ECONOMIC and BEHAVIOURAL THEORIES OF WAGES

Wage Determination Theories
Acc. To Prof. J. Dunlop the history of wage theory may be divided in to 3 periods :
Up to 1870 , Which was dominated by WAGE FUND THEORY
1870-1914 : THEORY OF MARGINAL PRODUCTIVITY
1914- till date : Process of Collective bargaining & Keynesian Equity & the General Wage Level & Employment.

Subsistence Theory by David Ricardo(1772-1823)
Also called as “Iron Law of Wages”
Assumptions
Law of diminishing returns apply to the industry.
Population increases or decreases on the basis of subsistence wages paid to the workers.
Labor demand constant
No wage differentials.

Subsistence Theory by David Ricardo(1772-1823)
This theory states that “ The laborers are paid to enable them to subsist & perpetuate the race without increase or diminution”

PROCESS OF actual wage level adjusting to Subsistence level

Wage Fund Theory by Adam Smith(1723-1790)
It assumes that there is a predetermined fund of wealth which lays surplus with wealthy persons as a result of savings & wages are paid out of it.
MAGNITUDE of Wage fund determines:-
Demand of Labor
Wages paid to the labor, higher the fund higher would be the demand for labor & wages paid to the labor & vice virsa.

Wage Fund Theory by Adam Smith(1723-1790)
Wages depends on Demand & Supply of Labor.
Wage fund is fixed
So to increase the wages 2 things can be done-
Large size of wage fund
Reduction in labor

Wage Fund Theory by Adam Smith(1723-1790)
Criticism
It is not clear from where wage fund will come.
No emphasis on efiiciency & productivity
No light on wage differencials

Surplus Value Theory by Karl Marx(1818-1883)
Acc to this theory Workers was an article of commerce which could be purchased on the payment of subsistence price.
The price of any product is determined by the labor TIME needed for producing it.
The workers were not paid acc to their contribution.

Surplus Value Theory by Karl Marx(1818-1883)
CRITICISM
Labor is treated as commodity
Price can not be determined by labor time
No emphasis on productivity
Not applicable in organized sector

MARGINAL PRODUCTIVITY THEORY by P H Wicksteed (England) & J B Clark(USA)
It assumes that wages depend upon the demand for & supply of LABOR.
“Wages are based on entrepreneur ‘s estimate of the value that will be produced by the last or marginal worker”
wages are paid on the base of economic worth

MARGINAL PRODUCTIVITY THEORY by P H Wicksteed (England) & J B Clark(USA)
Homogeneous factor of production
Full employment of resources
Perfect competition
Perfect mobility of factor of production
Law of diminishing returns
Perfect knowledge

MARGINAL PRODUCTIVITY THEORY by P H Wicksteed (England) & J B Clark(USA)
CRITISM
No importance to supply of labor
In practice employer gives lower wages than marginal productivity of laborer
Unrealistic assumptions

Residual Clainmant Theory by Francis A Walker(1840-1897)
4 factor of production-land ,labor, capital & entrepreneurship.
Wages = value of production – (rent+ interest+ profit)
Criticism
Demand & supply factor ignored
Based on wrong notion of residual clainmant
Productivity & efficiency ignored.

Investment Theory by H M Gitelman
Acc to this theory workers are paid in terms of their investment in education, experience & training.
Worker must be having attributes.
Higher attributes higher payments.

Bargaining Theory of Wages by John Davidson
Acc. To this theory Wages are determined by relative bargaining power of workers or trade unions and of the employers.
Applicable in organized sector.
If union is strong workers will be paid more. & vica virsa.

The Contingency Theory
No single best way to evolve the payment system
Acc to Lupin & Bowey” essentially, a contingency approach is that in some industry & in some envt conditions one managerial practice will contribute to some desired objectives while the same will not happen in other industry.

Demand & Supply Theory
Alfred Marshall, the chief exponent to this theory, explained the complexity of the economic world tried to provide a less rigid & deterministic theory. According to him, the determination of wages is affected by the whole set of actors which govern demand for & supply of labour. The demand price of labour, however, determined by the marginal productivity of the individual worker
The term “supply & labor” can be expressed in a number of senses. First, it refers to the number of workers seeking employment; these are the workers who have no alternative livelihood & join the labor market seeking employment for wages. Secondly, “supply & labor” may refer to the number of hours each worker is available for work. The supply of labour in this sense increases with any increase in the number of working hours.

Behavioral Theories of Motivation
Equity Theory
Equity can be external or external. Internal equity refers to the pay differential between & among the various skills & levels of responsibility. External equity refers to concerns regarding how wage levels for similar skill levels in one firm compare with those in other firms in similar or the same industry & location.
Expectancy theory
It suggests that motivation depends on individuals’ expectations about their ability to perform tasks & receive the desired rewards. An employer’s responsibility is to help employees meet their needs &, at the same time, attain organizational goals. Employers must try to find out match between employees’ skills & abilities & the job demands.

