisation in the cost of living should be given have been under constant examination by the industrial tribunals and other wage fixing authorities.
The law is thus clear that dearness allowance is intended to neutralise a portion of the increase in the cost of living. Though 100 percent neutralisation is not advisable as it will lead to inflation, full neutralisation may be permissible only in the case of the lowest class of employees. The management is entitled to complain if the neutralisation is more than 100 percent.
The different systems of dearness allowance have created disparities in the dearness allowance payment. The contributing factors are its automatic linkage with the consumer price indices; payment on point-to-point basis; cent-per-cent neutralisation and sometimes even more; absence of any ceiling, wide diversities in the rates prescribed by industrial tribunals or settled in collective agreements.
In the process, the fundamental and sound principles governing wage fixation, viz., productivity of labour; prevailing rates of wages in the same or similar occupations in the neighbouring localities; level of national income and its distribution; place of industry in the economy of the country; and capacity of the industry to pay have been completely ignored.
3. Overtime Payment:
Working overtime in industry is possibly as old as the industrial revolution. In the early days, however, due to the then existing social order, perhaps the concept of overtime did not exist as there were no defined hours of work. With the passage of time, the government came out with legislation to restrict excessive working by the employees beyond certain limited hours.
While the need for such legislation was welcome in situations where labour was exploited, another situation started shaping up in which employees started willfully organising work in such a fashion wherein the managements are compelled to give overtime as a means of achieving production. During the post-war period, overtime has become quite a regular feature in many industries. The employer began to supplement production and the employee his wage with overtime working.
The necessity of the management’s seeking overtime working from employees becomes inevitable mainly to overcome –
(a) Inappropriate allocation of manpower and improper scheduling;
(b) Absenteeism;
(c) Unforeseen situations created due to genuine difficulties like breakdown of machines;
(d) Where the work is of a fluctuating nature and it is economical and more convenient to work with existing staff longer hours during peak periods rather than employing extra-staff on a long-term basis;
(e) Rush jobs during the financial year end; and
(f) Situation willfully planned where overtime work is forced as the only answer to obtain production.
In many companies, overtime is necessary to meet urgent delivery dates, sudden upswings in production schedules, or to give management a degree of flexibility in matching labour capacity to production demands.
The payment of overtime allowance to the factory and workshop employees is guaranteed by law. All employees who are deemed to be workers under the Factories Act or under the Minimum Wages Act are entitled to overtime allowance at twice the ordinary rate of their wages for the work done in excess of 9 hours on any day or for more than 48 hours in any week.
The ordinary rate of wages have been defined as the basic wage plus such allowances, including the cash equivalent of the advantage accruing through the concessional sale to workers of foodgrains and other articles as the worker is for the time being entitled to, but not including a bonus. Compensatory and house rent allowance as well as the dearness allowance are to be taken into account in computing compensation for overtime work.
4. Annual Bonus:
The Encyclopaedia Britannica has defined bonus as an award in cash or its equivalent by an employer to an employee, for accomplishment being considered desirable and perhaps implied, though not required by the contract of employment. It is usually intended as a stimulus but may also express a desire on the part of the employer to share with the employees the fruits of their joint enterprise.
Bonus is a unique component of India’s compensation system. Bonus is regarded as an incentive for regular attendance; as an encouragement for good work or payment for some special or additional service by workers; as an ex-gratia payment depending upon entirely on the goodwill of the employers which cannot be claimed as of right; as a share in the profits which workers may claim as of legal right and also as a deferred wage. Bonus as a deferred wage implies that it is to be paid, irrespective of profit or loss of the concern.
The Payment of Bonus Act does not deal with customary bonus and is confined to profit-based or productivity-based bonus. The customary bonus does not require calculation of profits or availability of surplus because it is a payment founded on long usage.
The bonus payment under the Act has varied from one industry to another, and within an industry from one unit to another. There has also been a variation in bonus payment from year to year for the bonus-paying organisation.
The bonus disputes between management and unions mainly related to the computation of depreciation, development rebate, direct taxes, interest on capital, and accuracy of data content in the balance-sheet and the profit and loss account. Statutory bonus payments have led to the most frequent source of industrial unrest in our country.
