Human Resource Management book Chapter 7 PDF

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Book about Human Resource Management, it about Chapter 6. Human Resource Management book about the Human Resource Management course....

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Chapter 7 Wage and Salary Admnistration Objectives:     

Enumerate the different theories of wages. Explain the significance of wages to the worker, labor and labor relations, to the national economy, and to the society. Discuss the procedures of a wages and salary survey. Compare the procedures of a wage and salary survey. Deduce the advantages of the wages and salary structures.

The Role of Human Resources in the Payment of Salaries One of the most important functions of the Human Resource is the payment of the proper salaries and wages to all company employees. The pay that the employees receive from their employer is very reason for their being in the job. The pay provides them with strong incentive to do their jobs well and the rate of pay indicates their status in the company. The pay determines the standard of living and their positions in the community that they live. It must be commensurated with their efforts and contribution to the company’s profitability index. The determination of the proper level of pay is the foundation effective employee and employer relationship as a satisfied worker will stay longer in the company and develop a working team that could be beneficial to both parties. One way to retain competent employees and keep their morale high is to plan salary levels so as establish uniformity to pay in relation to the job in the company and those in other business establishments in the community. The function of the payroll in a company is usually the wage and salary administration and it is carried out by the Human Resource Department. The most important duty of the Human Resource Department is to set wage scales high enough to attract better employees and contribute to the level of profitability that will sustain continuous profitable operations. The level of pay must not impair profits, however.

Theories of Wages Wage theories deal with the payment of labor employed competitive enterprises. Wages represent the payment of one factor of production that is manpower. Profits and capital could not be attained without manpower that has to be paid according to their contribution for the acquisition of enough

capital to attain the desired profits. Wages are the contributions or are the shares paid for the value of land, capital and profits.

1. Classical Wage Theory This theory is based upon the fundamental concept that labor is a commodity, and we have to pay the price according to supply and demand. When labor supply is greater than demand, the lower is the price and when there is greater demand the higher the price. The price of labor which is called wages, is necessary to keep the laborers to subsist and perpetuate their race. Wages should not fall below subsistence level. When the supply of labor reaches below the industrial requirement, there will be a consequent rise in wages. When the price of the labor is below the natural price, the condition of laborers is most wretched. When this happens the laborers could be deprived of those comforts which customs render as absolute necessities. 2. The Just Wage Theory of St. Thomas Aquinas A just wage is described as wage which permits the recipient worker to live in a manner in keeping with his position in society. This doctrine is related to social organization based on the individual in the social organization. According to this theory, the workers’ cost of living should be considered first in the cost of production. Wages are responsible for allocating labor to various occupations. This theory is the basis in the implementation of minimum wage laws. While it could not be consistent with the minimum requirements for a decent living in the social organization, it responds to the basic requirements for subsistence living. The creation of the Tri-partite Board composed of Labor, Management and the Department of Labor is the answer to the study of the implementation of just wages. 3. The Wage Fund Theory The wage fund theory expounded by John Stuart Mill and his followers is based on the Malthusian theory of population and the law of diminishing returns. This theory holds the idea that the working capital of the nation provides a fund from which wages can be paid. The fund is to be divided by all the workers proportionately. When a certain group gets a greater share of the total fund, the rest in the group will have less to share. An increase in the wages of some through collective bargaining or any other pressures will adversely affect the wages of others.

Under this theory it would appear that it is futile to attempt to increase wages. It would appear that when you increase the wages of other workers in the company, it would redound to decrease the wages of the other sectors, because the portion of the corporate wage fund goes to the selected sectors in the organization. A comment under this theory is that the fund should be elastic for all the other factors of production such as capital, maintenance, materials and labor. It should be elastic enough to meet the economic conditions prevailing conditions prevailing at the time and the conditions of the corporate economy.

4. Bargaining Theory of John Davidson The bargaining theory proposes that labor is a commodity like anything that could be bought at a price by the user. As a commodity, it carries with it a price that is determined by the bargaining process between the buyer and seller. The sellers of labor are the workers and the buyers are the users or the industries that utilize their services. The labor sets the limit of the value of their services as conditioned by the utility of reward. Such reward is conditioned by what their money can buy with the wages in the light of their actual standard of living. The bargaining theory brings about the organization of labor unions. These unions bargain with management for their services. The management then sets the discounted value of labor based on the value of output in question; while labor demands the living wages that they think is enough to sustain a decent living condition. When management sets a rigid limit on the funds available for labor as it affects operating cost and profitability; on the other hand, labor insists on living wages for their effort. The resultant condition is either a strike or a lockout. 5. The Marginal Productivity Theory The marginal productivity theory offers the best explanation of the wages in modern industry. The supply of labor in any given economy on the whole depends upon the total number of individuals who want to work and available for work. Worker’s mobility, which is the transfer from one company to another due to opportunities in the other company, affects the structure of wages in the industry. It is not only the difference in wages that makes the employee transfer to another company. Better opportunities for advancement, more benefits, better working environment, or even the corporate atmosphere are other factors that affect mobility. In this juncture, it may be surmised that mobility is not judged by the amount of

