Wages & Incentives Notes PDF

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3. Wages and Incentives 3.1 Definition and Factors Affecting Wages, Methods of Wage Payment. 3.2 Wage Incentive – Type of Incentive, Difference in Wage Incentive and Bonus 3.3 Job Evaluation and Merit Rating Questions 1) 2) 3) 4) 5) 6)

Explain Wages and the factor affecting wages. Explain Wages the methods of wage payment. Explain the term “Wage Incentive” and its types. What is the difference between Wage Incentives and Bonus? Write the Short Notes on Job Evaluation. Write the Short Notes on Merit Rating.

Definition of Wages  A wage is monetary compensation (or remuneration, personnel expenses, labour) paid by an employer to an employee in exchange for work done. Payment may be calculated as a fixed amount for each task completed (a task wage or piece rate), or at an hourly or daily rate (wage labour), or based on an easily measured quantity of work done  A wage may be defined as the sum of money paid under contract by an employer to worker for services rendered. Factors Affecting Wages Some of the factors which influence the wage rates are: 1. Demand and Supply of Labour: Demand and supply is one of the important factors which influence the wage rates. If the number of workers required is more than availability of workers, then employees will be paid higher rate of work and vice versa. 2. Legal Provisions: The government had made cretin laws/acts for fixation of minimum wages to the workers such as minimum wages act 1948. According to this act, the employer must pay minimum wages to the worker. If any employers do not follow the rule of this act, an action can be takes against him. 3. Ability to Pay: Payment of wages also depends on the ability of a company to pay. A company running into losses will not be in a position to pay more than minimum wages, whereas a profit making company can give workers a share in the profit. 4. Nature of Job: Wages also depends upon the worker’s skill and the conditions of work. Some jobs can be done by skilled employees while some jobs can be done by unskilled employees. The work conditions can be safe or hazardous. So wages can be high or low, depending upon the worker’s skill and conditions of work.

5. Working Hours: Wages also depends upon the number of hours worked per day and the number of holidays. 6. Comparative Wage Levels: Wage rates also depend upon the wages paid in competitive firms for the same type of work. Wages are therefore fixed after conducting wage surveys. 7. Cost of Living: Cost of living also determines the wage rates. Wages should be such which satisfies the minimum needs of workers. 8. Type of Employment: Wages depends upon the type of employment i.e. regular employment or contractual employment. A regular and permanent job provides security of service. Methods of Wage Payment There are generally two methods of wage payment i) Time Wage System ii) Piece Wage System 1. Time wage system In this method worker is paid for the amount of time he has spent on the job. The period of time may be an hour, a day, a week, a month and the wages depend upon the period of time. Here wages are paid for the amount of time spent not on the basis of output. Thus, it is a nonvariable method of wage payment. Wages= number of hours worked* rate per hour Applicability of time wage system:  This method is used when it is difficult to fix standard time for the job.  When production process is complicated and requires high degree of skill.  When machines used are costly  When quality of work is important.  When mental work is involved. Advantages  This method is very simple as it is easy to calculate the time spent on the job.  When the quality of the product is more important in that case it is better to use this method rather than piece wage system because in that worker are in hurry of making more and more pieces.  Under this method workers are not in hurry so there is less wastage of material as well as of machinery.  All the workers are paid as per the time spent by them not on the basis of production. So there is the equality of wages between them.  This method gives the feeling of security to the workers as they will be paid irrespective of whatever is the production.

