Meaning

of [Link]
Defini&on
Gary Dessler in his book Human Resource Management defines [Link] in these words “Employee [Link]
refers to all forms of pay going to employees and arising from their employment.” The phrase ‘all forms of pay’ in the
defi[Link] does not include non-financial benefits, but all the direct and indirect financial [Link].
According to Thomas J. Bergmann(1988) [Link] consists of four [Link] components: [Link] = Wage or
Salary + Employee benefits +Non-recurring finan- cial rewards+ Non-pecuniary rewards.

The Concept of Compensa&on
[Link] refers to a wide range of financial and non financial rewards to employees for their services rendered to
the [Link]. It is paid in the form of wages, salaries and employee benefits such as paid [Link], insurance
maternity leave, free travel facility, [Link] benefits etc., Monetary payments are a direct form of [Link] the
employees and have a great impact in [Link] employees.
The system of [Link] should be so designed that it achieves the following [Link].
➢ The capable employees are aZracted towards the [Link]

➢ The employees are [Link] for beZer performance

➢ The employees do not leave the employer frequently



 More [Link] of [Link]/
[Link] Management
To Establish a Fair and Equitable Remunera&on
Eff[Link] [Link] management [Link] are to maintain internal and external equity in
[Link] paid to employees. Internal equity means similar pay for similar
work. In other words, [Link] diff[Link] between jobs should be in [Link] of differences in
the worth of jobs. External equity implies pay for a job should be equal to pay for a similar job in other
[Link]. Payments based on jobs requirements, employee performance and industry levels
minimize [Link] and [Link] in pay.

To A=ract Competent Personnel
A sound wage and salary [Link] helps to aZract qualified and hard- working people by ensuring
an adequate payment for all jobs. For example IT companies are [Link] each other and try their
level best to aZract best talents by offering beZer [Link] packages.

To Retain the Present Employees
By paying compe..ve levels, the company can retain its personnel. It can minimize the incidence of
quibng and increase employee loyalty. For example employees [Link] is high in knowledge sectors
(Ad-agency, KPO, BPO etc.,) which force the companies to offer beZer pay to retain their employees.

To Improve Produc&vity
Sound wage and salary [Link] helps to improve the [Link] and morale of employees which
in turn lead to higher [Link]. Especially private sectors companies’ offer [Link] linked
[Link] packages to their employees which leads to higher [Link].

To Control Cost
Through sound [Link] management, [Link] and labour costs can be kept in line with the ability of the
company to pay. If facilitates [Link] and control of pay roll. The companies can [Link] plan and control
labour costs.

To Improve Union Management Rela&ons
[Link] management based on jobs and prevailing pay levels are more acceptable to trade unions. Therefore,
sound wage and salary [Link] simplifies [Link] bargaining and [Link] over pay. It reduces grievances
arising out of wage [Link].

To Improve Public Image of the Company
Wage and salary programme also seeks to project the image of the progressive employer and to company with legal
requirements [Link] to wages and salaries.

To Improve Job Sa&sfac&on
If employees would be happy with their jobs and would love to work for the company if they get fair rewards in exchange
of their services.

To Mo&vate Employees: Employees
All have different kinds of needs. Some of them want money so they work for the company which gives them higher pay.
Some of them value achievement more than money, they would associate themselves with firms which offer greater
chances of [Link], learning and development. A [Link] plan that hits workers’ needs is more likely to
[Link] them to act in the desired way.

Peace of Mind
Offering of several types of insurances to workers relieves them from certain fears, as a result workers now work with
relaxed mind.

Increases Self-Confidence
Every human being wants his/her efforts to get acknowledgment. Employees gain more and more confidence in them and
in their [Link] if they receive just rewards. As a result, their performance level shoots up.