Agency Theory
Focuses on the goals & objectives of stakeholders & the way the employees remuneration can be used to align these interest & goals.
Employers & employees are 2 stakeholders
Employers – principals & employees – agents.
The agency theory says the principal must choose a contracting scheme that helps in aligning the interests of agents with the principals own interests

So behavioral Theories are based on
Employer’s concern for workers
Employees acceptance of wage levels
Internal wage structure
Wages & other motivators

Wage Differential

Wage differential refers to differences in wage rates due to the location of company, hours of work, working conditions, type of product manufactured, or other factors.
It may be the difference in wages between workers with different skills working in the same industry or workers with similar skills working in different industries or regions.
Wages Differential
Employees in MNCs are paid higher.
Different industries have different wage structures resulting in disparities in remuneration for identical works.
Wide gaps exist between wages of employees of organised sector vs. unorganised sector.

Occupational Differentials
Different occupations require different qualifications, skills and different degree of responsibility
1. To induce workers to undertake “more demanding”, “more risky” jobs.
2. Encourage workers to develop skills in anticipation of higher earnings in future.
3. To perform social function by way of determining the social status of workers.

Inter-Industry Differentials
Extent of unionization
Employers ability to pay/ product demand in market
Provides opportunity for workers to switch to higher wage
industries.
Arise when the workers in the same occupation and in the same area but in different industries are paid different wages.
Story about a foundry ‘Shakti Industries’ in Haora, West Bengal that makes New York City’s manhole covers.
, November 26, 2007

Personal Wage Differentials
Arise because of differences in personal characteristics (age or sex) of workers who work in the same plant and the same occupation.
In occupations which involve muscular work, women workers are employed but paid less than men workers
“Equal pay for equal work”
I.L.O. convention (No. 100)
Industrial courts
Labour Tribunals
Minimum Wages Committee
Fare Wage Committee

Why all the labor is not done by hardened hands?

Sector Differentials
Depends upon nature of workers group (organized/ unorganized) and level of economic development of the sector.
Agricultural workers are not able to better their living conditions, whereas workers in industrial sectors have their own unions to fight for them.

Regional (Inter-Area) Differentials
Workers in same industry and the same occupational group, but living in different geographical areas, are paid different wages.
Irritating climate
Isolation
Disparities in cost of living

Summary
The concepts of trade unions, wages and wage differentials are over a century old in India.
India’s economic development still needs a big push and the factors – unions, wages and wage differentials can play a vital role.
Let’s try to see the issues from labour’s viewpoint

Payment for labor or services to workers, especially remuneration on an hourly, daily, or weekly basis.
Wages
The demand for wages has never been fully met.
Wage raise in one company will inspire unions in other company to pitch tents demanding similar rise in wages.
Salary is a fixed periodical payment paid to a person for regular work or services.
Wage is usually paid by the day or week for work or services which are of a more irregular nature.

WAGE POLICY

Wage Policy
Wage policy refers to systematic efforts of the government in relation to national wage and salary system.
Purpose: To regulate the structure of wages and salaries with view to achieve economic and social objectives of the government.
To give to workers a share in fruits of economic development.
To set minimum wages for workers whose bargaining power is weak.
To bring about more efficient allocation and utilization of human resources through wage and salary differential.
To abolish malpractices and abuses in wage and salary payments.
To provide for a uniform, stable and reasonably competitive compensation structure for all employees.

Wage Policy
Organizations must develop policies as general guidelines to provide for coordination, consistency, and fairness in compensating employees.
For example, following a pay-for-performance philosophy requires incorporating performance appraisal results into the pay adjustment process.

Pay Policies Considerations
Types of Job Evaluation
SystemsMarket Positioning
Pay Expenditures Guidelines
Affordability Constraints
Linking of Performance Appraisals and Pay Adjustments
Figuring of Pay Structure adjustment
Administrative Appeals
Process for Resolving Individual Pay Problems
Width of Pay Ranges and Broadbanding
Number of Pay Grades

Broadbanding
Practice of using fewer pay grades having broader ranges than traditional compensation systems.

STEPS
Determine your place in the market
Select the types of compensation
Review your process.

Payment of Wages Act, 1937
Industrial Disputes Act, 1947
Minimum Wages Act, 1948
Equal Remuneration Act, 1976
To prohibit any delay or withholding of wages
Authorizing all state governments to set up industrial tribunals which would look into disputes relating to remuneration
Fixation of minimum rates of wages to workers
Prohibits discrimination in matters relating to remuneration on the basis of religion, sex etc.
With all these Acts in place, are there no disparities in wages?

