Chapter 1 Introduction to Wages and Salary

Concept of Salary:

A salary is a form of periodic payment from an employer to an employee, which

may be specified in an employment contract. It is contrasted with piece wages,
where each job, hour or other unit is paid separately, rather than on a periodic
basis.

From the point of a view of running a business, salary can also be viewed as the
cost of acquiring human resources for running operations, and is then termed
personnel expense or salary expense.
In accounting, salaries are recorded in payroll accounts.

Salary is a fixed amount of money or compensation paid to an employee by an

employer in return for work performed. Salary is commonly paid in stages at fixed
intervals, for example, monthly payments of one-twelfth of the annual salary.

Salary is determined by market pay rates for people doing similar work in similar
industries in the same region. Salary is also determined by the pay rates and salary
ranges established by an individual employer.
Salary is also affected by the number of people available to perform the specific
job in the employer's employment locale.

Today, the concept of a salary continues to evolve as part of a system of the total
compensation that employers offer to employees. Salary (also now known as fixed
pay) is coming to be seen as part of a "total rewards" system which includes
bonuses, incentive pay, and commissions, benefits and perquisites (or perks), and
various other tools which help employers link rewards to an employee's measured
performance.

In India, salaries are generally paid on the last working day of the month
(Government, Public sector departments, Multinational organizations as well as
majority of other private sector companies). According to the Payment of Wages
Act, if a company has less than 1000 Employees, salary is paid by the 7th of every
month. If a company has more than 1000 Employees, salary is paid by the 10th of
every month.

Concept of Wages:

A wage is remuneration paid by an employer to an employee. It may be calculated

as a fixed task based amount, or at an hourly rate, or based on an easily measured
quantity of work done. It is contrasted with salaried work, which is based on a
fixed time period and with commission which is based on performance.

Depending on the structure and traditions of different economies around the world,
wage rates will be influenced by market forces (supply and demand), legislation,
and tradition.

The two terms often used interchangeably are Wages and Salary.

Principles Governing Compensation Administration:

Maintaining Equity
Maintaining Competitiveness
Matching Employee Expectations
Reinforcing positive employee behavior
Eliminating any discrepancies
Devising a system that is most efficient
Optimization of management and employee interests
Maintaining good IR and harmony

Purpose of Wage & Salary:

Attracting talented resources
Retaining and motivating employees
Financial Management
Legal Requirements
Concepts of Different Wages:

Minimum Wages - Definition:

A minimum wage is the lowest hourly, daily or monthly remuneration that
employers may legally pay to workers. Equivalently, it is the lowest wage at which
workers may sell their labor. Although minimum wage laws are in effect in many
jurisdictions, differences of opinion exist about the benefits and drawbacks of a
minimum wage.

Supporters of the minimum wage claim it increases the standard of living of

workers, reduces poverty, reduces inequality, boosts morale and forces businesses
to be more efficient. Critics of the minimum wage claim it actually increases
poverty, increases unemployment (particularly among workers with very low
productivity due to inexperience or handicap, thereby harming less skilled workers
and possibly excluding some groups from the labor market), and is damaging to
businesses.

Thus, a minimum wage is such a wage that it not only guarantees bare subsistence
and preserves efficiency but also provides for education, medical requirements and
some level of comfort.

Wage Boards are set up to review the industrys capacity to pay and fix minimum
wages such that they at least cover a family of fours requirements of calories,
shelter, clothing, education, medical assistance, and entertainment.

Under the law, wage rates in scheduled employments differ across states, sectors,
skills, regions and occupations owing to difference in costs of living, regional
industries' capacity to pay, consumption patterns, etc.

Hence, there is no single uniform minimum wage rate across the country and the
structure has become overly complex. The highest minimum wage rate as updated
in 2012 is Rs. 322/day in Andaman and Nicobar to Rs. 38/day in Tripura.
MINIMUM WAGES
It is amount of remuneration, which is just sufficient to enable an average worker
to fulfill all his obligations
It is applicable to workers across the country and is governed by the Minimum
Wages Act 1948
The law states that an employer who cannot pay the minimum wage has no right
to engage labour and no justification to run a firm
The current minimum wage in India is Rs. 115 per day to all the workers in
scheduled employment
It is revised every 5 yrs

Need-based Minimum Wages:

To calculate the minimum wage, the committee accepted the following five norms
and recommended that they should guide all wage-fixing authorities, including
minimum wage committees, wage boards and adjudicators-
In calculating the minimum wage, the standard working class family should
be taken to consist of three consumption units for one earner
Minimum food requirements should be calculated on the basis of a net
intake of 2,700 calories
Clothing requirement should be estimated at a per capita consumption of 18
yards per annum which could give for the average workers family of four, a
total of 72 yards
In respect of housing, the norm should be the minimum rent charged by
government in any area for houses provided under the subsidized industrial
housing scheme for low-income groups
Fuel, lighting and other miscellaneous items of expenditure should constitute
20% of the total minimum wages

Fair Wages - Definition:

Wage levels and wage-fixing mechanisms that provide a living wage floor for
workers, while complying with national wage regulations (such as the minimum
wage, payment of wages, overtime payments, provision of paid holidays and social
insurance payments), ensure proper wage adjustments and lead to balanced wage
developments in the company (with regard to wage disparity, skills, individual and
collective performance and adequate internal communication and collective
bargaining on wage issues).

The Encyclopedia of Social Sciences describes a fair wage as one equal to

that received by workers performing work of equal skill, difficulty or
unpleasantness
The Committee on Fair Wages stated that the fair wage was something
between a minimum wage and a living wage
The lower limit of a fair wage must obviously be the minimum wage, the
upper limit is equally set by what may broadly be called the capacity of the
industry to pay

FAIR WAGES
Workers performing work of equal skills, difficulty or unpleasantness should
receive equal or fair wages
The basis of fair wage is the minimum wage, within the capacity of the
organization to pay
Fair wage should be related to the productivity of the labour
It should match the prevailing rates of wages in the same or neighboring localities
It should reflect the level of national income and its distribution

Living Wages - Definition:

In public policy, a living wage is the minimum income necessary for a worker to
meet needs considered basic. This is not necessarily the same as subsistence, which
refers to a biological minimum, though the two terms are commonly confused.
These needs include shelter (housing) and other incidentals such as clothing and
nutrition.

The living wage differs from the minimum wage in that the latter is set by law and
can fail to meet the requirements to have a basic quality of life and leaves the
family to rely on government programs for additional income. It differs somewhat
from basic needs in that the basic needs model usually measures a minimum level
of consumption, without regard for the source of the income.

Living wage is defined by the wage that can meet the basic needs to maintain a
safe, decent standard of living within the community.[1] The particular amount that
must be earned per hour to meet these needs varies depending on location.

Justice Higgins defined living wage as one appropriate for the normal needs of
the average employee, regarded as a human being living in a civilized community

There are three possible ways of obtaining some indication as to what constitutes a
living wage:
It should be sufficient to pay for a satisfactory basic budget
It should be sufficient to purchase the minimum theoretical needs of a typical
family, calculated in accordance with some more or less scientific formula
It should be comparable with a living wage already established in similar
circumstances

It is a difficult task to fix a living wage in terms of money as it differs from country
to country and from time to time, according to national economy and social
policies
It is obvious that the concept of a living wage is not a static concept; it is
expanding.

LIVING WAGES
Living wages should enable the male earner to provide for himself and his family,
not only the bare essentials of food, clothing and shelter, but also a measure of
frugal comfort including:
Education for the children
Protection against ill-health
Requirements of essential social needs
A Measure of insurance against the more important misfortunes including old age
Monetary Wages and Real Wages - Definition:

Wages earned by employees are normally expressed in terms of money. There are
two aspects of wages:
Money wage
Real wage

According to Adam Smith money wage level is determined and regulated by the
interaction between supply and demand of necessaries, on the one hand and the
supply and demand of labour, on the other.

With the exception of the First Plan period money wage increases have lagged
behind price increases throughout the period of Indian planning.

Since the early sixties, there has been a continuous rise in the prices of most of our
consumption of goods and services.

In an inflationary situation, there is bound to be erosion of the purchasing power of

earnings or money wages.

It is no doubt true that unless money wages rise as fast as consumer prices, it
would result in an erosion of real wages.

Real Wages Definition:

The term real wages refers to wages that have been adjusted for inflation. This
term is used in contrast to nominal wages or unadjusted wages. Real wages provide
a clearer representation of an individual's wages, but suffer the disadvantage of not
being well defined, since the amount of inflation, based on different goods and
services, is itself not well defined.