 Role of Employees in [Link]
Management
•  To get equity based [Link].
•  To fulfill social and security needs,
•  To [Link] their worth and subsistence need.
•  To achieve individual goals.
•  To get salaries as per the state of economy.
•  To improve the standard of living.
•  To give [Link] to their children.
•  For professional and career development.
•  Duty to improve their own efficiency and try to get [Link] feedback
for improvement.
•  Always be honest and [Link] oriented.
•  Don’t misuse the financial resources of the company for their own benefit.
 Role of Trade Union in [Link]
Management
•  To provide adequate environmental [Link] including [Link], [Link],
[Link], rest rooms, safety and other welfare measures to employees.
•  To act as a guard to protect the benefits of employees.
•  To build a beZer [Link] between employer and employee.
•  Trade Union fulfill their responsibility as a [Link] machinery which made
proposals on the behalf of employees for the other party of management and
the process [Link] un.l both [Link] enters into a contract. [Link]
are based on give and take principle. Trade Union [Link] to protect the
interest of workers.
•  Trade Union act as a welfare guard provide consultancy and [Link] for
personnel issues related to medical, [Link] and cultural.
•  Helps in providing financial assistance during strikes and lockouts.
•  Trade Union helps in maintaining the discipline and principle of equity in
terms of salary and working [Link].
•  Trade Union also fight for leaves, holidays, minimum working hours, security
benefits.
 Factors aff[Link] [Link]
Management
Demand and Supply of Labour
Legal Framework
[Link] Capacity to Pay
Compe..on Senario
Size of [Link]
Labour Union
[Link] of Employees
Prevailing Wage rate in the market
Cost of living
Technology Employed
Nature of Personnel
Social factors
Nature of job
Economic [Link]
Goodwill of the firm
Factors Considered in Deciding
[Link]
External Factors
Demand and Supply of Labour
Wage is a price or [Link] for the services rendered by a worker. The firm requires these services,
and it must pay a price that will bring forth the supply which is controlled by the individual worker or by a
group of workers [Link] together through their unions. The primary result of the [Link] of the law of
supply and demand is the [Link] of the going wage rate. It is not [Link] to draw demand and
supply curves for each job in an [Link] even though, [Link], a separate curve exists for each
job.
Cost of Living
Another important factor aff[Link] the wage is the cost of living adjustments of wages. This tends to vary
money wage depending upon the [Link] in the cost of living index following rise or fall in the general
price level and consumer price index. It is an [Link] ingredient of long-term labour contract unless
provision is made to reopen the wage clause periodically.
Labour Union
Organized labor is able to ensure beZer wages than the unorganized one. Higher wages may have to be
paid by the firm to its workers under the pressure or trade union.
If the trade union fails in their aZempt to raise the wage and other allowances through [Link]
bargaining, they resort to strike and other methods hereby the supply of labour is restricted. This exerts
a kind of influence on the employer to concede at least [Link] the demands of the labour unions.
Government
To protect the working class from the [Link] of powerful employers, the government has enacted
several laws. Laws on minimum wages, hours of work, equal pay for equal work, payment of dearness
and other allowances, payment of bonus, etc., have been enacted and enforced to bring about a
measure of fairness in [Link] the working class. Thus, the laws enacted and the labour policies
framed by the government have an important influence on wages and salaries paid by the employers.
Wages and salaries can’t be fixed below the level prescribed by the government.
Prevailing Wage Rates
Wages in a firm are influenced by the general wage level or the wages paid for similar [Link] in the
industry, region and the economy as a whole. External alignment of wages is [Link] because if wages
paid by a firm are lower than those paid by other firms, the firm will not be able to aZract and retain
efficient employees. For instance, there is a wide difference between the pay packages offered by
[Link] and Indian companies. It is because of this difference that the [Link] [Link]
are able to aZract the most talented workforce.
Internal Factors
Ability to Pay
Employer’s ability to pay is an important factor aff[Link] wages not only for the individual firm, but also for the [Link]
industry. This depends upon the financial [Link] and profitability of the firm. However, the fundamental determinants
of the wage rate for the individual firm emanate from supply and demand of labour. If the firm is marginal and cannot
afford to pay compe..ve rates, its employees will generally leave it for beZer paying jobs in other [Link]. But,
this adjustment is neither immediate nor perfect because of problems of labour immobility and lack of perfect
knowledge of [Link]. If the firm is highly successful, there is liZle need to pay more than the compe..ve rates to
obtain personnel. Ability to pay is an important factor aff[Link] wages, not only for the individual firm but also for the
[Link] industry.
Top Management Philosophy
Wage rates to be paid to the employees are also affected by the top management’s philosophy, values and abtudes. As
wage and salary payments [Link] a major [Link] of costs and /or [Link] of profits to the employees, top
management may like to keep it to the minimum. On the other hand, top management may like to pay higher pay to
aZract top talent.
ProducBvity of Workers
To achieve the best results from the workers and to [Link] him to increase his efficiency, wages have to be
[Link] based. There has been a trend towards gearing wage increase to [Link] increases. [Link] is the
key factor in the [Link] of a company. High wages and low costs are possible only when [Link] increases
appreciably.
Job Requirements
Job requirements [Link] measures of job difficulty provide a basis for determining the [Link] value of one job
against another in an enterprise. Explicitly, job may be graded in terms of a [Link] degree of skill, effort and
responsibility needed and the adversity of working [Link]. The [Link] wage diff[Link] in terms of
a) Hardship,
b) Difficulty of learning the job
c) Stability of employment
d) Responsibility of learning the job and
f) Change for success or failure in the work.
This reforms a basis for job [Link] plans and thus, determines wage levels in an industry.