5. General Allowances:
The employers pay various sorts of allowances to their workmen depending upon the nature of their duties and other incidents of the employment. Various allowances are also given to the employees under different settlements.
These are special allowance, house rent allowance, leave travel assistance, out station allowance, travelling allowance, washing allowance, conveyance allowance, lunch allowance/dinner allowance, allowance for working on weekly-off unpaid paid holidays, acting allowance, cash handling allowance, shift allowance, self- development allowance, transport allowance, underground allowance, education allowance, social security allowance, factory allowance, overtime allowance, and so on. Such allowances are innumerable. It is, therefore, not possible to deal with them exhaustively.
However, some such allowances are being discussed as illustrative case under the following heads:
i. Tiffin Allowance – Certain commercial and industrial concerns, with a view to ensure efficiency and economise time, provide free tiffin facilities to their employees. In some cases, they have become customary and an implied condition of service.
ii. Overtime Allowance – Section 59 of the Factories Act, 1948 prescribes that a worker who works overtime in a factory shall be entitled to twice his ordinary rate of wages in respect of the overtime work. Some States, in their respective Shops and Establishments Acts, have prescribed rates of overtime work and overtime allowance.
iii. Compensatory Allowance – Compensatory allowance indicates that it is a compensation for something. For instance, the allowance paid to the workmen for the work done on holidays has been treated as compensatory allowance.
iv. Acting Allowance – Acting allowance means the allowance paid to an employee when he is acting in a higher post in the event of an employee holding the higher post proceeding on leave or otherwise being away from his duties.
v. Special Allowance – A special allowance may be granted to the workmen in view of certain special circumstances peculiar to a situation or where they have to run some special risk. For instance, a special allowance in banks is paid in terms of Sastri and Desai awards when an employee discharges duties of a supervisory nature or is accorded the status of a person competent to discharge functions of a supervisory character.
vi. House Rent Allowance – Under the existing labour laws, there is no provision for payment of any house rent allowance. The problem of getting house accommodation has already become and is becoming very acute and also costly due to insufficient number of houses and high rate of house rent.
In order to give some relief to the industrial workmen on this account, some of the States like West Bengal and Maharashtra have already made laws providing for payment of house- rent allowance by the employer to industrial workmen in their States.
6. Tax Planning:
Tax planning is a conscious and well thought out process of arranging one’s financial and economic affairs in a manner that enables him to take advantage of all deductions, exemptions, allowances and rebates available under Income Tax law s with a view to reducing his tax liability to the minimum.
In relation to salary and wages, tax planning is important from the point of view of both the employer and the employee. The basic purpose of tax planning exercise is to minimise the incidence of tax to both the employer and the employee.
The compensation package generally consists of the following components:
(a) Salary:
Salary, according to its ordinary meaning is a fixed payment made periodically to a person as compensation for regular work or remuneration for services rendered. The definition of salary includes wages and conceptually there is no difference between the two. However, the term salary is used in the context of services of non-manual type of work, and services of a higher class. On the other hand, wages are confined to earnings of labourers and artisans.
(b) Allowances:
All payments made by the employer by way of allowances to the employees for the personal benefit of the latter will form part of the salary and hence will be chargeable to income tax.
If, however, such payments are made to meet expenses that are wholly, necessarily and exclusively incurred in the performance of duties of an office, the same will not form a part of the salary and will, therefore, be exempt from income tax. Such allowances will also be permissible deductions as business expenses for calculating the taxable income of the employer.
(c) Perquisites:
The third component of employee’s remuneration is perquisite. A perquisite is defined as a gain or profit incidentally made from employment in addition to regular salary or wages, especially of a kind expected or promised. It signifies such benefits in addition to the amount that may be legally due by way of contract for rendering service.
Perquisites are normally in the nature of voluntary payments attached to an office or employment. The main characteristic is that they are payable only during the continuance of employment and are directly dependent on the service. When employment comes to an end, perquisites cease to be payable. The normal meaning of the word denotes something that benefits an employee by going directly to his pocket.