movement but the degree to which existing job differences call for worker movement. The hiring of added labor force, or the transfer of one employee to another company at a particular wage is based on the assumption of the company that the added labor will contribute to the increase in production output or the increase in the quality of the product. While such assumption may have bearing to a certain extent, any increase in manpower tends to decrease the value of the marginal product as the number of workers increases. In our, developing economy where manpower is in great supply against demand, competition in the labor market is seldom felt by the industry, except in some critical positions where specialization is in great demand. 6. The Purchasing Power Theory The purchasing power theory tries to establish the relationship between wages and the level of economic activity. The level of economic growth is dependent upon the savings generated because the increase in wages creates a surplus that propels growth. The more income worker gets, the bigger the purchasing power of the workers; then this increases consumption of goods and services. Increased consumption of goods generates employment opportunities. 7. Labor Theory of Value Karl Marx propounds this theory of labor. This gives credence to the value of labor. It emphasizes that labor is the source of all product and that without this important component, there could be no goods for human consumption. Every good that is produced could be traced back to the participation of the worker, and therefore, labor must get the greater share of the profit. This is the philosophy of some organized labor groups who are more active in the greater share of the profits of the company operations. These labor unions have the notion that profits are the surpluses of the other factors of production, and are pocketed by the capitalist businessman making them a mass wealth. Profits should be shared with labor as they create the goods that generate these surplus incomes. Economic activity is created by capital, by the surplus profits that create investments. When employer’s contentions run counter to the activists’ group of labor unions, this can create labor unrest detrimental to both labor and management and even to economic growth. 8. The Standard of Living Theory of Wages

A recent development in labor market is the theory of living wages that means that wages should be based on the cost of living. The cost of living is dependent upon the economic needs of the family for the basic necessities of life for food, clothing, and shelter. While the philosophy is economically sound for the improvement of the living conditions of the labor force, it is counter productive due to the forces of global economic activity. Our productivity index has to cope with increased competition in the global market and our products must be paired in quality and price. Any increase in economic growth would redound to increased wages. Nevertheless, an increase in income would mean more consumption. More consumption increases the prices of goods and thus living wages also need to be increased proportionately. There could be no end to this argument. It is the government, labor and management that must sit together to determine the level of living wages if possible by industry and by region. Wage and Salary Surveys Once the worth of a job has been established using one of the job rating systems, the actual salary to be paid to each job must be determined. A major factors in making the determination is the wage survey. Since salaries paid by other companies have an effect on employment, morale and turnover rate, close attention is paid to the salary that is prevailing in the community and industry for specific jobs. Most companies participate in wage and salary surveys or they conduct their own surveys. Informal surveys may be conducted through telephones and informal interviews. Formal salary and wage surveys are questionnaires based on benchmark jobs that are also present in other companies and industries. In the formal survey method, the Human Resource Department prepares a set of questionnaires incorporating common jobs present in the company and is comparable with others jobs in other industries.

Procedure in Conducting Wage and Salary Surveys Before embarking on a wage and salary survey, the Human Resources Department should study the wage and salary data that are already available. In any request for survey data, it could be recognized that job title alone is not good enough for matching jobs. Each job title should be accompanied with one paragraph job description so that it is possible to

accurately compare jobs. In addition to the base salary, the information should include data on shift premiums overtime payment practices and methods of wage payment. Some surveys also include questions on paid holiday, vacation policies, pension benefits, group health cards and life insurances and additional leave pays. These data are needed for more analysis of the total pay structure and its relation to other company benefits.

The following are steps in conducting the survey: 1. Defining the labor market. Establishing the boundaries of the pertinent labor market is the most critical step in the survey procedure, It involves the selection of the industry, the region or area or the firm to be included in the survey. 2. List of key jobs and positions common to most firms in the survey. This will ensure a representative sampling of the jobs that will be selected as universal for a particular wage of salary survey. 3. A detailed description of the key jobs and positions that are to be included in the survey and that is common to most firm or industries. Key jobs are labor grades that are comparatively stable in duties and responsibilities. These are occupations that are common in most industries and scattered through the ladder of labor classification and commonly familiar to most people in the industry. 4. Collection of accurate wage and salary data. This may be done through a set of questionnaires and supplemented by interviews to get the accurate information. The information must be able to pin point the problem area that has to be addressed by the compensation level, compensation structure and the terms of payment plan.

