The wage payment is an important factor affecting the labour. Workers are very much concerned with the rates of wages as their standard of living is linked to the amount of remuneration they get. Managements, however, do not come forward to pay higher wages because cost of production goes up and profits decrease to that extent. There are a number of factors influencing the compensation package payable to employees.
They can be categorized into:
- External Factors
- Internal Factors
1. External Factors
These are demand and supply of labour, cost of living, society, labour unions, legislation, economy, and compensation survey.
(i) Demand and Supply of Labour
Even in times of high employment, individuals with certain skills or abilities are in demand. This demand and supply of labour influences wage and salary fixation. Jobs in high demand frequently will receive premium wages, as in case of skilled labour. However, if supply of labour exceeds the demand, then employers are willing to pay less.
High remuneration to skilled labour is necessary to attract and retain it. But exploitation of unskilled labour, like, for instance, paying less wages because it is available in plenty, is unjustifiable. The Minimum Wages Act, 1948, is precisely meant to prevent this kind of exploitation.
The basic point of this approach is that firm pays its employees the “going rate” for the type of work they do. Going rate analysis is done by reviewing all job descriptions and then collecting relevant salary market data through participating in national, regional, and local salary surveys and by third-party survey administrators (generally human resources consulting firms).
Going rates are those that are paid by different units of an industry in a locality and by comparable units of the same industry located elsewhere.
If the firm offers pay much below the going rate, it may be unable to attract and retain qualified workers. If it pays much more than the going rate, it may be unable to charge comparative prices for its product because its labour costs are too high.
Productivity of labour also influences wage fixation in labour market. Productivity can arise due to increased effort of the worker, or as a result of the factors beyond the control of the worker such as improved technology, better management, etc. Greater effort of the worker is rewarded through piece-rate or other forms of incentive payments.
Productivity is the relationship between the input of labour measured in man-hours and its output in the form of money or physical terms. Productivity linked wages may help utilize human resources better and help determine fair wages.
(ii) Cost of Living
The logic for using cost of living as a pay determinant is both simple and important. A pay increase must be roughly equivalent to the increased cost of living, if a person is to maintain a precious level of real wages.
A rise in the cost of living is sought to be compensated by payment of dearness allowance, basic pay to remain undisturbed. Some firms even index pay increases to the inflation rate and sacrifice merit pay to provide across-the-board increases designed to offset the results of inflation.
(iii) Society
Compensation paid to employees often affects pricing of the firm’s goods or services. For this reason, consumers may also become interested in compensation decisions.
Businesses in a local labour market are also concerned with the pay practices of new firms locating in their area. The Supreme Court has been keeping social and ethical considerations in adjusting wage and salary disputes. It was also considered to keep the company wages in line with other wages in the community.
(iv) Labour Unions
The presence or absence of labour organizations often determines the quantum of wages paid to employees. When union uses comparable pay as a standard in making compensation demands, the employer needs accurate labour market data.
When a union emphasizes cost of living, it may pressure management into including a cost-of-living allowance. The employees of strongly unionized companies too, have no freedom in wage and salary fixation. They are forced to yield to the pressure of labour representation in determining and revising pay scales.
(v) Legislation
There are numerous legislation acts which affect the compensation system. Equal employment legislation, including The Civil Rights Act, Family and Medical Leave Act, Payment of Wages Act, 1948, The Payment of Bonus Act, 1965, Equal Remuneration Act, 1976, Payment of Gratuity Act, 1972, etc.
The Payment of Wages Act seeks to protect workers against irregularities in payment of wages and unauthorized deductions by the employer.
The Minimum Wages Act enables the Central and State Governments to fix minimum rates of wages payable to employees in sweated industries. The Equal Remuneration Act provides for payment of equal remuneration to men and women workers for same or similar work.
The Equal Pay Act, 1963 prohibits an employer from paying an employee of one gender less money than an employee of the opposite gender, if both employees are performing same nature of job (same skill, effort, and responsibility).
In addition to legal enactments, there are wage boards, tribunals, and fair wages committees which aim at providing a minimal standard of living to workers. Also, there is the Companies Act, 1956, which checks the managerial remuneration.