It therefore does not apply to reimbursement of expenses actually incurred in interest of official work. In order to come within the meaning of perquisites, it ought to be a benefit, fee or profit attached to an office or position or an addition to salary or wages. What is important is the nature of benefits given and the name given to a particular payment is not conclusive.
The provisions which have implications to the employer in respect of various components of compensation package should be kept in view while deciding on compensation package. Income tax makes certain provisions for deductions in respect of employee remuneration. Apart from complying tax deduction provisions, employer has also to ensure that tax is deducted at source.
In short, proper tax planning is a basic duty of every person, which should be carried out religiously.
Basically, there are three steps in tax planning exercise:
1. Calculation of taxable income from all sources such as salary / pension, interest etc.
2. Calculation of tax payable on gross taxable income for whole financial year (i.e., from April 1 to March 31).
3. After calculation of the amount of tax liability, two options are open- (a) payment of tax (no tax planning required), and (b) minimisation of tax through prudent tax planning
Most people prefer option ‘b’, because of several tax saving schemes and investments which reduces tax liability to “zero” or to “minimum” possible
Wages – Factors that Determine the Level of Wages to be Paid to the Employees
The following factors determine the level of wages to be paid to the employees of different categories:
a. The Employer and the Policy of the Company:
In the private sector, the employer has been the sole decision maker in fixing wages to be paid to different categories of staff. Even, the minimum wage provisions are not followed for managers in many of the new private organizations.
The position is the same in the unorganized sector also. In progressive organizations like the House of Tatas and others, the payment of wages is determination on the basis of scientifically assessed methods like work measurement, job evaluation, etc. All good employers like Tisco, SAIL, NTPC, Hindustan Lever for instance pay more than others in the country as a matter of policy, and, of course, it depends upon their capacity to pay; progressive employers believe in paying more for attracting the best talents, in the competitive market.
b. Wage Fixation through Collective Bargaining:
The history of wage fixation in India is of recent origin. Under the Industrial Disputes Act, 1947, various tribunals have passed awards regulating wages in a number of important industries. Immediately after the Independence, industrial relations climate in the country deteriorated rapidly with rising number of disputes and loss of production. The government was worried to achieve industrial peace that was a prerequisite for industrial and economic growth.
So in 1947 the Union Government convened a tripartite conference with representatives of employers, laborers and the government. The government in its Declaration of Industrial Policy Resolution in 1948 included a spirit of truce. The Statement of Truce Resolution included two statements related to wages- (a) statutory fixation of minimum wages in sweated industries. In this context, the government passed the Minimum Wages Act, 1948, laying norms and procedures for determining the wages in 40 scheduled employments, e.g. china clay mines, fire clay, asbestos, iron ore, agriculture, etc. (b) promotion of fair wages agreement in more organized industries.
In this context the Government of India appointed a tripartite committee on fair wages for determining the principles on which fair wages should be fixed and also to suggest lines on which these principles should be applied.
Collective bargaining is one of the most acceptable and exclusive methods of determining wages in many organized set-ups, especially in engineering, heavy industries, steel-making, auto manufacturing organizations. Besides, industrial wage boards and government appointed commissions of pay and adjudication awards have also been the methods of wage fixation.
Collective bargaining process can take place with:
i. Employer’s representatives and workers’ representatives at the enterprise and plant level,
ii. Group of employers bargaining as a unit,
iii. Unions and groups of unions, and
iv. An association of some or all of employers in an industry in an area or region or a nation.
Collective bargaining helps workers to achieve a voice in fixing wages and hours of work, as well as the other conditions of work. It is a direct method of negotiation over the key issues of wages, hours of work and conditions of employment. It is preferred over the process of adjudication.
The central issues in all collective bargains are wages and wage-related matters, besides recognition of mutual rights, responsibilities by the management and the workers, system of wage and payment of dearness allowance, bonus, incentive wage and fringe benefits. Some of the wage agreements arrived through collective bargaining also relate to personnel issues, e.g., recruitment, promotion and transfers, etc.