Disadvantages  Under this method the workers slows down their work as there is no pressure of making required amount of pieces.  This method requires a lot of supervision to ensure better productivity.  If the workers make more production in that case also they are paid fixed wages as per the time spent by them in the job. 2. Piece Rate System:  Piece rate system is a system in which wages are paid in accordance with the number of units of work produced.  This is independent of time spent on the job.  A fixed rate of wage is paid for each piece of unit produced.  For Example: If a worker produces 100 pieces per day and he is paid at the rate of Rs.1.2 per piece, the daily wage is 100 x 1.2 = Rs.120. Advantages:  This system is simple in working and the workers can easily calculate their wages.  This system helps in distinguishing efficient and inefficient workers.  Strict supervision is not required in this system.  This system is fair to employee and employer both.  There will be no dispute for wages, as workers will be rewarded satisfactory for their work. Disadvantages:  This system does not guarantee a fixed minimum wage to a worker.  The quality of goods will be poor as workers try to speed up their work in order to produce more.  There will be increase in wastage of materials.  Workers intentionally ignore safety rules, inviting accidents.  Workers neglect their health in order to put their maximum efforts.  The wages of beginners will be less, as their output cannot be equal to the experienced workers. Wage Incentive Wage incentive refers to performance linked compensation paid to improve motivation and productivity. It is the monetary inducements offered to employees to make them perform beyond the acceptance standards.  Incentive pay is the payment that is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan.  Incentives are provided as a motivation to the workforce to complete more tasks and build loyalty to the organization.  An incentive is guaranteed to the employees if they complete the task.

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Type of Incentive The two common types of incentives are: a) Monetary or Financial Incentives The reward or incentive which can be calculated in terms of money is known as monetary incentive. These incentives are offered to employees who have more physiological, social and security need active in them. The common monetary incentives are:        

Pay and allowances Profits sharing Co-partnership/stock option Bonus Commission Suggestion system Productivity linked with wage incentives Retirement benefits

b) Non-Monetary/Non-Financial Incentives Money is not the only motivator, the employees who have more of esteem and selfactualization need active in them get satisfied with the non-monetary incentives only. The incentives which cannot be calculated in terms of money are known as non-monetary incentives. Generally people working at high job position or at high rank get satisfied with non-monetary incentives. The common means or ways of non-monetary incentives are:  Status. Status refers to rank, authority, responsibility, recognition and prestige related to job. By offering higher status or rank in the organization managers can motivate employees.  Organizational climate. It refers to relations between superior/ subordinates.  Job enrichment/ assignment of challenging job. Employees get bored by performing routine job. They enjoy doing jobs which offer them variety and opportunity to show their skill. By offering challenging jobs, autonomy to perform job, interesting jobs, employees get satisfied and they are motivated. Interesting, enriched and challenging job itself is a very good motivator or stimulator.  Employee’s recognition. Recognition means giving special regard or respect which satisfies the ego of the subordinates. Examples of employee’s recognition are congratulating employee for good performance, displaying the achievement of employee, giving certificate of achievement, distributing mementos, gifts etc.  Job security. Job security means life time bonding between employees and organization  Employee’s participation. It means involving employee in decision making especially when decisions are related to workers.  Autonomy/ employee empowerment. It means giving more freedom to subordinates. This empowerment develops confidence in employees. They use positive skill to prove that they are performing to the best when freedom is given to them.

Difference in Wage Incentive and Bonus A bonus is the decision to pay one, a group or all employees, based on criteria decided by management to reward past achievements, such as reaching a specific profit or target, or some important milestones for the organization. Incentive pay is the payment that is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan. 1. Basic difference: The bonus is granted to a person after a particular task or project has been completed by the person, an incentive is offered at the onset. Incentives will be mentioned to the employee before he started working. 2. Bonus is surprising: A bonus is usually given as a surprise. Incentives have no surprise factor. Incentives are provided as a motivation to the workforce to complete more tasks and build loyalty to the organization. An incentive is guaranteed to the employees if they complete the task. The bonus is provided at random or on the spot that the management of a firm decides to give a bonus to their employees for accomplishing the task. 3. Forward-looking and backward looking: The incentive is an additional pay (above and beyond the base salary or wage) awarded to an employee, such as stock options or a contingent bonus plan that is forward looking. The bonus is may be in the form of a cash award or other items of value, such as stock, based on tasks achieved. Bonus plans are backward looking in nature. 4. Bonus in cash form: Incentives are any form of variable payment tied to performance. The payment may be a monetary award, like cash or equity, or a non-monetary award, such as merchandise or travel. In bonus, payments may be made in cash, shares, share options or other items of value. In the context of sales compensation, a defined, pre-established amount of money to be earned for achieving a specified performance goal. 5. An incentive in the form of bonus: An incentive can be a bonus, but a bonus cannot serve as an incentive. It is because the incentive is forward looking and encourages the employees to perform a given task well, where as a bonus is something which is only handed out once a task has been fulfilled and the boss thinks that individuals have outdone themselves.

