17 Principles of Wages and Salary Administration

Learning Objectives

After completing this session, you will be able to:

  • explain the principles of wages and salary administration.

A. Principles of Wages and Salary Administration

Wages in the widest sense mean any economic compensation paid by the employer under some contrast to his workers for the services rendered by them. Wages, therefore, include family allowance, relief pay, financial support and other benefits. But, in the narrower Sense wages are the price paid for the services of labor in the process of production and include only the performance wages or wages proper. They are composed of two parts – the basic wage and other allowances. The basic wage is the remuneration, by way of basic salary and allowances, which is paid or payable to an employee in terms of his contract of employment for the work done by him. Allowances, on the other hand, are paid in addition to the basic wage to maintain the value of basic wages over a period of time

Principles governing the fixation of wages and salary

The generally accepted principles governing the fixation of wages and salary are:

(i) There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements, such as skill effort, responsibility or job or working conditions, and mental and physical requirements.

(ii) The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. The labour market criterion is most commonly used. The plan should carefully distinguish between jobs and employees. A job carries.

Pay Policies Organizations must develop policies as general guidelines to provide for coordination, consistency, and fairness in compensating employees. The pay policies are an outgrowth of the answers to the compensation philosophy issues discussed earlier. For example, following a pay-for-performance philosophy requires incorporating results into the pay adjustment process. However, a more entitlement-oriented philosophy will require developing policies in automatic step increases based on length of service for hourly employees. Many of these items are mentioned in the discussion that follows.

  1. Market positioning:  A major policy decision must be made about the comparative level of pay the organization wants to maintain. Specifically, an employer must identify how competitive it wishes to be in the market for employees. Organizations usually want to “pay market”—that is, to match the “going rates” paid to employees by competitive organizations in order to ensure external equity.
  2. Market Pricing:  Some employers do not establish a formal wage and salary system. Smaller employers particularly may assume that the pay set by other employers is an accurate reflection of a job’s worth, so they set their pay rates at market price, the typical wage paid for a job in the immediate labor market

B. Nature and Purpose Minimum Wage, Fair Wage, Living Wage

Minimum wages

Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.

Purpose OF Minimum Wage

The purpose of minimum wages is to protect workers against unduly low pay.

  1. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection.
  2. Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value.
  3. The key purpose of a minimum wage system is social to prevent labor exploitation and poverty. This means the minimum wage should provide sufficient purchasing power to enable a worker to have a basic standard of living.
  4. The minimum wage may also have an economic objective – to motivate workers, enable them to enjoy the benefits of economic growth, and contribute to the economy.


Exempt and non-exempt status under the FLSA, employees are classified as exempt or non-exempt. Exempt employees are those who hold positions classified as executive, administrative, professional, or outside sales, to whom employers are not required to pay overtime. Non-exempt employees are those who must be paid overtime under the Fair Labor Standards Act.

C. Basic types of Wage Plans

The basic types of wage plans are :

    1. Living wage
    • This wage was recommended by the Committee as a fair wage and as ultimate goal in a wage policy. It defined a Living Wage as “one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the more important misfortunes, including old age
    • Such a wage was so determined by keeping in view the national income, and the capacity to pay of an industry. The Committee was of the opinion that although the provision of a living. wage should be the ultimate goal; the present level of national income did not permit of the payment of a living wage on the basis of the standards prevalent in more advanced countries.
    • The goal of a living wage was to be achieved in three stages. In the first stage, the wage to be paid to the entire working class was to be established and stabilized. In the second stage, fair wages were to be established in the community-cum-industry. In the third stage, the working class was to be paid the living wage.

2. Fair Wage

According to the Committee on Fair Wages, “it is the wage which is above the minimum wage but below the living wage.”

 The lower limit of the fair wage is obviously the minimum wage; the upper limit is set by the “capacity of the industry to pay.” The committee envisages that while the lower limit of the fair wage must obviously be the minimum wage, the upper limit is equally set by what may broadly be called the capacity of the industry to pay.

 This will depend not only on the present economic position of the industry but on its future prospects. Between these two limits, the actual wages should depend on considerations of such factors as:

a) The productivity of labour

b) The prevailing rates of wages in the same or neighbouring localities

c) The level of the national income and its distribution

d) The place of industry in the economy of the country

D. Elements of a good wage plan

The following are the features of a good wage plan:

(i) It should be easily understandable, i.e., all the employees should easily understand what they are to get for their work. They should be instructed in how the wage plan works.

(ii) It should be capable of easy computation, i.e., it should be sufficiently simple to permit quick calculation. Mathematical tables may be supplied, be reference to which calculations can. be quickly made.

(iii) It should be capable of effectively motivating the employees, Le., it should provide an incentive for work. If both the quality and quantity of work are to be stressed at the same time, a plan should be selected that will not unduly influence the worker to work too fast or to become careless of quality.

(iv) It should provide for remuneration to employees as soon as possible after the effort has been made. Daily or weekly payment of wages would be preferable to induce employees to work. (v)It should be relatively stable rather than frequently varying so that employees are assured of a stable amount of money.


Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Human Resource Management by Icfai Business School is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Share This Book