Once an agreement is achieved it reflects the interplay of many forces like:
i. Unionism and its bargaining power
ii. Methods of wage payment
iii. Various regional and local conditions
iv. Size of establishment
v. Technical efficiencies
vi. General business conditions
vii. Capacity to pay
viii. Company’s wage policy
ix. Union wage policy.
In all bargaining processes trade union representatives focus on shortcomings in the following issues:
i. General level of wage rates
ii. Structure of wage rates
iii. Bonus
iv. Incentives
v. Fringe benefits
vi. Administration of wages.
c. Wage Boards:
The Government of India had constituted industry wise wage boards in 1957-66 and after. But wage boards are not popular due to its being a time-consuming process. The parties involved also contest wage boards awards. But, wage boards were quite effective in the 1920s, during the British Regime for ‘sweated trades/industries’, like chain, bidi-making, where workers were not able to bargain effectively with the employers.
d. Pay Commissions:
The Government of India has constituted five pay commissions for regulating the salary of civil servants including those in post and telegraph, railways, defense and civil aviation. In case of a dispute arising out of the award of the pay commission for implementation, the subject is with the Commission of Inquiry, Adjudication by Tribunals and the Joint Consultative machinery.
e. Wage Policy:
All progressive employers have their own policy on employees’ compensation. They pay higher than their competitors to attract the best talents. They also like to be known as the best pay masters in the region/country. Such organizations create what is termed as ‘wage islands’, which is not healthy for the community. MNCs pay on an average, higher than the Indian firms.
This causes disparity in wages and if the wages are abnormally higher than those of the others, then it may cause distortion in the economy. A good example, we have in the wage revision of the state- owned PSU, namely BHEL, in 1978-79, when BHEL outfits operating in Bangalore were the highest pay-masters to the workers.
f. Ability to Pay:
This is the most significant factor. The government also leaves the issue open for each organization in PSUs to pay as per its capacity. But within the ceiling and the norms issued by the BPE.
g. Productivity Bargain:
Productivity bargain gained momentum in collective bargain. The keyword in the emphasis, output per man per hour rather than to productivity. Productivity bargain provides a new dimension to management, to shape its industrial relations and to aim for better managerial control, for improving organizational effectiveness as also restructuring.
The real outcome of productivity bargain has been in an effective productivity agreement. Productivity agreement, being a systematic attempt at securing greater efficiency and economy in utilization of resources, both physical and human, it is a package deal.
The features of such agreements are as follows:
i. The agreements are based on the concept of give and take, self-interest of both sides protected.
ii. The agreements lay down specific and direct contribution of labor towards improving productivity.
iii. Agreements are based on cost-benefit analysis, unlike the classical wage agreements.
iv. The agreement constitutes the package of practices, methods to be followed in exchange for rewards. Thus, it is a rationalized system of wage and incentives.
Productivity bargains are no doubt, short-term methods of implementation of wage payments.
In the long term, there may be problems in case of a change in the climate, and with regard to sharing the gains of productivity. So, it is liable to result into industrial unrest.
What is termed as ‘personnel payment’ is the most significant factor in the overall profitability of an organization. Expenditure under ‘personnel payment’ as a percentage of the total cost is higher in labor-intensive organizations as compared to capital intensive outfits or in assembly-type organizations as compared to process outfits.
Accordingly, in mining or heavy industries organizations like BCCL, Coal India or BHEL, the personnel payments to the total cost may be around 60 per cent as compared to the petro-chemical fertilizers where it is estimated to be 2-3 per cent only. In some manufacturing units this expenditure is limited to 15-16 per cent.
As such, the capital intensive units pay higher than labour intensive organizations and the impact of higher pay on output cost is not as acute as in the case of labour intensive organizations.
In this context, productivity bargain has been an important factor in wage negotiation process in collective bargaining in India ever since, the early 1960s, although the workers’ representatives have been opposing this factor. But, settlement of wage based on a given rate of productivity gain is the ideal method to hedge against the rising labour cost. Such bargaining agreements have been practiced in Premier Automobiles, ITC as also in Tisco and BHEL/other PSUs.
