Define Wage What is the classification and components of wage? Explain the popular remuneration systems

The definition of wages is complex. Wages are defined as return to labor. This simple

economic definition, however, has to be considered in the context of terms and conditions of

employment. Employers define wages as all costs incurred for the recruitment and use of

labor in their enterprises. This includes both direct wages, fringe benefits, social security

benefits paid to the employees and other costs incurred for occupational safety and health and

human resource development. Employers are therefore concerned with the total cost of

labor.

Workers usually define wages as the direct payments received for work done. They consider

wages as a means for an acceptable quality of life in the context of the standard of living in their country. 

Wages are, therefore, classified as follows:

Subsistence wage - a quantum which provides for basic subsistence needs

Living wage - a quantum which provides for subsistence and means for a quality of life which is acceptable in society.

Fair wage - a quantum which is determined through negotiations based on opportunity cost of labor, labor market conditions and cost of living. The quantum is usually above the subsistence wage and close to the living wage. Workers are concerned with the immediate quantum of disposable income, although they recognize that fringe benefits associated with terms and conditions of employment which include paid weekly days of rest, paid public holidays, paid medical leave and treatment, paid annual leave, quarters or rent in lieu, free amenities of water supply and electricity, transport  allowances, work clothes, retirement benefits , social security benefits and all other benefits in cash or kind are also part of wages.

The types and quantum of fringe benefits vary with countries. It is determined through government intervention with legislation and through collective agreements between employers and trade unions. It is therefore a result of tripartite consultation and agreement.

The actual fringe benefits will depend on implications on cost of labor, capacity of employers to pay and obligation to comply with minimum standards in terms and conditions of employment.

Types of employment also influence the nature and quantum of wages paid to workers.

Workers can be classified into 2 main categories as follows:

 Direct employees - workers with a contract of service

 with the employer

 Indirect employees - workers with a contract for services with the employer

Direct employees are permanent workers while indirect employees are workers recruited through contractors for supply of labor services. They are usually self-employed workers or contract workers where the contractor is their employer and employment is for short duration on casual terms and conditions of employment. The nature and status of employment of the worker is, therefore, important in the determination of wages.

Wage determination is not the outcome, solely of market forces of supply and demand. The Government has an important role in the determination of wages through its policies on wages and the legislation it creates for Industrial Relations in the country. Collective

Bargaining is regulated through legislation on Industrial Relations. Apart from legislation, the Government also sets policies on guaranteed minimum wages and minimum statutory benefits due to workers. Wage determination therefore is the outcome of interaction between the tripartite social partners in society viz: Government, employers and workers.

 

PAYMENT SYSTEMS

The determination of wages is based on remuneration systems in the private sector. Each industry has evolved a remuneration system suitable to the peculiarities of the industry and the labor market conditions.

Workers who work on a contract for services are those who are paid a fixed sum negotiated

and agreed upon before commencement of the work specified to be undertaken. The disbursements will depend on the negotiated progress payments. The employers and the workers mutual obligations cease upon completion of work and payments are made subject to indemnities for quality of work. The nature of employment under a contract for services usually sets remuneration systems based on the measurement of work done according to specifications agreed upon. The employer pays a lump sum for the work and does not incur any other costs, unless expressly agreed upon, with regard to the labor services provided. Work is therefore specific to jobs to be done in specific time frames usually of short

duration.

Workers who have a contract of service are permanent employees and their remuneration systems depends on the nature of jobs they do and their position in the hierarchy of the

enterprise they work in. Workers can be classified as follows in the private sector:

 Executives

 Administrative staff

 Technical staff

General staff

 Artisans and skilled workers

 Semi-skilled workers

 Manual and unskilled workers.

There are some universal features in payment systems for all the above categories of workers.

The main components in payment systems are as follows:

 Basic wage this is a fixed payment for a wage period which is the consideration for the contract of service. The quantum is determined based on market conditions of supply and demand of labor, entry qualifications, cost of living, level of experience based on service in the enterprise

and critical nature of responsibility held by the worker. The quantum varies with each enterprise.