Minimum Wages, Living Wages and Fair Wages
Minimum wages- It must provide not only for the bare sustenance of life but for the preservation of the efficiency of the workers by providing some measures of education, medical care, etc.
Criteria: It must be calculated for a family of 4 units (numbers)
It must be able to provide 2700 calories per adult per day
It should be sufficient for 18 yards of cloth per unit per annum
There should be a provision for reasonable house rent, light, fuel and miscellaneous items

Minimum Wages, Living Wages and Fair Wages
Living wages- It is not only for the bare essentials for the worker and his family, but also for comfort, protection against ill-health, decency, social needs and insurance for old age
Fair wages- It is in-between minimum wages and living wages, but below the living wage

Legal framework on wages
The Government has enacted various laws to regulate and govern the wages.
They are:
The payment of Wages Act 1936
The payment of Bonus Act 1965
The Equal Remuneration Act
The Minimum Wages Act
The Companies Act 1956

STRATEGIC PERSPECTIVE OF COMPENSATION

Business Goals
Business
Strategy
CEO
Compensation Philosophy/ activities serve Business Objectives
The Pay Model
Business Strategy – This defines the direction in which organization is going in relation to its environment in order to achieve its objectives.
Compensation Philosophy – Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate

Business Goals
Business
Strategy
Compensation
Plan
Compensation
Strategy
Non-Financial
Rewards
Org.Structure
CEO
HR Head
Compensation activities serve Business Objectives
Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
The Pay Model
Compensation Strategy – defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs
to achieve its business goals

Business Goals
Business
Strategy
Compensation
Plan
Compensation
Strategy
Non-Financial
Rewards
Org.Structure
CEO
HR Head
Compensation activities serve Business Objectives
Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
The Pay Model
A strategic perspective on compensation takes the position that how employees are compensated can be a source of sustainable competitive advantage

Business Goals
Business
Strategy
Compensation
Plan
Market Surveys
Compensation
Strategy
Job Evaluation
Unit Inputs
Total
remuneration
Performance
Management
Non-Financial
Rewards
Org.Structure
Performance
linked Pay
Individual Pay
Contribution
/outputs
Internal Equity
External Equity
CEO
HR Head
Employee
C & B/S M
Pay levels /
structures
Compensation activities serve Business Objectives
Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
Compensation Manager, along with team is responsible for carrying out compensation related activities
The Pay Model

Strategic Pay
Pay structure has strategic value that assigns different pay rates for the jobs with different values which differentiates individual employee contribution

Strategic compensation
– Using the compensation plan to support the
company’s strategic aims.
– Focuses employees’ attention on the values
of winning, execution, and speed, and on
being better, faster, and more competitive..
• IBM

Strategic Compensation
Planning
• Strategic Compensation Planning
– Links the compensation of employees to the
mission, objectives, philosophies, and culture
of the organization.
– Serves to identify the net monetary payments
made to employees with specific functions of
the HR program in establishing a pay-forperformance
standard.
– Seeks to motivate employees through
compensation.

Compensation Policy Issues
• Pay for performance
• Pay for seniority
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression (A salary inequity problem,
generally caused byinflation, resulting in longer-term employees in a position earning less than
workers entering the firm today)
• Geographic costs of living differences

Strategic compensation Choices
Fixed vs variable pay
Internal & external equity
Job vs individual pay
Above the market vs below the market pay
Competency base pay or broad banding
Global compensation
Process vs mechanics
Paying the jobs vs laying the person

Strategic compensation theory
Contingency theory
3 types of business level strategies
Cost leadership
Differentiation
innovation

Aspects of compensation theory
Compensation philosophy
External competitiveness
Administrative & implementation issues

Equity
The perceived fairness of
the relation between what
a person does (inputs) and
what the person receives.
PROCEDURAL AND DISTRIBUTIVE JUSTICE IN COMPENSATION

Procedural justice
The perceived fairness of
the process and procedures
used to make decisions
about employees.
Distributive justice
The perceived fairness in the distribution of outcomes.

Equity Considerations in Compensation
EXTERNAL: LABOR MARKETS
• Pay survey data
• Competing employers’ policies
ORGANIZATIONAL JUSTICE
Distributive
• Pay for performance
• Managerial decisions
Procedural
• Policies and procedures
• Pay structures

Equity Considerations in Compensation
Individual
Perception of inputs and outcomes
PAY OPENNESS
Another equity issue concerns the degree of openness or secrecy that organizations allow regarding their pay systems.
Pay information kept secret in “closed” systems includes how much others make, what raises others have received & even what pay grades and ranges exist in the organization.

EXTERNAL EQUITY
Externally, the organization must provide compensation that is seen as equitable in relation to the compensation provided employees performing similar jobs in other organizations.