The agreements define that attainment of a given rate of productivity will lead to the given rate of wages and more jobs, over and above the period of the tenure of the agreement. Further, high profit is another factor which may result in a quantum jump in wages/benefits to the staff/across the board.
Wages – Methods of Wage Fixation Adopted in India: Wage Board, Job Evaluation and Wage Legislation
In India, several methods of wage fixation are used. These methods include wage boards, job evaluation, collective bargaining and legislation.
Method # a. Wage Boards:
The government of India, acting upon the recommendations of the First- Five-Year Plan, appointed wage boards for fixing wages. The first wage board was set up in 1957 for the cotton textile industry. The wage boards are tripartite in nature, with independent members and a chairman. It was actually the Committee on Fair Wages that recommended the setting up of wage boards for fixing wages.
Wage boards were set up because workers were not satisfied with the method of compulsory adjudication for wage determination not only because it was a lengthy procedure but also because they had no role to play in determining wages.
The First and Second Five-Year Plans, drawing support from the FWC’s recommendation, encouraged the setting up of wage boards to deal with all aspects of the question of wages.
The NCL (1969) had constituted a Committee to study the functioning of the system of wage boards, which suggested that the wage boards were expected to create a climate for harmonious industrial relations; and to safeguard the interests of the community and to represent consumers’ interest; and derive standardized wage structure for the concerned industry.
A wage board is tripartite in character and is non-statutory body consisting of representatives of employers and workers and is headed by an independent chairman. The government appoints the representatives of employers and workers in equal number after consulting the concerned organization.
The government nominates the chairman as well as an economist and a consumers’ representative both being independent also. The consumers’ representative is a Member of Parliament, who is expected to safeguard consumers’ interests while the chairman is usually a judge either serving or retired. The total number of members of wage boards constituted so far varied from 7 to 9.
A wage board issues a detailed questionnaire to collect information from the concerned parties, makes an assessment of the views of the parties, and makes its recommendations regarding wage structure. The wage structure recommended by a wage board is in operation for five years. The management may not always implement the wage structure recommended.
Method # b. Job Evaluation:
Job evaluation is another method of wage fixation. Job analysis explains the duties of a job, authority relationships, skills required, conditions of work, and additional relevant information. Job evaluation, on the other hand, uses the information in job analysis to evaluate each job-valuing its components and ascertaining relative job worth.
It involves a formal and systematic comparison of jobs in order to determine the worth of one job relative to another, so that a wage or salary hierarchy results. So this process evaluates the jobs in an organization.
Job evaluation aims to assess the relative worth of a given collection of duties and responsibilities to the organization. It helps the management to maintain high levels of employee productivity and employee satisfaction. In the absence of proper job evaluation, it is very likely that jobs would not be properly priced.
Consequently, high valued jobs may receive less pay than low-valued jobs. The employees realizing this may become dissatisfied, leave the organization, reduce their efforts or may adopt other modes of behavior detrimental to the organization. Therefore, organizations pay a great deal of attention to the relative worth of jobs so that they are able to determine what a particular job should be paid. A person is paid for what he brings to a job – his education, training and experience.
Job evaluation as a part of compensation system relates to the systematic procedure for creating a wage structure with a view to determining a proper value relationship between several jobs in an enterprise to attract, motivate and maintain effective human resources by adequately compensating them for work performed.
Wendell French defines job evaluation as, “a process of determining the relative worth of the various jobs within the organization, so that differential wages may be paid to jobs of different worth”. Factors such as responsibilities, skill, effort and working conditions determine the relative worth of a job.
Thus, we can define job evaluation as a evaluating – analyzing and describing- positions, grouping them and deciding their relative value by comparing the duties, responsibilities, skill, effort and working conditions of different jobs.
Method # c. Wage Legislation:
In India workers have always needed state protection against exploitation. As such, the state has enacted a number of legislations to ensure regular, expeditious, equitable and minimum payment of wages and bonus to workers.
There are four main acts that comprise the legal framework relating to wage legislation:
(i) The Payment of Wages Act, 1936.
