Factors affecting Wage
Determination
Part 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. nonunion 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). Performancerelated 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
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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 America
b. Union models: one seller of labour
- Exclusive craft model – electrical workers
- Inclusive industrial model – auto workers
c. 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