Productivity Incentives: this component in the remuneration system is subject to the workers level and quality of productivity. This is usually measured in terms of physical output or revenue brought in through the workers efforts. The actual quantum fixed as productivity incentives depend on the nature of industry.

Special Incentives: these are payments made where workers are scarce or conditions of work are difficult.

Prosperity Payments: this component is often referred to as bonus payments.This is subject to the prosperity of the enterprise which is measured in terms of net profit. The quantum of bonus for each worker is according to his level in the hierarchy of the management of the enterprise.

Social security payments towards gratuity, provident funds, pensions, contingent payments for occupational hazards, occupational rehabilitation in the event of occupational injuries and survivors’ pension.

Components of Wage:

These 5 important components feature under various designations in remuneration systems.

The Basic wage per unit time is paid as an unqualified fixed payment or in some cases with

qualifications to turn out for work and completion of duties. Employers are conscious that

this component is a fixed cost obligation and, therefore, resort to ensure that work is

performed before payment is due and disbursed. In some instances, such as in the case of

agricultural workers, the basic wage is based on basic income security through a Guaranteed

Minimum Wage per unit time for a level of output and turn out. In the manufacturing sector 

similar models are also implemented for production workers to ensure that wages are paid

only for work done.

Productivity incentive payments are usually tied to performance measured in terms of turn

out for work and levels of output. Both these measures are modified and adapted according

to the nature of work in the context of the enterprises concerned. Productivity must be

evaluated in the context of realities of working conditions especially technology and human

capital of workers. Productivity is, therefore, “working smart and not merely working

hard”.

Special incentive payments are paid to workers in order to cope with the hardship involved in

the work and to attract and retain workers in occupations occurring at odd hours during the

day , and/or are hazardous, or in remote areas. These payments are also made when the

nature of work becomes difficult due to uncertainties such as weather conditions and normal

productivity cannot be achieved. For example, productivity of plantation workers are affected by adverse weather conditions and as wages depend on output of workers, a special incentive is necessary to ensure they cope with difficult work conditions caused by adverse weather conditions and are able to earn a reasonable wage.

Prosperity payments are also performance related. However it is the enterprise performance

as a whole that is taken into account to determine bonuses to be paid at the end of each financial year.

In addition to the above components wages also consist of various fringe benefits. Some of the important fringe benefits are tied to social security, viz:

Medical Benefits- free medical treatment, paid medical leave, hospitalization benefits, maternity benefits

Paid Leave - weekly days of rest, public holidays,  annual leave, pilgrimage leave, marriage leave, paternity leave, compassionate leave

Allowances - rent in lieu of quarters, basic amenities for electricity , water, transport to work, subsidies for education of children, domestic assistance

The popular remuneration systems are payment by results, productivity linked and productivity gain sharing systems. All these systems are implemented to ensure that workers earn a fair wage and to ensure that enterprise retain their competitiveness in the domestic and global markets. It is also important to ensure that wage increments are equitable and commensurate with productivity and cost of living.

The selection of remuneration system based on payment by results, productivity linked wage system and productivity gain sharing systems depend on the nature of enterprise, types of employment, organization and methods of work, level of technology used and labor market conditions. While employers retain their prerogative to determine organization and methods of work, workers need to organize themselves into viable and strong trade unions so that they will be able to negotiate effectively during collective bargaining on wages and terms and conditions of employment.

Collective bargaining is only effective when both parties i.e. employers and trade unions negotiate from a position of equal level of knowledge and understanding of the economic circumstances of the enterprise and the industry. Trade unions must have the total support of the workers so that trade union leaders can make effective representation and decisions on behalf of the workers they represent. Principles of good governance viz.democracy, transparency and accountability are crucial for the conclusion of successful and meaningful collective agreements. An effective social dialogue between employers and trade unions based on mutual trust can strengthen a process of co-operation and collective bargaining

based on an objective understanding of the realities of economic circumstances in the enterprise and industry. The trade union priority is sustained employment and social justice while the employer is focused on sustained economic viability, competitiveness and returns on capital. Both are mutually dependent on each other to achieve their objective. The process of collective bargaining is therefore not acrimonious between the two social partners as both recognize that meaningful income distribution in society in a free enterprise based economy can only be achieved through collective bargaining.