(ii) The Minimum Wages Act, 1948.
(iii) The Equal Remuneration Act, 1976.
(iv) The Payment of Bonus Act, 1965.
(i) The Payment of Wages Act, 1936:
The Payment of Wages act, 1936 aims to protect the wage earners against exploitation by the employer, in the form of arbitrary deduction and imposition of fines. It also stipulates the payment for working overtime and deduction of wage. Section 3 of the Act makes it obligatory for the employers to make payment of wages, fix the wage period and time of payment.
The Act authorizes the employers to make deductions of fines, for absence from duty, damage or loss of goods, money, house accommodation provided by the employer, deductions for such benefits/amenities and services supplied by the employer, for recovery of advances or for adjustment of over payment of wages, income tax at source, subscription to and for repayment of advances from PF, payment to a co-operative society and deduction for written authorization of the employee.
(ii) The Minimum Wages Act, 1948:
The Minimum Wages Act aims to-
1. Provide minimum (statutory) wages for scheduled employments.
2. Eliminate chances of exploitation of labour through payment of very low and sweating wages.
3. Provide for maximum daily working hours, weekly rest and over time.
4. The rates fixed under the Act prevail upon the rates fixed under the award or agreement.
The Act, defines wage as all remuneration which are capable of being expressed in Terms of money and, which would, if the terms of the contract of employment, expressed or implied, are fulfilled, be payable to a person employed in respect of his employment or of work done in such employment.
But it does not include value of accommodation, supply of light, water, medical attendance, any other amenity or any service, excluded by general or special order of the government, any contribution by employer towards provident fund or pension fund or under any scheme of social justice, any travel allowance or value of travel concession, any sum to meet special expenses entailed on him by the nature of the employment or, any gratuity payable on discharge from service.
(iii) The Equal Remuneration Act, 1976:
This act emphasizes on equal payment of wage to men, women wage earners who are engaged in identical employment. The act attracts punishment to employers for violation of the provisions of the Act.
(iv) The Payment of Bonus Act, 1965:
The Payment of Bonus Act, 1965 provides for payment of bonus to workers in all establishments/factories in which 20 or more persons are employed on any day, covered in the related accounting year. The Act lays down a minimum eight and one-third per cent and a maximum of twenty per cent of pay. The minimum bonus is payable, even though a company has not made profits during the related accounting year.
Although, the act aims to ensure payment of bonus every year to a factory worker, it became a constraint for many good employers like Tatas, who earlier paid much more than the prescribed limit. In reality, many of the then British firms operating in West Bengal paid some kind of bonus in the form of puja bonus that was more than the provisions under the act.
Wages – 3 Basic Systems of Wage Payment: Time Rate System, Piece Rate System and Balance or Debt Method (With Advantages and Disadvantages)
There are three basic systems of payment, i.e.:
1. Time Rate System,
2. Piece Rate System and
3. Balance or Debt Method.
1. Time Rate System:
Under this system, wages are paid on the basis of time, the employee puts on the work, without considering output of the worker. Wages are calculated on the basis of attendance.
Advantages of Time Rate System:
(i) Wages can be easily calculated by workers and the management.
(ii) As there is no hurry for completing the work, machine material and instruments are properly handled.
(iii) Provides regular and stable income to the worker.
(iv) Requires less administrative attention as the system is based on trust and understanding.
(v) Quality of production can be maintained as the workers are not under pressure to complete work.
(vi) Time rate system is preferred by trade union.
Disadvantages:
(i) The wage payment is not linked to production and therefore there is no motivation to increase production.
(ii) Workers may go slowly at work, leading to low production.
(iii) There is no distinction between efficient and inefficient workers.
(iv) As there is no record of individual workers’ output, it becomes difficult to determine the relative efficiency of workers for the purpose of promotion.
2. Piece Rate System:
The wages are paid on the basis of output of workers without considering the time taken for performing the work. The workers are paid based on quantity of work and this is known as payment by results.
Advantages of Piece Rate System:
(i) It encourages workers to produce more and efficiency of the workers tend to increase.
(ii) Workers know that they will not be paid for idle time and therefore idle time is minimised.
