Wage Determination Process

Everything you need to know about the wage determination process. Wage determination is a complex process.

The steps involved in determining wage rates involves performing job analysis, wage surveys, analysis of relevant organisational problems, forming wage structure, framing rules of wage administration, explaining these to employees, assigning grades and price to each job and paying the guaranteed wage.

The process of determining wages involves a series of interrelated steps.

The steps are:- 1. Job Analysis 2. Job Evaluation 3. Job Design 4. Job Description 5. Job Assessment 6. Wage Survey 7. Wage Curve

8. Group Similar Jobs into Pay Grades 9. Price Each Pay Grade 10. Fine-Tune Pay Rates 11. Conduct the Salary Survey 12. Relevant Organisational Problems 13. Wage Administration Rules 14. Explaining about Wage and Salary Programme to the Employees.

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Steps Involved in Wage Determination Process: Job Analysis, Job Evaluation, Wage Survey, Wage Curve and a Few Other Steps

Wage Determination Process – Top 6 Steps: Job Analysis, Wage Survey, Group Similar Jobs into Pay Grades, Price Each Pay Grade and a Few Other Steps

Wage determination is a complex process.

However, wage determination process consists of the following steps:

Step # 1. Job Analysis:

Job analysis describes the duties, responsibilities, working conditions and inter-relationships between the job as it is and the other jobs with which it is associated. It attempts to record and analyse details concerning the training, skills, required efforts, qualifications, abilities, experience, and responsibilities expected of an employee.

After determining the job specifications, the actual process of grading, rating or evaluating the job occurs. A job is rated in order to determine its value relative to all the other jobs in the organization which are subject to evaluation. The next step is that of providing the job with a price. This involves converting the relative job values into specific monetary values or translating the job classes into rate ranges.

Step # 2. Wage Survey:

In determining the wages for a specific job it is very necessary to work as to what wages are being given for the same job in other enterprises.

If, on the basis of utility, the wages for a specific job are determined below the wages for the same job on other enterprises, following will be its disadvantages:

(a) Good persons and persons of merit will not be available.

(b) If such people are at all obtained for employment, they will shift to another enterprise after some time.

It is, therefore, necessary to keep in mind the following in wage-survey:

(i) Term of survey (weekly or monthly)

(ii) The whole wage-payment-knowledge of daily working hours or monthly payment

(iii) Definition of jobs

(iv) Appropriate questionnaire for collecting information

(v) Scientific technique of collecting the data

Step # 3. Group Similar Jobs into Pay Grades:

After the results of job analysis and salary surveys have been received, the committee can turn to the task of assigning pay rates to each job, but it will usually want to first group jobs into pay grades.

A pay grade comprises the jobs of approximately equal difficulty or importance as determined by job evaluation. Pay grading is essential for pay purposes because instead of having to deal with hundreds of pay rates, the committee might only have to focus on a few.

Step # 4. Price Each Pay Grade:

The next step is to assign pay rates to pay grades. Assigning pay rates to each pay grade is usually accomplished with a wage curve. The wage curve depicts graphically the pay rates currently being paid for jobs in each pay grade, relative to the points or ranking assigned to each job or grade by the job evaluation.

The purpose of wage curve is to show the relationship between:

(i) The value of the job as determined by one of the job evaluation methods and

(ii) The current average pay rates for the grades.

Step # 5. Fine-Tune Pay Rates:

Fine tuning involves correcting out of line rates and developing rate ranges.

(i) Correcting Out of Line Rates:

The average current pay for a job may be too high or too low, relative to other jobs in the firm. If a rate falls well below the line, a pay rise for that job may be required. If the rate falls well above the wage line, pay cuts or a pay freeze may be required.

(ii) Developing Rate Ranges:

Most employers do not pay just one rate for all jobs in a particular pay grade. Instead, they develop rate ranges for each grade so that there might be different levels and corresponding pay rates within each pay grade. The rate is usually built around the wage line or curve.

One alternative is to arbitrarily decide on a maximum and minimum rate for each grade. As an alternative, some employers allow the rate for each grade to become wider for the higher pay ranges reflecting the greater demands and performance variability inherent in these more complex jobs.

Step # 6. Wage Administration Rules:

The development of rules of wage administration has to be done in the next step. It is considered advisable in the interests of the concern and the employees that the information about average salaries and ranges in the salaries of group should be made known to the employees concerned; for secrecy in this matter may create dissatisfaction and it may also vitiate the potential motivating effects of disclosure. Finally, the employee is appraised and the wage is fixed for the grade he is found fit.