Employees Related Factors
Several employees related factors interact to determine his [Link]. These include
i) Performance: [Link] is always rewarded with a pay increase. Rewarding performance
[Link] the employees to do beZer in future.
ii) Seniority: Unions view seniority as the most [Link] criteria for pay increases whereas
management prefer performance to effect pay increases.

iii) Experience: Makes an employee gain valuable insights and is generally rewarded

iv) Poten&al: [Link] do pay some employees based on their [Link]. Young managers are
paid more because of their [Link] to perform even if they are short of experience.


Organiza&onal Poli&cs
[Link] surveys, job analysis, job [Link] and employee performance are all involved in
wage and salary decisions. [Link] [Link] may enter into the [Link] in the following ways:
i) [Link] of firms included in the [Link] survey: managers could make their firm
appear to be a wage leader by including in the survey those [Link] that are pay followers.

ii) Choice of compensable factors for the job [Link] plan: Again, the job value determined by this
process could be manipulated

iii) Emphasis placed on either internal or external equity and

iv) Results of employee performance appraisal may be [Link] disported by the supervisor
Thus, a sound and [Link] [Link] system may be destroyed by [Link]
[Link].

 Wage Concepts
1) Minimum Wage Concept:
In 1948 minimum wage act was passed in India
that empower the central and state government
to fix the minimum wage for workers.
Wages must be sufficient to fullfill basic needs.
Basic needs= clothes +rent+fuel+lightening+
shelter+food
2) Living wage concept
The [Link] of living wage is to improve the
standard of living of employees.
Basic needs+ [Link]+ insurance+ health
benefits+ pension
3) Fair Wages:
Wages should depend upon [Link], paying
capacity of employers, level of [Link] income,
prevailing wage rate.
4)Real Wage Concept
It is defined as the nominal wages adjusted by
price level. In other words, income of an
individual calculated aler taking into
[Link] the effect of infl[Link], purchasing
power, nature of work, regularity and
employment, social [Link].

Real Wage==== Nominal Wages
given wage price level
 Wage Theories
1)  Subsistence theory of wages:
This theory was propounded by Adam Smith.
Minimum wages to fulfill physical needs or subsistence level.
If we get income below subsistence level, people will die due to [Link].
It states that wages tend to keep to a level that will provide the workers only with
bare subsistence. If wages for a .me rise above this level, it inevitably leads, it is said,
to an increase in the [Link], and increased compe..on among workers for
employment, causing wages to fall again. If wages fall below subsistence level, fewer
children are born and [Link] raises the death-rate, so that compe..on for
employment is reduced and wages tend to rise.

[Link]
Only considered supply side of labour
It does not consider the [Link] of labour
Subsistence level cant be measured easily.
•  2) Standard of living theory of wages
•  This theory is an improvement over the
subsistence theory of wages.
•  Wage rate is determined on the basis of
minimum needs of workers, comfort and
luxuries.
•  The theory is based on the [Link] that
the standard of living will maintain the
efficiency of workers high.
3) Wage fund theory of wages
•  This theory was propounded by J.S. Mill.
•  Wage rate is determined by the ra.o of wage fund and the [Link](no.
of workers)
•  At the .me when the wage fund theory was developed it was thought that
a fund of capital had to be accumulated in advance before wages could be
paid. Thus the size of the fund limited the total amount available for
payment of wages.
•  Though the theory did not specifically say so, it appeared to imply that if
one group of workers obtained a rise in wages it could be only at the
expense of other workers, whose share of fund was thereby reduced. The
theory ignored the fact that total output could increase and the wage-
earners might also be able to benefit at the expense of capital.


