factors affecting wage and salary structure
The wage policies of different organizations vary somewhat. Marginal units pay the Minimum necessary to attract the required number and kind of labor. Often, these units pay only the minimum wage rates required by labor legislation, and recruit marginal labor. At the other extreme, some units pay well above the going rates in the labor market. They do so to attract and retain the highest caliber of the labor market. They do so to attract and retain the highest caliber of the labor force. Some managers believe in the economy of higher wages. They feel that, by paying high wages, they would attract better workers who will prod use more than the average worker in the industry. This greater production per employee means greater output per man-hour.
Hence, labor costs may turn out to be lower than those existing in firms using marginal labor. Some units pay high wages because of a combination of favorable product market demand, higher ability to pay and the bargaining power of a trade union.
But a large number of them seek to be competitive in their wage program, i.e., they aim at paying somewhere near the going rate in the labor market for the various classes of labor they employ. Most units give greater weight to two wage criteria, viz., job requirements and the prevailing rates of wages in the labor market. Other factors, such as changes in the cost of living, the supply and demand of labor, and the ability to pay are accorded a secondary importance.
In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important.
During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organizations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation.
“The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors. This is done for several reasons:
First, competition demands that competitors adhere to the same relative wage level;
Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition;
Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated;
Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates;
Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
A sound wage policy is to adopt a job evaluation program in order to establish fair differentials in wages based upon differences in job contents. Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
1. The Organization’s Ability to Pay
Organization decisions on job and wage structures represent a -balancing of the aforementioned forces. But the strength of these forces varies by organization type and within organizations by job clusters.
Banks, insurance companies, department stores, and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. This makes for a commonality between organizations in the design of professional jobs.
Organizations having many specialized jobs, dealing in labor markets too disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally determined wage structures. Product markets may influence such wage structures, but only if labor cost is high relative to total cost. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates.
Organizations in small towns, isolated locations, or nonunion communities provide examples, as do unique organizations in -larger communities, and government employment. Most large, unionized organizations have what might be called union-and-product-oriented wage structures. In these organizations, wage structures represent management decisions -shaped and restrained by technology, unions, and cost-price relationships, and the product market.
Technology provides some uniformity in job structures in organizations engaged in common lines of production. Unions, through their insistence on traditional relationships,
establish some key jobs and job clusters and provide an upward thrust to the entire structure.
Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand, however, reduce competitive pressures on organizations.
Professional employees (such as engineers ) have salary structures that combine market orientation and internal determination, regardless of the major activity of the organization. Managerial salary structures are primarily internally determined except in very tight labor markets, without regard to organization type.
2. Supply and Demand of Labor
The labor market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. The other alternative is to pay higher wages if the labor supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labor expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. “The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors.”
3. Prevailing Market Rate
This is also known as the ‘comparable wage’ or ‘gain wage rate’, and is the most widely used criterion. An organization’s compensation policies generally tend to conform to the wage rates payable by the industry and the community.
This is done for several reasons:
· First, competition demands that competitors adhere to the same relative wage level.
· Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition.
· Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated.
· Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates.
· Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
4. The Cost of Living
The cost-of living pay criterion is usually regarded as an Auto minimum equity pay criterion. This criterion calls for pay adjustments based On increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living, “escalator clauses” are written into labor contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline the management does not resort to this argument as a reason for wage reductions.
5. The Living Wage
This criterion states that wages paid should be adequate to enable-an employee to maintain himself and his family at a reasonable level of existence However, employers do not generally favor using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a worker’s budget is open to argument since it is based on subjective opinion.
6. Productivity
It is a criterion, and is measured in terms of output per man hour. It is not due to labor efforts alone. Technological improvements, better organization and management, the development of better methods of production by labor and management, greater ingenuity and skill by labor are all responsible for the increase in productivity. Actually, productivity measures the contribution. of all the resource factors - men, machines, methods, materials and management. No productivity index can be devised which will measure only the productivity of a specific factor of production.
7. Trade Union’s Bargaining Power
Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most powerful weapon used by it. Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation.
However, for those remaining on the pay roll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power. Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft.
Other unions, most of them craft unions, seek to preserve customary relationships and job security, resist changes in job content and structure, and are uninterested in the employer’s problems of maintaining economic efficiency. Still other unions seem totally uninterested in job designs and the wage structure of the organization and they;
1. Insist on no wage cuts when job content changes,
2. Demand wage increases for all increases in job productivity,
3. Strongly resist job-content and other changes calculated to increase productivity, and
4. Encourage wage-inequity grievances.
In such cases job, and wage structures become chaotic, and correcting the irrationalities may require long and bitter strikes, which are often prolonged by political struggles within the union resulting from the wage inequities.
8. Job Requirements
Generally, the more difficult a job, the higher are the wages Measures of job difficulty are frequently used when the relative value of one job to another in an organization is to be ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job conditions required.
9. Managerial Attitudes
These have a decisive influence on the wage structure and wage level since judgment is exercised in many areas of wage and salary administration - including whether the firm should pay below average, or above average rates, what job factors should be’ used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level- of wages are bound to bound to be affected accordingly. These matters require the approval of the top executives. Lester observes, “Top management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in management’s wage-policy decisions.