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Wage Determination Process – 5 Interrelated Steps: Job Evaluation, Wage Survey, Wage Curve, Pay Grades and Rate Ranges

The process of determining wages involves a series of interrelated steps. Usually, it involves the following:

i. Job Evaluation:

Job analysis offers valuable information for developing a compensation system in terms of what duties and responsibilities need to be carried out. The relative worth of a job is being ascertained through job evaluation. The worth of a job is then converted into monetary terms to fix the basic wage for the job.

ii. Wage Survey:

Wage or salary surveys are conducted to find out wage/salary levels prevailing in the region or industry for similar jobs. The survey could cover all the jobs within an organisation or limited to only benchmark or simply key jobs that are used to anchor the company’s pay scale and around which other jobs are plotted based on their relative importance and worth to the organisation.

iii. Wage Curve:

The relationship between the relative worth of jobs and their wage rates and be depicted through a wage curve. The wage curve shows the relationship between relative worth of jobs and wage rates. This curve shows the rates currently paid for jobs within an organisation, the new rates resulting from job evaluation, or the rates for similar jobs currently being by other organisation within the labour market. The wage curve can be relatively straight or curved. This curve can then be deployed to establish the relationship between the worth of a job and its wage rate at any given point on the line.

iv. Pay Grades:

In this step, similar jobs are grouped into grades for establishing the pay plan. Instead of hundreds of pay rates, the organisation can work with 10 to 12 pay grades. A pay grade consists of jobs of approximately equal difficulty or importance as determined by job evaluation.

If a point method is followed, the pay grade consists of jobs falling with a range of points. In any case, the number of pay grades used should be sufficient to permit difficulty levels to be distinguished but not so great as to make the distinction between two adjoining grades unimportant.

v. Rate Ranges:

Although a single rate may be established for each pay grade, it is more common to come out with a range of rates for each pay grade. The rate ranges may be the same for each grade or proportionately greater for each successive grade as shown in the below mentioned figure. Rate range enables employees to receive increases upto the maximum rate for the range on the basis of merit or seniority or a combination of the two.

Organisations, sometimes, may decide to pay more than the maximum of the pay range when employees have exceptional merit or promotional opportunities are scarce. Wages paid above the maximum pay range are known as red circle rates.

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Wage Determination Process

The wage determination process includes the following:

1. Job Analysis:

It involves the identification and precisely identifying the required tasks, the knowledge and skills necessary for performing them and the conditions under which they must be performed. It is the basic technical procedure that is used to define the duties, responsibilities and accountabilities of a job. It involves determination of methods and equipments used and the skills and attitude required for successful performance of the job.

2. Job Evaluation:

It is the formal process used to assign wage and salary rates to job. A variety of systems and products exist to guide this process, each different from the other in packaging, pricing, philosophy, procedures and utility. It is a systematic technique determining the worth of a job. Once the worth is determined, it becomes easier to fix the wage structure that will be fair and remunerative.

3. Conduct the Salary Survey:

Once the process of job evaluation has determined the relative worth of jobs, the actual amounts to be paid must be determined. This is done by making wage or salary surveys in the area concerned.

Employers use these surveys in three ways:

(i) They use survey data to price ‘benchmark jobs’, which are usually known as good indicators on the basis of this, the firm then slots its other jobs, based on their relative worth to the firm.

(ii) The employers typically price 20% or more of their positions directly in the market place based on a formal or informal survey of what comparable firms are paying for comparable jobs.

(iii) The surveys also collect data on benefits like insurance, sick leave and vacations to provide a basis for decisions regarding employee benefits.

There are various ways to make such a survey. Most firms either use the results of ‘packaged surveys’ available from the research bodies, employers’ association, Government Labour Bureaus etc. Also many employers use surveys published by consulting firms or professional associations. Around 200 annual area wage surveys provide data for a variety of clerical and manual occupations ranging from secretary to messengers to office clerk.

These surveys may be carried out by mailed questionnaires, telephone, and personal interviews with other managers and personnel agencies and Internet sites. Some of the private consulting or executive recruiting companies are Hay Associates, Hewitt Associates, Hedrick and Struggles etc. In addition to the average wage level for specific job, other information frequently requested includes entry- level and maximum wage rates, shift differentials, overtime pay practices, vacation and holiday allowances, the number of pay periods and the length of the normal work-day and work-week.

4. Grouping of Similar Jobs into Similar Grades – Pay Grades:

Once the relative worth of each job is determined, the task of assigning pay rate to each job is done which is possible only by first grouping jobs into pay grades. It comprises of jobs of approximately equal nature or importance, as established by job evaluation. The committee used various techniques for pay grades such as point method (Job falling within a range of points), Ranking method, where the grade consists of all jobs that fall within two or three ranks and the classification method categorises jobs into classes or grades.