(vi) The Economy
The economy definitely affects financial compensation decisions. For example, a depressed economy generally increases the labour supply and lowers the market rate. On the other hand, a booming economy results in greater competition for workers and price of labour is driven upward.
Since the cost of living is commonly used as pay standard, the economy’s health exerts a major impact upon pay decisions. Cost of living typically rises as the economy expands.
(vii) Compensation Survey
A compensation survey strives to obtain data regarding what other firms are paying for specific jobs within a given labour market. The surveys may be either outsourced to a consulting firm or conducted by the organization itself. In this, market rates remain the most important standard for determining pay.
Most big organizations provide low, high, and average salary for a given position with the help of compensation survey. It provides information for establishing both direct and indirect compensation.
A firm should take the determinants such as the geographical area of the survey and the specific firms to contact before conducting a compensation survey.
2. Internal Factors
Among the internal factors that affect pay structure are the compensation policies, organizational ability to pay, job analysis and job descriptions, employee, and trade union’s bargaining power.
(i) Compensation Policies
It provides general guidelines for making compensation decisions. The first thing employers should consider when developing compensation package is fairness. It should be vital and maintain internal and external equity.
The policy should include the company’s philosophy related to the major components of incentive compensation, including the strengths and weaknesses of each and how the overall plan provides optional alignment of interest with shareowners.
The policy should provide broad guidelines by which the company will use alternative forms of compensation, and the relative weight in relation to overall compensation if “others” form of compensation will be utilized.
An organization often, formally or informally, establishes compensation policies that determine whether it will be a pay leader, a pay follower, or strive for an average position in the labour market.
- (a) Pay leaders: They are organizations that pay higher wages and salaries than competing firms. This helps to retain and attract high-quality and productive employees.
- (b) The market rate: These are the average pay that most employers provide for a similar job in a particular area or industry, also known as going rate.
- (c) Pay followers: These are companies that choose to pay below the market rate because of poor financial condition or a belief that they simply do not require highly capable employees.
(ii) The Organizational Ability to Pay
An organization’s ability to pay is also an important factor in determining compensation package. Companies that have good sales and, therefore, high profits tend to pay higher wages than those which are running at a loss or earning low profits because of the high cost of production or low sales.
However, all employers, irrespective of their profits or losses, must pay no less than their competitors to attract and retain potential employees.
(iii) Job Analysis and Job Description
It is found that the more difficult and challenging a job, the higher are the wages. For this, the particular job is analysed and then the relative value of a job is determined.
Job analysis is the systematic process of determining the skills and knowledge required for performing job.
- Determine what tasks must be accomplished by whom.
- Decide which job classifications should be exempt and which should be non-exempt.
- Develop model job descriptions for exempt and non-exempt positions and distribute the models to incumbents for reviews and comment; adjust job descriptions if necessary.
- Finalize and document all job descriptions.
- Evaluate jobs.
- Conduct general task analysis by major departments to the jobs within each senior, vice president’s, and manager’s department, then rank jobs between and among departments.
- Verify ranking by comparing it to industry market data concerning the ranking and adjust if necessary.
- Prepare a matrix organizational review.
- Determine grades.
- Establish the number of levels – senior, junior, intermediate, and beginner – for each job family and assign a grade to each level.
- Determine the number of pay grades or monetary range of position at particular level and establish the salary range.
(iv) Employee Related
In addition to all the above factors, employee-related factors are also important in determining wage structure. These factors include:
- Performance or productivity is always rewarded with a pay increase. Rewarding performance motivates the employees to do better in future.
- Seniority. Unions view seniority as the most objective criteria for pay increases whereas management prefers performance to effect pay increases.
- Experience. Makes an employee gain valuable insights and is generally rewarded.
- Potential. Organization do pay some employees based on their potential. Young managers are paid more because of their potential to perform even if they are short of experience.
(v) Trade Union’s Bargaining Power
The stronger and more powerful the trade union in any organization, the higher the wages. Trade union’s bargaining powers are often measured in terms of its membership, its financial strength, and the nature of its leadership.
