Shashikumar A

Assistant Professor
Department of Commerce and Mgt
Surana College
CHAPTER-IV
WAGES AND SALARY ADMINISTRATION
WAGES FUND THEORY:
Concept: This theory, associated with early classical economists like David Ricardo, suggests
that there is a predetermined "wages fund" set aside by employers to pay wages. The size of
this fund is determined by the total capital available for investment.
This theory, associated with classical economists like Nassau William Senior and John Stuart
Mill, posits that there is a fixed "wages fund" set aside by employers to pay workers. The size
of this fund is determined by factors such as capital accumulation and the overall economic
conditions. Wages are seen as dependent on the available funds, and an increase in the labor
force might lead to lower wages.
➢ Wages are constrained by the size of the wages fund.
➢ If the labour force increases, individual wages decrease since the fund is distributed among
more workers.
➢ This theory assumes a fixed relationship between capital and wages.

SUBSISTENCE THEORY:
Concept: This theory, prevalent in classical economic thought, posits that wages tend to
gravitate towards the minimum level required for workers to subsist and reproduce. It is
associated with thinkers like David Ricardo and Thomas Malthus.
The subsistence theory of wages, often associated with classical economists such as David
Ricardo and Thomas Malthus, argues that wages tend to gravitate towards the minimum level
required for workers to subsist and reproduce. It suggests that population growth tends to put
downward pressure on wages, as an increase in the labor supply could lead to wages only
covering basic living expenses.
➢ Wages are influenced by the cost of living and the basic needs of workers.
➢ The theory implies that wages will remain at or near the subsistence level in the absence of
external factors.

SURPLUS VALUE THEORY OF WAGES:

Concept: Developed by Karl Marx, this theory is rooted in the labor theory of value and argues
that wages are a portion of the surplus value produced by workers. The surplus value is the
difference between the value of goods produced by labor and the value of labor itself. This
theory is rooted in Marxist economics. Karl Marx argued that the value of labor power (wages)
is less than the value created by the worker in the production process.
Key Points:
➢ Workers receive only a fraction of the value they produce.
➢ Capitalists extract surplus value, contributing to the exploitation of labour.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College

RESIDUAL CLAIMANT THEORY:

Concept: This theory, associated with economist Francis Walker, posits that workers are like
residual claimants in the production process, receiving what remains after other factors of
production (land, capital) have been compensated.
This theory, associated with economist Francis A. Walker, views labor as the residual claimant
in the production process. It suggests that after all other factors of production (capital, land,
etc.) are compensated, whatever remains goes to labor in the form of wages. In this perspective,
wages are seen as the "residue" left after other costs are covered.
➢ Workers earn wages based on what is left after deducting other production costs.
➢ The theory highlights the uncertain and residual nature of labour income.

MARGINAL PRODUCTIVITY THEORY:

Concept: Developed by neoclassical economists like John Bates Clark, this theory suggests
that wages are determined by the marginal productivity of labour. Workers are paid based on
the value of the last unit of output they produce.
This neoclassical theory, associated with economists like John Bates Clark, argues that workers
are paid according to their marginal (additional) productivity. Employers are willing to pay a
wage equal to the value of the last unit of output that a worker contributes to the production
process. It links wages to the contribution of labor to overall production.
➢ Wages are linked to the additional output (productivity) generated by each additional unit of
labor.
➢ Reflects a market-oriented approach where wages are seen as just compensation for
contribution to production.

BARGAINING THEORY OF WAGES:

Concept: This theory emphasizes the negotiation process between employers and employees
in determining wages. Bargaining power, influenced by factors like labor unions and individual
skills, plays a crucial role.
The bargaining theory emphasizes the negotiation process between employers and employees
in determining wages. Factors such as the bargaining power of labor unions, the demand for
labor, and individual bargaining skills come into play. Wages are viewed as outcomes of
negotiations and agreements between the two parties.
➢ Wages are a result of mutual agreement or conflict between employers and workers.
➢ The theory recognizes the role of power dynamics in the determination of wages.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
BEHAVIOURAL THEORIES OF WAGES:
Concept: Behavioral economics explores how psychological and social factors influence
economic decisions, including wage-setting. It considers non-rational elements in wage
determination. Behavioral theories consider psychological and social factors in wage
determination. These theories explore how individual and group behaviors, preferences, and
perceptions influence wage decisions. Factors such as fairness, motivation, and social norms
are considered alongside traditional economic variables in understanding wage-setting
mechanisms.
➢ Wages may be influenced by psychological biases, social norms, and individual perceptions.
➢ Behavioral theories go beyond traditional economic models by incorporating psychological
insights into wage-setting.
"Wage fixation" refers to the process of determining or setting the wages that employees
receive for their work. Various factors and mechanisms contribute to the fixation of wages, and
it can be influenced by economic, social, legal, and institutional considerations.
Wage payment refers to the compensation provided by employers to their employees in
exchange for the work or services they have rendered. The process of wage payment involves
various aspects, including the methods of payment, frequency, legal regulations, and the
components that make up the total compensation.
Salary administration refers to the process by which organizations establish, maintain, and
periodically review the compensation structures for their employees. It involves determining
the salaries, wages, and other forms of remuneration that employees receive for their work.
Effective salary administration is crucial for attracting and retaining talent, ensuring fair
compensation, and aligning pay structures with the organization's goals.