5. Preparation of Wage Structure – Wage Curves:

The next step is to determine the wage structure.

For this, several decisions need to be taken, such as:

(a) Whether wage ranges should provide for merit increases or whether there should be single rates.

(b) Whether the organization pays around above, below or equal to the averages in the community or industry.

(c) The number and width of the ‘pay grades” and the extent of overlap.

(d) The jobs placed in each of the pay grade and the actual money value to be assigned to various pay grades.

(e) Differentials between pay plans.

For this purpose, ‘wage curve’ is used to help assign pay rates to each pay grade (or to each job). It shows the relationship between the value of the job and the average wage paid for this job. It is a two- dimensional graph on which job evaluation points for key jobs are plotted against actual amounts paid or against desired level. It shows pay rates on the vertical axis, and pay grades (in terms of points) along the horizontal axis.

The purpose of the wage curve is to show the relationship between:

(i) The value of the job.

(ii) The current average pay rates for your grades.

There are various steps involved in drawing a wage curve:

(i) Find the average pay for each pay grades, since each pay grade may have several jobs.

(ii) Plotting the wage rate for each pay grade.

(iii) Drawing ‘wage lines’ through the points plotted. This can be done freehand or by using a statistical method.

(iv) Finally, price the jobs. Wages along the ‘Wage line’ are target wages or salary rates for the jobs in each pay grade. It is possible that some of the plotted points may fall off the wage line i.e., average for that grade is too high or too low.

If the current rates being paid for any of your jobs or grades fall above the wage line that indicates rates are high and the overpaid employees are often called “red circle”, “flagged” or “overrates. If the plot falls below the line, raises for jobs in this pay grade may be required. Such under-valued jobs carry a “green circle” rate and attempts should be made to make raises either immediately or in one or two steps.

6. Developing Pay Ranges – (Wage Structure):

It is only a short step from plotting a wage curve to developing the organization wage structure. Jobs that are similar in terms of classes, grades or points are grouped together. Most employers do not pay just one rate for all jobs in a particular pay grade. Instead, they develop vertical pay range (rate range) for each horizontal pay grade.

These pay range makes it easier to attract experienced employees from other organization and allow the management to provide for performance differences between employees. These pay ranges may appear as vertical boxes within each grade, showing minimum, maximum and mid-point pay rates for that grade.

‘Rate ranges’ can be developed in various ways. A maximum and minimum range for each grade, such as 15% above and below the wage line, may be arbitrarily decided. The maximum and minimum lines may then be drawn on the curve. The ‘range’ may be allowed to become wider for the higher pay grades, reflecting the greater demands and performance variability inherent in more complex jobs.

While deterring pay ranges it is important to keep in mind that there is an adequate difference between superiors and subordinates and regional differences should be maintained. The existing pay structure should be regularly reviewed and revised to make the process more acceptable to employees.

7. Wage Administration Rules:

Once the pay ranges have been determined, the development of rules of wage administration has to be done.

The rules developed should determine:

(i) Whether degree of advancement of service be based on seniority or merit.

(ii) How control over wage and salary costs can be maintained.

(iii) Frequency of pay increase.

The employees are to be informed of the details of wage and salary program. Finally, the employee is appraised and the wage fixed for the grade he is found fit.

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Wage Determination Process – Steps Involved in Determining Wage Rates

Usually, the steps involved in determining wage rates involves performing job analysis, wage surveys, analysis of relevant organisational problems, forming wage structure, framing rules of wage administration, explaining these to employees, assigning grades and price to each job and paying the guaranteed wage.

The steps involved in determination of wage rate:

Step # 1. The Process of Job Analysis:

A job analysis describes the duties, responsibilities, working conditions and interrelationships between the job and the other jobs associated to it. It attempts to record and analyse details concerning the training skills, qualifications, abilities, experience, and responsibilities expected of an employee.

After preparing a statement of the minimum acceptable qualities necessary to perform a job properly, the actual process of grading, rating or evaluating the job occurs. A job is rated in order to determine its value relating to all the other jobs in the organisation which are subject to evaluation. The next step is that of providing the job with a price. This involves converting the relative job values into specific monetary values or translating the job classes into rate ranges.

Step # 2. Wage Surveys:

Once the relative worth of jobs has been determined by job evaluation, the actual amounts to be paid must be determined. This is done by making wage or salary surveys in the area condemned and by gathering information about ‘benchmark jobs’, which are usually known as good indicators. There are various ways to make such a survey.

Most firms either use the results of “packaged surveys” available from the research bodies, employer’s associations, Government Labour Bureaus, etc., or they participate in wage surveys and receive copies of results, or else they conduct their own. These surveys may be carried out by mailed questionnaire, telephone, or personal interviews with other managers and personnel agencies.

