Principles of Wage and Salary Administration

employee compensation

The main objective of wage and salary administration is to establish and maintain an equitable wage and salary system. This is so because only a properly developed compensation system enables an employer to attract, obtain, retain and motivate people of required caliber and qualification in his/her organization.

Other objectives include: To control pay-rolls; to satisfy people, reduce the incidence of turnover, grievances, and frictions; to motivate people to perform better; and to maintain a good public image. These objectives can be seen in more clearly from the point of view of the organization, its individual employees and collectively.

The compensation system should be duly aligned with the organisational need/ objectives and should also be flexible enough to modification in response to change.

Accordingly, the objectives of a compensation or remuneration system should enable the organization to:

  • Have the quantity and quality of staff it requires;
  • Retain the employees in the organization;
  • Motivate employees for good performance for further improvement in performance;
  • Maintain equity and fairness in compensation for similar jobs;
  • Achieve flexibility in the system to accommodate organisational changes as and when these take place; and
  • Make the system cost-effective.

From individual employee’s point of view, the compensation system should have the following objectives:

  • Ensure fair compensation;
  • Provide compensation according to employee’s worth;
  • avoid the chances of favoritism from creeping in when wage rates are assigned; and
  • Enhances employee morale and motivation.

Collective Objectives include:

  • Compensation be ahead of inflation;
  • Matching with market rates;
  • Increase in compensation reflecting increase in the prosperity of the company; and
  • Compensation system free from management discretion.

Principles of wage and salary administration

There are three general principles that govern wage and salary fixation namely External Equity; Internal Equity and Individual Worth.

The Principle of External Equity

The principle of external equity acknowledges that factors/variables external to organization influence levels of compensation in an organization if these variables are not consideration while fixing wage and salary levels, the salaries may be insufficient to attract and retain employees in the organization. The principles of external equity ensure that jobs are fairly compensated in comparison to similar jobs in the labour market.

The Principle of Internal Equity

Internal equity acknowledges that organisations have various jobs which are relative in value term. In other words, the values of various jobs in an organisation are comparative. This relative worth of jobs is ascertained by job evaluation. Thus, an ideal compensation system should establish and maintain appropriate differentials based on relative values of jobs i.e., the compensation system should ensure that more difficult jobs should be paid more.

The Principle of Individual Worth

According to the principle of individual worth, an individual should be paid as per his/her performance. Thus, the compensation system, as far as possible, enables the individual to be rewarded according to his contribution to organization. This principle ensures that each individual’s pay is fair in comparison to others doing the same/similar jobs, i.e., ‘equal pay for equal work’.

Based on these three principles, Wage administration should be guided by the following basic considerations (principles):

  • Wage policies should be carefully developed having in mind the interests of management, the employees, the consumers and the community.
  • There should be a 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, mental and physical requirements.
  • The general level of wages and salaries should be reasonably in line with that prevailing in the labour market.
  • The plan should carefully distinguish between jobs and employees. A job carries a certain wage-rate and a person is assigned to fill it at that rate.
  • Wage policies should be clearly expressed in writing to ensure uniformity and stability.
  • Wage decisions should be checked against the carefully formulated policies.
  • Management should see to it that employees know and understand the wage policies.
  • Wage policies should be evaluated from time to time to make certain that they are adequate for current need.
  • Departmental performance should be checked periodical against the standards set in advance.
  • Job descriptions and performance ratings should be periodically checked to keep them up-to-date.

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