Compensation Management

Saket Jeswani
MBA Sem - 3 RCET, Bhilai

[SAKET JESWANI]

Institution/Machineries & Productivity Linked Wage System

Unit - V

[2013]

Saket Jeswani, Jeswani, Associate Professor, Professor, MBA, RCET, Bhilai Page 1 Saket Associate MBA, RCET, Bhilai

Institution/Machineries Related to Reward System

Saket Jeswani Associate Professor, MBA,RCET, Bhilai

Various Institutions/Machineries for Wage-fixation

1. Since independence, a number of institutions have developed in order to determine and revise wages for industrial workers. 2. These institutions are 1) Collective Bargaining Appointment of Trade Unions 2) Wage Boards Industry specific government appointed boards 3) Pay Commissions Government appointed commissions, 4) Statutory Fixation of Wages - Central and State Governments under the Minimum Wages Act and 5) Adjudication - Court and Tribunals under the Industrial Disputes Act.
Saket Jeswani, Associate Professor, MBA, RCET
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Collective Bargaining
1. Collective bargaining is an arrangement between the parties of the dispute (i.e., employers and employees) under which wages and conditions of employment are generally discussed and determined by agreements. 2. It is a process in which conditions of employment including wages are determined by agreement between representatives of union, on the one hand, and those of the employer, on the other hand. 3. It is called collective because both the employer and the employee act as a group rather as individuals. 4. It is described as bargaining because from both the parties the method of reaching an agreement involves proposals and counter proposals, offers and counter offers. 5. The outcome of such a bargaining is a collective agreement which defines the terms and conditions of employment negotiated between the two groups.
Saket Jeswani, Associate Professor, MBA, RCET
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Wage Boards
1. 2. 3. 4. 5. 6. First Wages Board was set-up in 1957 for Textile Industry Wages Board for Tea Industry in 1960 Wages Board for Jute Industry in 1960 Wages Board for Iron & steel Industry in 1962 Wages Board for Engineering Industry in 1964 These wage boards are appointed by the govt purely on adhoc basis on the demand of the trade unions and employers. The wage board should: 1) Create a climate for harmonious industrial relations 2) Safeguard the interests of the community and the consumes 3) Device standardised wage structure for the concerned industry
Saket Jeswani, Associate Professor, MBA, RCET
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Factors considered by the wage boards

1. 2. 3. 4. 5. 6. 7. 8. Need-based minimum wages Industrys capacity to pay Productivity of labour Prevailing rates of labour Level of national income and its distribution Place of the industry in the economy of the country Requirement of social justice Adjustment of wage differentials in such a manner as to provide incentives for skill formation

Saket Jeswani, Associate Professor, MBA, RCET

Pay Commissions
1. Demand for setting of Seventh Pay Commission is being raised since January 2011 on completion of 5 years since the date of effect of the sixth Pay Commission - as recommended by the last 2 Pay commissions. 2. Till now six pay commissions had been constituted since 1946 - to review and recommend pay structure of central government employees.

3. All the six pay commissions have taken many aspects into consideration to prescribe the pay structure for government servants.

Saket Jeswani, Associate Professor, MBA, RCET

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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Pay Commissions
1. In the first pay commission the concept of living wage was adopted. 2. In second pay commission it had been reiterated that the pay structure and working condition to be crafted in a way so as to ensure the effective functioning of government mechanism. 3. The third pay commission adopted the concept of need based wage

Saket Jeswani, Associate Professor, MBA, RCET

Pay Commissions
4. The Fourth CPC had recommended the government to constitute permanent machinery to undertake periodical review of pay and allowances of Central Government employees, but which got never implemented. 5. In Fifth pay commission all federations demanded that the pay scale should be at par with the public sector. But the pay commission didnt accept this and told that the demand for parity with the Public Sector was however difficult to concede as it felt that the Job content and condition of service in the government and public sector not necessarily the same. 6. The Sixth Central Pay Commission, claimed that it had not only tried to evolve a proper pay package for the Government employees but also to make recommendations rationalizing the governmental structure with a view to improve the delivery mechanisms for providing better services to the common man.
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Statutory Fixation of Wages

1. In India certain employments have been earmarked where wages are fixed by the machinery provided under the Minimum Wages Act 1948. 2. Such employments are those where workers are not organised and therefore they lack bargaining power. In such employments, workers are vulnerable to exploitation due to lack of organization and bargaining power. 3. The central and state Governments fix the wages of workers in schedule employments either on the recommendations of Advisory Committee appointed under the Act or directly publishing the rates of minimum wages in the official gazette. Both these methods are being used currently. 4. The Act does not provide any guideline for the fixation and revision of wages under the Act. It is lift to the individual Advisory Committee or the appropriate Government to determine their own standards and arrive at the conclusion.
Saket Jeswani, Associate Professor, MBA, RCET
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Adjudication
1. The Industrial Disputes Act, 1947 provides for the constitution of various authorities for the prevention and settlement of industrial disputes connected with the terms of employment or with the conditions of labour of any kind. The Act makes conciliation compulsory for all disputes in public utility concerns and optional in other industrial establishments. Conciliation or mediation is a process which endeavours to settle a controversy by assisting parties to reach a voluntary agreement and the ultimate decision is by the parties themselves. The Act empowers the appropriate Government to constitute one or more Industrial Tribunals or National Tribunals and refer the dispute to these tribunal or tribunals. A National Tribunal is constituted in cases where the industrial dispute involves a matter of national importance or entangles establishments in more than one state. Reference to the National Tribunal is made by the Central Government. Adjudication is one of the main instruments for settlement and revision of existing pay-scale and standardization of wages and allowances.
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2. 3. 4. 5. 6.