Cri&cism: Wage rate is imaginary concept
Efficiency of worker ignored.
Increase in Wages don’t affect profit
Trade Union may impact wages.
4)Residual Claimant Theory
This theory was propounded by American Economist
F.A. Walker. According to Prof. Walker the total
[Link] of an industry is distributed amongst land,
labour, capital and entrepreneur in the form of rent,
wages, interest and profit. When the rent, interest and
profit is distributed amongst landlord, then rest is
given to labour in the form of wages.
Wage Rate===Total Output-(rent+ interest+ profit)
[Link]:
They take into [Link] only demand for labour
Role of trade union is ignored

 5) Modern theory of wages/ Demand
and Supply of Wages
•  The wage-rate in a [Link] industry is determined by the
demand for and the supply of labour. Labour is demanded
because of its [Link] and so the employer demands
the labour up to the level at which the wage-rate is equal
to the value of the marginal product of labour.
•  The supply of labour depends, on the other hand, on its
supply price, which depends on the standard of living of the
workers, the strength of trade unions and various other
factors. The workers supply their labour up to the point at
which the rate of wages becomes equal to the cost of
living. The equipment rate of wage established when the
demand for labour is equal to its supply. This point is
illustrated in Fig. 14.3.
In Fig. 14.3 DD is the demand curve for labour
and SS is its supply curve. When the wages
become OW0 or EL0, the demand for labour
becomes equal to its supply. So OW0 or EL0 is
the equilibrium rate of wages under pure
compe..on and the number of labour
employed is OL0.
 Supply of Labour
The term ‘supply of labour’ may refer to either of the following:
(a) The supply of labour in the country as a whole;
(b) The supply of labour by an individual worker, and
(c) The supply of labour for a [Link] job.
An Individual‘s Supply of Labour:
If an individual is permiZed to choose the number of hours he works, his
supply curve of labour will be backward bending, as has been shown in Fig.
14.4. Why is it so? This is explained by two effects of a rise in wages— the
[Link] effect and the income effect. We may first discuss the nature of
[Link] effect.
As the wage rate rise from W0 to W1 the worker decides to work more (i.e.,
for longer hours per day). Consequently, the number of hours worked
increases from OL0 to OL1. This is because he is losing more money now by
sibng idle — leisure .me has become more expensive. Leisure will,
therefore, be [Link] by extra work.
• 
•  However, if the wage rate [Link] to rise a strange thing
happens. Here in Fig. 14.4 the supply of labour is maximum when
the wage rate is OW1. This may be called the [Link] wage
because it ensures maximum labour supply. However, if the wage
rate goes above OW1, the income effect becomes stronger than the
[Link] effect. A rise in wages is equivalent to a rise in the
income of the worker.
•  Thus, the worker can earn the same amount of money as before by
pubng less effort. In the past the worker might have put extra
effort in order to buy more things for himself and his family, e.g.,
tape recorders, TV sets, refrigerators. Now he takes advantage of
the further increase in wages to take more .me off in order to
enjoy what he has bought.
•  In other words, as the income of the worker has gone up, he may
prefer to enjoy certain superior goods which he could not
previously afford (viz., leisure). Because his income has increased,
he can now afford to buy more leisure, i.e., work fewer hours each
week or enjoy paid holiday (by taking a day off more olen). He is
no longer interested in [Link] work or leave encashment.
 6 Marginal [Link] Theory
•  The marginal [Link] theory of wage states that the price of
labour, i.e., wage rate, is determined according to the marginal
product of labour. This was stated by the neo-classical economists,
especially J. B. Clark, in the late 1890s.
•  The term marginal product of labour is interpreted here in three
ways: marginal physical product of labour (symbolized by MPPL),
value of the marginal product of labour (symbolized by VMPL) and
marginal revenue product of labour (symbolized by MRPL).
•  When marginal product of labour is expressed in money terms we
obtain VMPL. MRPL is the change in total revenue following a
change in the employment of labour. Marginal [Link] theory
of wage states that wage of labour equals VMPL (= MRPL). Employer
will employ labour up to the point un.l market wage equals
labour’s value of the marginal product (VMP) and marginal revenue
product (MRP).
Assump&ons of Marginal Produc&vity Theory of Wage:
The important assump-&ons of this theory are:
i. Perfect compe..on prevails in products market and in
labour market. Perfect compe..on in product market implies
that products are homogene-ous and the price of the goods is
given for all firms in the market. Perfect compe..on in labour
market also implies that labour as well as firms behave
as ‘wage-takers’; no one can influence the wage rate.
Consequently, labour supply curve, SL, becomes perfectly
elas.c. Since wage rate does not change, labour supply curve
incidentally, becomes the average cost curve of labour (ACL)
and it coincides with the marginal cost curve of labour (MCL).
ii. Law of variable [Link] operates.
iii. The firm aims at profi[Link].
iv. All labourers are homogeneous and are divisible.
v. Labour is mobile and is [Link] to capital and other
inputs.
vi. Resources are fully employed.
Wage rate will be determined by the [Link] of demand and supply curves of
labour in the market. Labour demand curve is explained by the VMPL curve. Since
perfect compe..on exists in the product market, VMPL curve coincides with the
MRPL curve. VMPL = MRPL curve is the firm’s demand curve for labour.