5. A compilation of the wage and salary data for each job. The data gathered will provide management with the opportunity of arriving at the arithmetical average, the median and the range of rate paid and the supplementary wage data. 6. Presentation of the results of the survey. The results are properly evaluated and HRD prepares the corresponding recommendations to the management of the most appropriate action to take relative to the revision of the current wage structure. Participating companies are also provided with the summary of the findings to foster continuous cooperation.

After the organization completes the salary survey and finds out what he prevailing salaries are in the community for comparable jobs, it must then make several decisions: 1. Whether the company should pay salaries above, below or at the same level, as the others in the same industry in the community are paying for the same jobs. 2. Whether the company should pay a single rate for each job, or slot the jobs into ranges or grades which would provide room for merit increase. 3. How many pay grades or salary ranges to use, and how wide each pay grade should be (from the minimum of the grade to the maximum) 4. What is the range of the amount in terms of money value that should be allotted for each salary grade levels? Although there are no set rules for making these decisions, one tool that is often used to simplify the process is the use of two-dimensional graphs, also known as data trend graph. When the graph is used with point system, the values of the points for key jobs in the industry are plotted with the lowest pay at the bottom. The survey data for any job is then plotted according to the evaluation points and grades. Eventually all the pay survey data should be plotted.

An examination of the graph will indicate the trend of the data plotted. A line is drawn to indicate this trend, using one of the following techniques: 1. Eye Inspection – The line is drawn freehand so that about the same number of data points fall above the line. It allows the general trend of the data, This technique is the least scientific and reliable as this does

not require scientific computations. It is more of a judgmental analysis that is used only by experts in the field of job evaluation. 2. The Least Squares – This uses the statistical formula; the trend line will normally follow a straight path. It represents more accurately the relationships between the peso or money value and the points for the key jobs.

3. The Second Degree Curve – Using another statistical formula; the trend line will normally take the form of a curve and may more accurately indicate the trend of the data.

The trend line should correctly reflect the trend of the data collected so that competitive pay rates and ranges will hold throughout the structure. If the ranking method is used, the rank number or grade can be substituted for the points on the horizontal of the graph. A similar graph should then be drawn to reflect the relationship between internal existing rates and job rating points. A trend line should be established and drawn. This trend line should be compared with the outsidesurvey trend line. In this way, management can see how salaries compare with those outside the company. Then the decision will have to be made whether to pay below the survey trend line, meet it or pay above it. In deciding whether to match a survey trend line, management faces a conflict between personnel and economic forces. If the company pays above the survey trend line, its ability to complete may be endangered as the labor cost will be higher than the same industry, thereby added cost of production will be added to the cost of the product. If the company pays below the trend line, its ability to hire capable employees may be affected or this will cause personnel turnover. To reconcile these two conflicting forces, management may decide its own slope line that should be about the same as the result of the survey. Another important decision is whether hourly paid occupations should be assigned as single rate or a range of rates. For production or maintenance workers, most organization pays one standard rate for all jobs in the same grade. That is especially true when an operation is so standardized that is difficult to determine accurately the contribution of workers. A single rate for each job has the advantage of eliminating favoritism.

The Development of Wage and Salary Structure The design and operation of wage and salary structure is the concern of management and employees. Wage and salary structure is the hierarchy of jobs to where they pay rate is attached. The positions are allocated in pay grades according to the job evaluation results and its relations with the pay system derived from the results of the salary survey. The jobs are ranked in ascending to descending order according to their importance and based on the points or ranked earned in the job evaluation program conducted by the HRD and the committee created for the development of a more responsive pay system. The following are the advantages of the wage and salary structure: 1, It affects the workers earning and standard of living. 2. It eases the recruitment and maintenance of an effective labor force. 3. It develops employee morale and increase work efficiency. 4. It represents cost and competitive advantages in the industry. 5. It helps in preparing budgetary allocations and eases computation of salary adjustments and as an aid in short term and long range plans. 6. It eliminates pay distortions and inequities in employee compensation. 7. It establishes an equitable salary range for various job.

Wage Structure Design The design of the wage and salary structure is the establishment of the job classes and rate ranges. All jobs within a class are treated in the same way for purpose of economical administration. Pay structure ranges should be used in developing a schedule for both rank-and-file employees, technical and managerial positions. In some companies, they have a separate structure for hourly and daily paid employees and separate salary structure for regular monthly paid jobs. The managerial pay systems are separated, based on rank depending on their assignments and contributions to the company’s profitability index. The number of pay ranges in pay structure depends on the company and on the number such structures in the company. If a company has a single salary structure then, there should be many pay grades. If the organization has one wage structure for hourly workers, another for the office regular workers and still another for supervisors and managerial employees, then there should be a moderate number of pay grades in each

structure. There is no standard number of pay grades per s...