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 care 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 get. Therefore, the management in establishing wage rates should not overlook these things. Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages should be commensurate with their efforts,” that “ they are not exploited, and that no distinction is made on the basis of caste, color, sex or religion.” To satisfy the conditions of equity, famines and justice, a management should take these factors into consideration.
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.
Hence, labor costs may turn out to be lower than those existing in firms using marginal labor. Some units pay high wages because of a combination of favorable product market demand, higher ability to pay and the bargaining power of a trade union.
But a large number of them seek to be competitive in their wage program, i.e., they aim at paying somewhere near the going rate in the labor market for the various classes of labor they employ. Most units give greater weight to two wage criteria, viz., job requirements and the prevailing rates of wages in the labor market. Other factors, such as changes in the cost of living, the supply and demand of labor, and the ability to pay are accorded a secondary importance.
In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important.
During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organizations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation.
“The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors. This is done for several reasons:
First, competition demands that competitors adhere to the same relative wage level;
Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition;
Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated;
Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates;
Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
A sound wage policy is to adopt a job evaluation program in order to establish fair differentials in wages based upon differences in job contents. Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
1. The Organization’s Ability to Pay
Organization decisions on job and wage structures represent a -balancing of the aforementioned forces. But the strength of these forces varies by organization type and within organizations by job clusters.
Banks, insurance companies, department stores, and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. This makes for a commonality between organizations in the design of professional jobs.
Organizations having many specialized jobs, dealing in labor markets too disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally determined wage structures. Product markets may influence such wage structures, but only if labor cost is high relative to total cost. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates.
Organizations in small towns, isolated locations, or nonunion communities provide examples, as do unique organizations in -larger communities, and government employment. Most large, unionized organizations have what might be called union-and-product-oriented wage structures. In these organizations, wage structures represent management decisions -shaped and restrained by technology, unions, and cost-price relationships, and the product market.
Technology provides some uniformity in job structures in organizations engaged in common lines of production. Unions, through their insistence on traditional relationships,
establish some key jobs and job clusters and provide an upward thrust to the entire structure.
Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand, however, reduce competitive pressures on organizations.
Professional employees (such as engineers ) have salary structures that combine market orientation and internal determination, regardless of the major activity of the organization. Managerial salary structures are primarily internally determined except in very tight labor markets, without regard to organization type.
2. Supply and Demand of Labor
The labor market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. The other alternative is to pay higher wages if the labor supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labor expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. “The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors.”
3. Prevailing Market Rate
This is also known as the ‘comparable wage’ or ‘gain wage rate’, and is the most widely used criterion. An organization’s compensation policies generally tend to conform to the wage rates payable by the industry and the community.
This is done for several reasons:
· First, competition demands that competitors adhere to the same relative wage level.
· Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition.
· Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated.
· Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates.
· Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
4. The Cost of Living
The cost-of living pay criterion is usually regarded as an Auto minimum equity pay criterion. This criterion calls for pay adjustments based On increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living, “escalator clauses” are written into labor contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline the management does not resort to this argument as a reason for wage reductions.
5. The Living Wage
This criterion states that wages paid should be adequate to enable-an employee to maintain himself and his family at a reasonable level of existence However, employers do not generally favor using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a worker’s budget is open to argument since it is based on subjective opinion.
6. Productivity
It is a criterion, and is measured in terms of output per man hour. It is not due to labor efforts alone. Technological improvements, better organization and management, the development of better methods of production by labor and management, greater ingenuity and skill by labor are all responsible for the increase in productivity. Actually, productivity measures the contribution. of all the resource factors - men, machines, methods, materials and management. No productivity index can be devised which will measure only the productivity of a specific factor of production.
7. Trade Union’s Bargaining Power
Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most powerful weapon used by it. Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation.
However, for those remaining on the pay roll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power. Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft.
Other unions, most of them craft unions, seek to preserve customary relationships and job security, resist changes in job content and structure, and are uninterested in the employer’s problems of maintaining economic efficiency. Still other unions seem totally uninterested in job designs and the wage structure of the organization and they;
1. Insist on no wage cuts when job content changes,
2. Demand wage increases for all increases in job productivity,
3. Strongly resist job-content and other changes calculated to increase productivity, and
4. Encourage wage-inequity grievances.
In such cases job, and wage structures become chaotic, and correcting the irrationalities may require long and bitter strikes, which are often prolonged by political struggles within the union resulting from the wage inequities.
8. Job Requirements
Generally, the more difficult a job, the higher are the wages Measures of job difficulty are frequently used when the relative value of one job to another in an organization is to be ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job conditions required.
9. Managerial Attitudes
These have a decisive influence on the wage structure and wage level since judgment is exercised in many areas of wage and salary administration - including whether the firm should pay below average, or above average rates, what job factors should be’ used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level- of wages are bound to bound to be affected accordingly. These matters require the approval of the top executives. Lester observes, “Top management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in management’s wage-policy decisions.
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 care 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 get. Therefore, the management in establishing wage rates should not overlook these things. Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages should be commensurate with their efforts,” that “ they are not exploited, and that no distinction is made on the basis of caste, color, sex or religion.” To satisfy the conditions of equity, famines and justice, a management should take these factors into consideration.
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.