Factors affecting Wage DeterminationPart 2

Equity in Pay

Equity in pay means a fair day’s wage for a fair day’s work.Individual perception:- Living wage : more than subsistence wage, will be

sufficient to meet persons regular and indiscriminate expenditure.

- Standard of living: relative to rate of inflation and changes in cost of living, pay increase equal to, higher than or lower than the past rate of inflation generally regarded as maintaining, increasing or reducing individual’s standard of living, irrespective of income or pattern of expenditure.

External: - rate for the job: equal work for equal. The type of work

performed rather than abilities, quantity/quality of work.- Wages paid in other organizations: implies existence of

common labour market. Payment of the going rate for labour.

- Relative value placed on jor or occupation by society: job/occupation considered unimportant by incumbents if rewards to all employers lower than warranted by tasks/ responsibilities.

Internal:-The individual’s pay should correspond to the

complexity of the job, level of authority. - Differentials in pay between different kinds of

work within the organization and the value and importance to the organization’s objectives.

Wage related concepts

• Wages – compensation paid to hourly workers (including those on incentive pay) for services rendered.

• Wage level – the average of all wage rates paid to workers in an occupation, industry or group of industries.

• Wage rate – the money rate expressed in dollars and paid to the employee hourly.

• Wage differentials – differences that exist in wage rates for similar jobs, because of location of company, hours of work, working conditions, type of product manufactured, etc.

Factors Determining Pay in Negotiations

• Cost of living – unions and employees base their arguments for increases in pay on the grounds that it should be capable of maintaining the individual’s purchasing power. Therefore past inflation levels are taken into account when bargaining for wages. N.B. non-union employees less likely to get wage increases with changes in cost of living.

• Profitability – is the most usual method of determining the organization’s ability to pay in the private sector.

Yardstick of profitability – pre-tax, post-tax, relationship of profits to assets, sales returns on capital costs, wage costs on current basis and over a period of time.

Constraints – access by unions/employees to information; whether company is autonomous or part of a group.

• Comparability: refers to the relationship in pay between different groups of employees.

- comparisons are made in respect of internal and external factors. Internal factors are the more important basis for ‘leap-frogging’ bargaining , in other words, the reasons one group would use to close a gap in pay while the other seeks to restore it.

External factors: many organizations use data from pay surveys to make comparisons between their own wages/salaries and those of their competitors. Also important to compare earnings, hours, holidays and other fringe benefits.

• Productivity: important criteria are measure of quantity or value of output per employee.

- assumption is that if overall productivity has improved the labour element would have made some contribution to it and should be suitably rewarded.

- Payment schemes: profit-related pay in which part of individual’s pay directly linked to organization’s profits, (private rather than public sector). Performance-related pay – any pay arrangement that explicitly links at least some part of the employee’s pay to the performance of the individual, group or organization, e.g. merit-pay, bonuses, gain-sharing plans.

• Labour supply: organization’s ability to obtain and keep adequate workforce is an important consideration in determining its wage level. Wage level must be sufficient to perform this function. Serious shortages of certain skills may force the organization to raise wages to attract the needed skills.

- Wage leaders are organizations that seek to maintain a quality workforce. Wage leadership permits ‘skimming’ the cream of the present labour force as well as ensuring a continuing supply of high quality new entrants.

Reasons for differences in pay and compensation package

• Kinds and levels of required knowledge and skills• Kind of business • Union, non-union status• Capital intensive or labour intentive• Philosophy of management• Total compensation package• Geographical location• Supply and demand of labour• Profitability of firm• Employment stability• Employer tenure and perfromance

Wage determination models

1. Competitive model: many buyers and sellers acting independently such as the market for unskilled workers.

2.Monopoly power models:a. Monopsony model: one buyer, many sellers such as one-factory

towns in rural Americab. Union models: one seller of labour- Exclusive craft model – electrical workers- Inclusive industrial model – auto workersc. Bilateral monopoly: one buyer and one seller which occurs when

unionized workers such as cricketers negotiate with one buyer such as the West Indies Cricket Board.

N.B. Handout to be given with more detailed information