This curve slopes downward because of diminishing marginal returns. In Fig. 6.11,
VMPL = MRPL = DL represents the firm’s demand curve for labour.

Further, as perfect compe..on exists in the labour market, the labour supply, SL =
ACL = MCL, curve has been drawn perfectly elas.c.

In Fig. 6.11, E is the equilibrium point since at this point labour demand equals labour
supply. The equilibrium wage rate thus determined is OW. Corresponding to this wage
rate, equilibrium level of employment is OL.

Note that for OL amount of labour, VMPL = MRPL is LE, which equals wage rate OW. At
this going wage rate (i.e., OW) the employer will be maximizing profit by employing OL
units of labour. However, less (more) labour will be employed if market wage rate
rises above (falls below) OW.

•  The Main Cri&cisms are:

i.  In the real world, perfect compe..on does not exist—both in the product market and in the labour
market. Im-perfect compe..on is found in all the markets. This theory, therefore, has limited applicability
in the real world. If it is applied to the imperfectly com-pe..ve market, the workers will be subject to
[Link].

ii. Labour can never be homogeneous— some may be skilled and some may be unskilled. Wage rate of a worker is
greatly influenced by the quality of labour. A higher wage rate is enjoyed by the skilled labour compared to the
unskilled labour. This simple logic has been totally ignored by the authors of this theory.

iii. Perfect mobility of labour is another unrealis.c [Link]. Mobility of labour may be restricted due to socio--
[Link] reasons.

iv. The marginal [Link] theory of wage ignores the supply side of labour and concentrates only on the
demand for labour. It is said that labour is demanded because labour is [Link]. But why labour is supplied
cannot be answered in terms of this theory.

This is because of the fact that, at a given wage rate, any amount of labour is supplied. But we know that higher
the wage rate, higher is the supply of labour. This [Link] wage-labour supply [Link] has been ignored by
the makers of this theory.

v. Full employment of resources is another unrealis.c [Link].

vi. This theory, in fact, is not a wage theory but a theory of employment. Wage rate is predetermined. At the
given wage rate OW, how many units of labour are supplied can be known from this theory. In this sense, it is a
theory of employment and not a theory of wages.

vii. Finally, this theory ignores the usefulness of trade union in wage [Link]. Trade union, through its
[Link] bargaining power, also influences wage rate in favour of the members of the [Link].