The use of adjusted figures is used in undertaking some forms of economic

analysis. For example, to report on the relative economic successes of two nations,
real wage figures are more useful than nominal figures. The importance of
considering real wages also appears when looking at the history of a single
country.

If only nominal wages are considered, the conclusion has to be that people used to
be significantly poorer than today. However, the cost of living was also much
lower. To have an accurate view of a nation's wealth in any given year, inflation
has to be taken into account and real wages must be used as the measuring stick.

An alternative is to look at how much time it took to earn enough money to buy
various items in the past. Such an analysis shows that for most items, it takes much
less work time to earn them now than it did decades ago, at least in the United
States.

Real wages are a useful economic measure, as opposed to nominal wages, which
simply show the monetary value of wages in that year. However, real wages does
not take into account other compensation like benefits or old age pensions.

Factors affecting Wage and Salary:

The organizations ability to pay

Supply and demand of labour
The prevailing market rate
The cost of living
Living wage
Productivity
Trade unions bargaining power
Job requirements
Managerial attitudes
Psychological and sociological factors
Levels of skills available in the market

(1) The organizations ability to pay: Wage increases should be given by those
organizations which can afford them. Companies that have good sales and,
therefore, high profits tend to pay higher those which running at a loss or
earning low profits because of higher cost of production or low sales.
(2) Supply and demand of labour: The labour market conditions or supply and
demand forces operate at the national, regional and local levels, and determine
organizational wage structure and level.
(3) Prevailing market rate: This is known as the 'comparable wage' or 'going
wage rate', and is the widely used criterion. An organization compensation
policy generally tends to conform to the wage rate payable by the industry and
the community.
(4) The cost of living: The cost of living pay criterion is usually regarded as an
automatic minimum equity pay criterion. This criterion calls for pay
adjustments based on increases or decreases in an acceptable cost of living
index.
(5) The living wage: Criterion means that wages paid should be adequate to
enable an employee to maintain himself and his family at a reasonable level of
existence.
(6) Productivity
(7) Trade Unions Bargaining Power
(8) Job Requirements
(9) Managerial Attitude
(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 secure; 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 they get.
Therefore, these things should not be overlooked by the management in
establishing wage rate.
(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.
Payment Systems:

The payment system is an operational network - governed by laws, rules and

standards - that links bank accounts and provides the functionality for monetary
exchange using bank deposits. The payment system is the infrastructure (consisting
of institutions, instruments, rules, procedures, standards, and technical means)
established in effect the transfer of monetary value between parties discharging
mutual obligations. Its technical efficiency determines the efficiency with which
transaction money is used in the economy, and risk associated with its use.

What makes it a "system" is that it employs cash-substitutes; traditional payment

systems are negotiable instruments such as drafts (e.g., checks) and documentary
credits such as letter of credits. With the advent of computers and electronic
communications a large number of alternative electronic payment systems have
emerged.

These include debit cards, credit cards, electronic funds transfers, direct credits,
direct debits, internet banking and e-commerce payment systems. Some payment
systems include credit mechanisms, but that is essentially a different aspect of
payment. Payment systems are used in lieu of tendering cash in domestic and
international transactions and consist of a major service provided by banks and
other financial institutions.

Payment systems may be physical or electronic and each has their own procedures
and protocols. Standardization has allowed some of these systems and networks to
grow to a global scale, but there are still many country and product specific
systems. Examples of payment systems that have become globally available are
credit card and automated teller machine networks.

Specific forms of payment systems are also used to settle financial transactions for
products in the equity markets, bond markets, currency markets, futures markets,
derivatives markets, and options markets and for transfer funds between financial
institutions both domestically using clearing and Real Time Gross Settlement
(RTGS) systems and internationally using the SWIFT network.
The term electronic payment can refer narrowly to e-commerce - a payment for
buying and selling goods or services offered through the Internet, or broadly to any
type of electronic funds transfer.

Administration of Wages and Salary:

The overall goal of a wage and salary administration program is to attract, retain,
and motivate employees and to help an organization achieve its management
objectives. Because employees represent a substantial investment in an
organization and labor costs have a significant impact on the annual budget and
profitability, it is critical for employers to have an effective wage and salary
administration program.
If your organization doesn't currently have a formal compensation program, you're
probably paying some employees too much while other employees may not be paid
enough. In today's competitive labor market, you can't afford to lose talented
employees due to an ineffective compensation program.