Step # 3. Relevant Organisational Problems:

In addition to the results of job analysis and wage surveys, several other variables have to be given due consideration in establishing wage structure. For example, whether there exists a well-established and well-accepted relationship among certain jobs, whether the organisation would recruit new employees after revised wage structure; are the prevailing rates in industry or community inconsistent with the results of job evaluation, what will be the result of paying lower or higher compensation; and what should be the relationship between the wage structure and the fringe benefit structure?

Step # 4. Preparation of Wage Structure:

The next step is to determine the wage structure. For this, several decisions need be taken, such as-

(a) Whether the organisation wishes, or is able, to pay amounts above, below, or equal to the average in the community or industry;

(b) Whether wage ranges should provide for merit increases or whether there should be single rates;

(c) The number and width of the ‘pay grades’ and the extent of overlap;

(d) Which jobs are to be placed in each of the pay grades?

(e) The actual money value to be assigned to various pay grades;

(f) Differentials between pay plans; and

(g) What to do with salaries that are out of line once these decisions have been made.

There are no hard and fast rules for making such decisions, and the procedure commonly used is the two-dimensional graph on which job evaluation points for key jobs are plotted against actual amounts paid or against desired levels. Plotting the remaining jobs then reveals which jobs seem to be improperly paid with respect to the key jobs and to each other.

While determining pay ranges the following points should be considered:

i. It is important to keep in mind that there is an adequate differential between superiors and subordinates.

ii. When the pay-range of one group is changed, equal attention must be given to the pay- level of the other.

iii. The existing pay structure should be regularly reviewed and revised. This will make job evaluation programme more acceptable to employees.

iv. Regional differences in wages should invariably be maintained. Forces that favour regional differences are- low mobility; lower skill jobs; major cost of living differences between areas; added sources of income; or characteristics (rural versus urban or industrial); seasonal occupations as in agriculture versus stable occupations.

Step # 5. Wage Administration Rules:

Rules have to be developed to determine to what degree advancement will be based on length of service rather than merit; with what frequency pay increases will be awarded; how controls over wage and salary costs can be maintained; what rules will govern promotion from one pay grade to another, etc.

Step # 6. Explaining about Wage and Salary Programme to the Employees:

At the next stage, the employees are to be informed of the details of wage and salary programme. Although most hourly- paid workers are informed through the wage contract about the details of wage programme, a substantially smaller number of salaried employees have such information about their jobs.

It is considered advisable in the interest of the concern and the employees that the information about average salaries and ranges in the salaries of group should be made known to the employees concerned- for secrecy in this matter may-create dissatisfaction and it may also weaken the potential motivating effects of disclosure.

7. Finally, the employee appraisal takes place and the wage rate is fixed for the grade which the employee is found fit.

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Wage Determination Process

Fixed compensation periodically paid to regular worker is called as wage or salary or pay. It is a regular payment usually monthly, made to employees as their contributions to the service for organisation. It is an important element to give efforts and performance towards organisational goals.

It is a motivator to the organisational goals. Remuneration or “pay” constitutes the most important single factor among the attractions of public service. It is a factor about which the employees are most sensitive. Pay in an organisation is fixed in the context to various categories of job performed by the incumbent.

The only safe criterion is that government should pay only that much to their employees as is necessary to obtain recruits of the right stamp and to maintain them in such a degree of comfort and dignity as will shield from temptation and keep them efficient for the term of their services.

When an industrial tribunal established an appropriate wage level for workers, rather than letting workers and their employer work it out themselves through enterprise bargaining then it is called wage fixation and this process is called wage determination.

The various activities that are involved in the process of wage determination are as under:

1. Job Evaluation – It facilitates the comparison of wage rates of job evaluation with those of other employees. Besides, it clarifies the functions, responsibilities and authority of employees.

2. Job Assessment – Under the job assessment, information of each job is made available to the assessors. Close observation and inspection is made of every job whether manual or not, in actual operation by the assessors. If required, assessors put question to the operators and their supervisors to gather details about the job to clear doubts if any.

It keeps pace with the changing job content, due to technological changes, it is necessary to make periodic assessment of the job keeping in view of the old job description.

3. Job Design – Job design is the process of structuring work and designating specific activities at individual or group levels.

4. Job Analysis – A detailed and systematic study of jobs is done under this process. Its objective is to understand the nature and characteristics of the people to be employed on various jobs. It involves collection of essential data regarding jobs and their analysis.

5. Job Description – Objective listing of the job title, tasks, duties and responsibilities involved in a job is given the title job description. Basically, it is a written statement consisting the following — of what the job holder proceeds, how it is done, under what conditions it is done and why it is done.

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