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Saket Jeswani, Associate Professor, MBA, RCET

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Productivity Linked Wage System (plws)

Saket Jeswani Associate Professor, MBA,RCET, Bhilai

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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What is Productivity?

1. Productivity is a quantitative measure. It is the measure of how well we use our resources to produce goods and services.
2. Our major resources are people (labor) and capital (machines, technology, raw materials).

Saket Jeswani, Associate Professor, MBA, RCET

Do not confuse Productivity with Performance

Productivity
your output on a certain task how long did it take you to do this and how much resources utilized

Performance
the quality of your work the end outcome, how well you have done

Saket Jeswani, Associate Professor, MBA, RCET

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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What Is Productivity Linked Wage System?

The Productivity-Linked Incentive System is a system which establishes a closer link between wages and productivity so as to enhance competitiveness.

Saket Jeswani, Associate Professor, MBA, RCET

How are wages and productivity related?

1. Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce. Otherwise, competitive firms would have an incentive to alter the number of workers they hire, and these adjustments would bring wages and productivity in line. If the wage were below productivity, firms would find it profitable to hire more workers. This would put upward pressure on wages and, because of diminishing returns, downward pressure on productivity. Conversely, if the wage were above productivity, firms would find it profitable to shed labor, putting downward pressure on wages and upward pressure on productivity. The equilibrium requires the wage of a worker equaling what that worker can produce.
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2.

3.

4.

5.

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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5 ways to Improve Productivity

Saket Jeswani, Associate Professor, MBA, RCET

Types of Incentives - What Theyre Based

1. 2. 3. 4. 5. 6. Piece rate Standard hour plan Bonuses Commissions Stock options Profit sharing Units produced Time saved Established goals Sales Established goals Organizational profits

Saket Jeswani, Associate Professor, MBA, RCET

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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Advantages of Incentive Plans

1. Higher wages for worker and higher profits for companies 2. Greater competitiveness for companies 3. Low Inflation 4. Focus Employee Effort 5. Variable Costs linked to Results 6. Tied to Performance 7. Can Foster Teamwork 8. Reward those who Perform well
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Key Elements of Plws are as Follows:

1. Fixed Component
1) Basic Wage 2) Annual Increment 3) Contractual Bonus (where applicable)

2. Variable Component Wage increase for the year based on Productivity/Profit sharing formula.

Saket Jeswani, Associate Professor, MBA, RCET

Saket Jeswani, Associate Professor, MBA, RCET, Bhilai

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Types of Models
1. Profitability Model 2. Productivity Model 3. Combined Model

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Profitability Model
Establish the cap to the bonus According to profit levels Profit After Tax Million ($) <1.5 (threshold) 1.5 - 1.99 2.0 - 2.49 2.5 - 2.99 3.0 and above Bonus Month (s) Salary 0 0.5 1.0 1.5 2.0
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PRODUCTIVITY MODEL
Fixed Component Basic Wage An Annual Increment Variable Component A variable productivity payment to be determined

Saket Jeswani, Associate Professor, MBA, RCET

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Formulation
T=A+P

Where; T = wage increase A = annual increment P = variable productivity payment

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Example:
Year 1 (T=A+P) If basic wage = 1000 per month, Annual increment (A) = 2% and Productivity payment (P) = 4%, Basic wage + A = 1000 + 2% (1000) = 1020 (built into basic wage). P = 4% x 1000 x 12 months = 480 per annum

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Year 2:
(T=A+P) If basic wage = 1,020; A = 2% and P = 4% Basic Wage + Annual Increment (A) = 1,020 + 2% of (1,020) = 1,040 per month Productivity payment (P) = 4% x 1,020 x 12 months = 489.60 per annum Annual Variable Productivity Payment at end of year 2: P for year 1 = 480.00 P for year 2 = 489.60 Cumulative for 2 consecutive years = 969.60
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Combined Model
Annual Profit (in mn.) >1.49 1-1.49 .70-.99 .50-.69 1 .75 .50 .25 1 .75 .50 .25 Months of Basic Wage 1.25 1 .75 .50 1.5 1.25 1 .75 1.75 1.5 1.25 1 2 1.75 1.5 1.25

< .50
Productivity ratio

.25

.50

.75

<1

1-2.49

2.5-4.99

5-7.45

7.5-7.99

>10

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Factors For Successful Implementation

1. 2. 3. 4. 5. 6. Satisfactory Labour-management relations Realistic annual increments Challenging and equitable variable payment Formula for variable payment Applied company-wide Wage system should be
1) 2) 3) 4) 5) Specific Measurable Achievable Realistic Time specific
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Productivity Enhancement Program (1/3, 1/3, 1/3)

1. Designed to increase employee productivity through the elimination of vacant positions, reallocation of workload and shared savings with employees and the company. 2. One-third of the salary and benefits (excluding health insurance) of the deleted positions would be reallocated to the employees within the unit who are assuming the increased workload 3. One-third of the salary and benefits (excluding health insurance) would be used to purchase productivity enhancing technology, or other productivity enhancing tools . 4. The remaining one-third of the salary and benefits (including the full cost of the health insurance) would revert to the State .
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