DIFFERENCE BETWEEN SALARY AND WAGES

Feature Salary Wages
Payment Structure Fixed and predetermined, Variable and often paid on an
typically monthly. hourly, daily, or weekly basis.
Frequency of Payment Monthly or semi-monthly. Typically, weekly, or bi-weekly,
but can vary.
Basis of Payment Paid for an entire year's work, Based on the number of hours
regardless of hours worked. worked or units produced.
Consistency Generally consistent, regardless of Can vary based on the number of
hours worked. hours worked.
Overtime Pay Typically exempt from overtime Subject to overtime pay
pay regulations. regulations for extra hours
worked.
Applicability Common for professional, Common for hourly or part-time
managerial, or salaried positions. positions.
Benefits May include additional benefits Benefits may be provided but are
like health insurance, retirement often more limited compared to
plans, etc. salaried positions.
Examples Professionals, managers, Hourly workers, part-time
executives. employees.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
Basis of Compensation Fixation :
In India, the basis for compensation fixation (setting salaries and other benefits)
is influenced by various factors, including legal regulations, industry practices,
market conditions, and organizational policies. Here are some key elements that
contribute to compensation fixation in India:
1. Legal Framework:
Minimum Wages Act: The Minimum Wages Act, 1948, establishes the
minimum rates of wages that must be paid to skilled and unskilled labourers in
different industries. States and union territories periodically revise these rates.
Payment of Wages Act: This act governs the timely payment of wages to
employees and specifies the permissible wage deduction limits.
2. Job Evaluation and Grading:
Organizations often use job evaluation methods to assess the relative value of
different roles within the company. This may involve considering factors such as
skills required, responsibilities, and market demand for specific positions.
3. Market Conditions:
Compensation is often influenced by prevailing market conditions. Employers
may conduct salary surveys to benchmark their pay structures against industry
peers and competitors to ensure they remain competitive.
4. Performance and Merit:
Employee performance and merit-based systems play a crucial role in
compensation fixation. Organizations may have performance appraisal processes
that link salary increases, bonuses, and other benefits to individual or team
achievements.
5. Industry Practices:
Compensation practices can vary across industries. Certain sectors may have
unique standards and norms for remuneration. For example, the information
technology (IT) industry might have different compensation structures compared
to manufacturing.
6. Negotiation and Bargaining:
Collective bargaining, especially in unionized sectors, can influence
compensation. Unions may negotiate with employers on behalf of workers to
secure better wages, benefits, and working conditions.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
7. Government Regulations:
The government periodically revises and updates labor laws and regulations that
can impact compensation. Employers need to comply with these regulations to
ensure fair and legal compensation practices.
Wages consist of various components that together make up the total
compensation that employees receive for their work. These components can vary
based on factors such as industry practices, organizational policies, and local
regulations.
Components of wages
Basic Salary/Wage:
The fixed amount of money paid to an employee for their regular working hours.
It forms the core of the compensation package and is often the basis for
calculating other benefits.
Allowances:
Allowances are additional payments made to employees to cover specific
expenses related to their job or personal circumstances. Common allowances
include:
House Rent Allowance (HRA): Provided to cover accommodation expenses.
Transport Allowance: Given to employees to cover commuting costs.
Medical Allowance: Intended to cover medical expenses.
Special Allowances: Additional payments that are not part of the basic salary and
can vary based on the organization's policies.
Overtime Pay:
Compensation for hours worked beyond the standard working hours. Overtime
rates are typically higher than regular hourly rates.
Bonuses:
Bonuses are additional payments made to employees based on performance,
company profitability, or other predetermined criteria. Types of bonuses include:
Annual Bonus: Paid annually based on overall performance.
Performance Bonus: Linked to individual or team performance.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
Retention Bonus: Given to encourage employees to stay with the company for a
specified period.
Incentives:
Incentive programs provide financial rewards for achieving specific goals or
targets. These can be individual or team-based and are designed to motivate and
reward high performance.
Benefits:
Employee benefits are non-monetary forms of compensation. Common benefits
include:
❖ Health Insurance: Coverage for medical expenses.
❖ Retirement Plans: Such as provident fund or pension schemes.
❖ Gratuity: A lump-sum payment to employees upon retirement or
resignation.
❖ Stock Options: The right to purchase company shares at a predetermined
price.
❖ Commissions: Commission-based pay is common in sales and certain
industries. Employees receive a percentage of the sales they generate.
❖ Profit-Sharing: Employees may receive a share of the company's profits,
distributed periodically based on a predetermined formula.
Piece-Rate Pay:
In industries where work is measured by the quantity produced, employees may
receive payment based on the number of units or pieces they produce.
Leave Encashment:
Some organizations allow employees to encash unused leave days, providing
additional monetary compensation.
Special Payments:
Occasional or one-time payments made for specific reasons, such as employee
recognition, awards, or special projects.
BONUS SCHEMES
Bonus schemes can be designed to reward individual performance, team
achievements, or a combination of both. Here's a brief overview of individual and
group bonus schemes:
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
Individual Bonus Schemes:
Merit-Based Bonuses:
Description: Employees receive bonuses based on their individual performance
and achievements. This could include meeting specific targets, exceeding
expectations, or demonstrating exceptional skills.
Advantages: Encourages individual excellence and recognizes outstanding
contributions. Motivates employees to strive for personal improvement.
Sales Commission:
Description: Common in sales roles, employees earn a commission based on the
value of the sales they generate.
Advantages: Directly ties compensation to individual sales performance,
providing a clear incentive for sales professionals.
Performance Bonuses:
Description: Bonuses awarded for achieving predefined performance goals or
targets. This could include meeting sales quotas, project deadlines, or quality
standards.
Advantages: Aligns employee efforts with organizational objectives. Provides a
clear framework for performance expectations.
Recognition Awards:
Description: Non-monetary awards, certificates, or public recognition given to
employees for exceptional contributions.
Advantages: Fosters a positive work environment by acknowledging and
celebrating individual achievements.
Group Bonus Schemes:
Profit-Sharing:
Description: Employees receive a share of the company's profits, distributed
among the entire workforce based on a predetermined formula.
Advantages: Encourages a sense of shared ownership and responsibility for the
organization's success.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College
Team-Based Bonuses:
Description: Bonuses are awarded to a specific team or department for achieving
collective goals or milestones.
Advantages: Promotes collaboration and teamwork. Incentivizes groups to work
together toward common objectives.
Gainsharing:
Description: Like profit-sharing, gainsharing involves sharing the financial gains
resulting from improved productivity or cost savings.
Advantages: Encourages employees to contribute to efficiency improvements and
cost-saving initiatives.
Departmental Bonuses:
Description: Bonuses are based on the performance of a specific department or
unit within the organization.
Advantages: Recognizes and rewards collective efforts within a particular
functional area.
Project-Based Bonuses:
Description: Bonuses are tied to the successful completion of a specific project.
All team members involved in the project may receive a bonus.
Advantages: Provides motivation for teams to collaborate effectively and deliver
successful project outcomes.
Employee Stock Ownership Plans (ESOPs):
Description: Employees receive shares of the company, fostering a sense of
ownership and aligning their interests with the company's performance.
Advantages: Encourages long-term commitment and loyalty. Allows employees
to benefit from the company's growth.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College