 7 Bargaining Theory
•  This theory was propounded by Adam Smith.
•  Wage rate of employees depend upon the bargaining capacity of
labour.
•  Earlier theories of wages have been rendered invalid or atleast
inadequate, as a result of [Link] bargaining by trade unions.
[Link] bargaining provides an example of what is [Link]
called bi-lateral monopoly, the trade union being the monopolist
supplier and the employer’s [Link], the monopolist buyer of a
[Link] kind of labour. Level of wages in an industry depends on
the bargaining strength of the trade union concerned.
•  The power of a trade union depends on the size of its membership,
the size of its fi[Link] fund and the extent of the [Link] to the
[Link] economy it can cause by a strike. In .mes of full
employment, the union will be in a strong [Link], in a depression
they will be weaker.
 Unit 2
Wage systems
Wages are the payments made to employees for their
services rendered. The following factors should be considered
before deciding the wage rate:
Demand & Supply of labour
Ability of [Link] to Pay
Cost of Living
[Link]
State [Link]
Prevailing Wage Rate
Job Requirements
Labour Union
 Methods of Wage Payments
1)  Time Wage system

Under this system, wages are paid on the basis

of .me spent on the job. The unit of .me may
be a day, a week, a month. Daily wages have
been the most common system.
Wages === Hourly Rate * Time Spent
•  Advantages
•  It is the simplest and oldest method.
•  Earning of workers are regular and fixed .
•  It is economical system and no detailed records of
output are required.
•  There is no pressure on employees to spped up the
[Link].
•  Learners can concentrate on learning strategies.
•  It avoids wasteful handling of materials and tools.
•  It is an [Link] method.
•  Trrade Union prefer .me wage system as it does not
diff[Link] between efficient workers and in efficient
workers.
•  The employer can calculte the wagess of each
employee in advance
•  Disadvantages
•  No [Link] is provided for beZer performance.
•  Guaranteed [Link] makes worker
indifferent.
•  In the absence of [Link] to hard work, the
[Link] of labour becomes low.
•  There is no standard of performance.
•  Delay in work.
•  More trade union interference
•  Low quality of work.
•  It requires more supervision
Suitability
•  Where units of output are not measureable
•  Where delay in work hour is frequent and
beyond the control of employees.
•  When quality of worker is more important.
•  It is applicable to [Link] where
supervision and control is important.
•  When workers are new and learning about
new jobs.

2) Piece Rate System
•  Under this system [Link] is based on
the amount of work done or output of a
worker.
•  Greater is the number of pieces produced by
the workers, higher the [Link].
•  It is also called payment by results.
•  Wages ==== No. of units produced* Piece
Rate
Advantages
•  There is a direct [Link] between efforts and reward. This
improves [Link].
•  Efficient workers are provided with the opportunity to [Link] their
talent.
•  This is a fair method.
•  Management can easily diff[Link] between efficient and
inefficient workers.
•  Increase in [Link] results in higher output and lower cost on
[Link] per unit.
•  Cost of training and supervision would be low.
•  There is more [Link] and team spirit amongst workers.
•  It helps in [Link] employees.
•  Lower cost provides benefit to customers as the cost of goods
would also be less.
•  Helps in achieving the goals of the [Link].

Disadvantages
•  It is very difficult to set piece wage rate.
•  The earning of worker are not stable and they
will suffer from temporary delays.
•  Employees not focus on quality.
•  There are more wastages of resources as
every one wants to produce more.
•  [Link] of trade union is more in this
system
•  It creates more conflict and clashes between
employees.
Suitability
•  When the [Link] of outputs depends upon
the skills and efforts of workers.
•  Where Quality is not important
•  When methods of [Link] are
standardized.
•  When labour is efficient and dedicated.
•  When there is compe..on in market.
•  When flow of [Link] is regular.
 Reward Management
Reward
•  It is a [Link] benefit for the [Link] services.
•  It is monetary as well as non monetary
•  It is the [Link] benefit by the [Link] to create
compe..on amongst employees and diff[Link]
efficient and inefficient workers.
•  It is [Link] in nature and helps in retaining talent.
•  It is a source of [Link]
•  It is people oriented
•  It helps in [Link].
 Reward Strategy
•  As per Merser, human resource and related
financial services, reward payments beyond just
[Link] but also retain employees.
•  It contributes business success. It basically means
right reward to right people and eliminate the
others at right .me for right reason.
•  [Link], Benefits, career planning, variable
pay, [Link], [Link], tours, free [Link]
are the form of rewards.
 Benefits derived from total reward
strategy
•  Source of [Link]
•  Retaining Talent
•  As a tool of employee ranking
•  Helps in greater ROI (Return on Investment)
•  Helps in reducing conflicts.
•  Helps in maximising [Link].
•  Increase inPerformance.
•  Helps in [Link].
•  Increase in team synergy.
•  Increase in loyalty of employees towards [Link].