Job Evaluation  Job Evaluation is a systematic process of evaluating different jobs of an organization.  Depending upon the characteristics and requirements of a job, job evaluation determines its relative worth and attaches a value to it.  These relative values of a jobs assist in deciding wages rates and salaries for different jobs.  Job evaluation deals with job only and is in no way concerned with the persons doing these jobs.

Role of Job Evaluation        

Decide the relative values of different jobs in an organisation Helps to formulate an appropriate and uniform wage structure Clarifies the responsibility and authority concerned with each job Provide a basis of recruitment, selection, training, promotion and transfer of the employees Improves employer-employee relationships Adds to job satisfaction Minimize the labour turnover Describe and evaluates new jobs

Methods of Job Evaluation The various commonly used methods or systems of Job Evaluation are; a) Ranking Method The different jobs, depending upon their requirements, responsibilities involved and their importance to the organization, are ranked, graded or placed from top to bottom. b) Classification Method Jobs are classified or graded in groups or level of equal skill, difficulty, responsibility, importance and other requirement. It may be a production job, a sales job or an office job; each job family can be broken into a number of grades. For Example, office job may be classified into six grades, namely grade A to grade F. Grade A involves simple tasks like sorting whereas grade F deals with those which require high responsibility and judgement. Each grade carries an appropriate monetary scale c) Factor Comparison Method This Method employs a five factor scale for analysis, comparing and evaluating different jobs. The five factors are Skill, Mental Effort, Responsibility and Working Condition. d) Point Method The point method bases itself on dividing in the jobs into a number of factors which in turn are further subdivided into grades or degrees. Each degree is awarded certain points and when such points for all the degrees are totalled they indicate the importance of the job in the organisation; consequently a suitable wage rate proportional to the total points is determined Merit Rating  Merit Rating is a systematic and orderly approach to assess the relative worth of an employee working in an organization in terms of his job performance, integrity, leadership, intelligence, behaviour etc.  Merit Rating provides a record of the worth of employees; they, therefore, can be put on the most appropriate jobs depending upon their capabilities.  Merit Rating unfolds the limitations of an employee and thus helps in employee improvement.

Merit Rating records form a basis for: a) b) c) d) e) f)

Wage-increase Promotion Special Assignments Training Transfer Discharge

Methods of Merit Rating There are two different methods of merit rating: 1) Rating Scale Method 2) Check List Method 3) Employee Comparison Method Advantages of Merit Rating Merit Rating develops the ability of a rater Meritorious Employees are encouraged Employee-Employer relations improve It is easy to deal with the unions as merit rating is a systematic method to rate the employees.  It involves lesser calculations as compared to other incentives schemes.    

Disadvantages of Merit Rating  It entails Halo effect. Halo Effect means the tendency of the rather to rate an employee consistently low, average, or high in all jobs, simply basing upon the general impression formed by him about the employee.  Correct result not be obtained, if merit factors relevant to a particular job are, somehow or other omitted or points allocated to them are not fair.  Merit Rating does not reward employees immediately for their performance.  A supervisor may not like to degrade his subordinates who may be excellent otherwise but not good at work.  A supervisor, if he does not make enough personal contacts with each employee cannot rate them correctly....