(iii) The systems is fair to the management and employee since the employee is paid as per quantum of output and the management gets production in proportion to the wages paid.
(iv) The workers handle the equipments, machinery, etc., with care as they know that breakage, will reduce the output and the wages.
(v) The management can distinguish between efficient and inefficient workers based on quantity of output.
(vi) Labour cost per unit of production remains fixed and constant and it is relatively easy to calculate cost of production while submitting tender quotations.
Disadvantages:
(i) The fixation of piece rate is not done on a scientific basis by management. If the employer finds that the workers are getting higher wages, he puts pressure on the workers to accept lower piece rate.
(ii) Deterioration in the quality of output since the focus is on quantity of production.
(iii) Wear and tear of equipment and machinery due to speeding of work.
(iv) Trade union is opposed to piece rate system.
3. Balance or Debt Method:
This is a combination of time and piece rates. The worker is guaranteed an hourly or day rate with an alternative piece rate. If the earnings of a worker calculated at the piece rate exceed the amount which he would have earned if paid on time basis, he gets credit for the balance. If the piece rate earnings are equal to time rate earnings, additional payment is not required.
When piece rate earnings are less than time rate earnings, he is paid on the basis of time rate, but additional amount which he is paid is carried forward as a debt against him to be recovered in future.
The advantage of the system is that an efficient worker has an opportunity to increase his wages and at the same time worker with ordinary ability gets guaranteed time wage.
Wages – Theories Influencing Wage Determination
Wage determination, apart from the statutory aspect, is influenced by different theories. These theories—subsistence theory, wages fund theory, surplus value theory, residual claimant theory, marginal productivity theory, bargaining theory of wages, and behavioural theory of wages are discussed in brief below-
Subsistence theory, propounded by David Ricardo (1772-1832), advocates that workers should be paid, ‘to enable them to subsist and perpetuate the race without increase or diminution’. The theory is based on the assumption that if the workers were paid more than subsistence wage, their numbers would increase, 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. In this situation, wages would increase again due to short supply of labour. In economics, the subsistence theory of wages states that, in the long run, wages will be reduced to the minimum level needed to keep workers alive.
This theory, developed by Adam Smith (1723-90), rests on the assumption that wages are paid out of a predetermined fund of wealth, the surplus savings of the wealthy. This fund could be utilized for employing labourers for work. If the fund was large, wages would be high; if it was small, wages would be reduced to subsistence level. The demand for labour and the level of wages were determined by the size of the fund.
The surplus value theory of wages owes its development to Karl Marx (1818-83). According to this theory, labour was an article of commerce, which could be purchased on the payment of the ‘subsistence price’. The price of any product was determined by the labour and the time needed to produce it. The labourer was not paid in proportion to the time spent on work, but was paid much less, and the surplus was utilized for paying other expenses.
The residual claimant theory, advocated by Francis Walker (1840-1897), assumes that four factors of production/business determine wages. The factors are 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, labours get the residue as residual claimant.
5. Marginal Productivity Theory:
The theory assumes that wages are based upon an entrepreneur’s estimate of the value that will probably be produced by the 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.
6. Bargaining Theory of Wages:
This theory considers that wages are determined by the relative bargaining power of workers, trade unions, and 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. Behavioural Theory of Wages:
This theory was pioneered in succession by several psychologists and sociologists, such as Marsh and Simon, Robert Dubin, and Eliot Jacques.
Based on their various research studies, we can identify the following areas of interest in behavioural theories of wages:
i. The employee’s acceptance of a wage level – Individuals believe in employment stability and prefer to stay on with the same organization, pacing with their salary level. There are, however, several other factors to be considered such as size and prestige of the company, trade unions’ power in the organization, their level of knowledge and competencies, etc.
ii. The internal wage structure – Employees value internal pay equity. Moreover, some jobs also command social status (such as the job of a journalist). Organizations design wages for different cross-sections of employees, while considering maximum and minimum wage differentials, norms of span or control, and demand for specialized skill-sets. Balancing of wages with such internal equity also keeps employees more motivated.