EFFECT OF VARIOUS LABOUR LAWS ON WAGES PREPARATION

OF PAY ROLL
Labor laws play a significant role in influencing the preparation of a payroll,
impacting aspects such as wage rates, deductions, compliance, and overall
employment-related practices. Different labor laws address various aspects of
employment, and their effects on wages and payroll preparation can vary. Here
are some key labor laws that commonly influence payroll preparation:
Minimum Wages Act:
Effect on Payroll: The Minimum Wages Act sets the minimum rates of wages
that must be paid to skilled and unskilled labourers in different industries.
Employers must ensure that the wages paid to employees meet or exceed the
specified minimum rates.
Payment of Wages Act:
Effect on Payroll: This act governs the timely payment of wages to employees. It
specifies the frequency of wage payments, permissible wage deductions, and the
modes of payment. Non-compliance with these provisions can result in penalties.
Employee Provident Fund (EPF) Act:
Effect on Payroll: The EPF Act mandates that employers and employees
contribute a certain percentage of the employee's salary to the provident fund.
The contribution rates and applicable wage ceilings influence the payroll
calculations.
Employee State Insurance (ESI) Act:
Effect on Payroll: The ESI Act requires employers and employees to contribute
to the Employees' State Insurance Corporation. The contribution rates are based
on the employee's wages, and compliance affects payroll deductions.
Payment of Bonus Act:
Effect on Payroll: The Payment of Bonus Act mandates the payment of an annual
bonus to eligible employees. The calculation of bonus amounts is based on
specified criteria, such as profits and allocable surplus, which impacts the payroll
during bonus disbursement.
Shashikumar A
Assistant Professor
Department of Commerce and Mgt
Surana College

Gratuity Act:
Effect on Payroll: The Payment of Gratuity Act requires employers to pay
gratuity to employees who have completed a specified period of continuous
service. The calculation of gratuity is based on the employee's last drawn salary,
influencing payroll computations.
Labour Welfare Laws:
Effect on Payroll: Various labor welfare laws may require employers to
contribute to welfare funds or provide certain benefits to employees. These
contributions or benefits can impact the overall cost reflected in the payroll.