Wages & Salary Administration
Wage Structure
Summary
In this chapter you will learn: 1. Basic Wage 2. Dearness Allowance 3. Overtime Payment
4. Annual Bonus 5.Fringe Benefits 6. Incentive Payments . Agricultural Wage Structure
1. Introduction: Wage structure is the complex of rates within firm differentiated by occupation and
employees and the complex of inter-firm rate structures. It is a significant aspect of the wage rate analysis.
The wage structure of an office or a plant or, more broadly, of a national economy can be viewed as a
series of wage rates designed to compensate workers for the varying skills a nd abilities required in the
production process The industrial wage structure in India consists of various components such as basic
wages, dearness allowance, annual statutory bonus and host of fringe benefits and incentives. 2. Basic
Wage: The term ‘basic wage’
is ordinarily understood to mean that part of the price of the labour which the employer must pay to all
workmen belonging to all 1 categories. The term is used in contradistinction
to allowances, the quantum of which varies in different contingencies. The floor of the basic
wage is the ‘minimum wage’. The revision to ‘basic wage’ has become progressively less frequent and
insignificant because of the ever growing dearness allowance component.
2. Dearness Allowance:
The DA is an additional payment made by the employer to his employees to compensate them to a certain
extent for the rise in the cost of living. It serves as a device to protect workers’ real
wages. This allowance is peculiar to India and some Asian countries. In western countries increases in cost
of living index are compensated by periodic ad hoc increases in basic pay.
The system of dearness allowance to offset decline in purchasing power of money has become a dominant
feature of wage fixation in India. However, the payment of DA in India is not regulated by any law or a set
of principles, but it is being included in an ever increasing number
of wage awards and collective agreements. Earlier these committees were of the opinion that
protection from inflation through DA is required only for workers on lower levels of wages. Further they
stated that % of neutralization of increase in cost of living should be need based and highest for lower
levels of wages and gradually reduced as wage
levels rise. The Fifth Pay Commission [1994 – 96] stated that formula of differential rates of neutralization
above has operated unjustly against middle and
senior management in the Government
2
Payment of Uniform DA:
The adjudicators have generally favored the payment of uniform DA to factory workers and clerical staff
when they get the same pay. Rate of Neutralization: The method and extent to which neutralization in the
cost of living should be given have been under constant examination by the industrial tribunals and other
wage fixing authorities. In a series of decisions, the Supreme Court expressed the view that 100 %
neutralization cannot be allowed as it would lead to a vicious circle and add to the inflationary spiral.
Ceiling on DA: On this issue again the supreme court said that it does not wish to lay down as an
invariable rule that in all cases there should be a ceiling on DA.
Merger of DA in Basic Wage:
The question of merger was considered by Central Wage Boards and National Commission on Labour.
Their recommendations were influenced by the need to strike a balance between
the views of the trade unions & managements which held contrary views. Trade Unions, generally, favored
the merger on the ground that it would make basic wage realistic in keeping with the improved levels
production & productivity. Employers’ organizations were against such merger. The quantum of DA
depended on outside factor like cost of living index while basic pay reflects true worth of the skill of
workers or true economic value of their work.
Prevalent Practice:
The existing system of DA in the public & private sectors presents a bewildering variety of patterns in the
matter of linkage to salary, the mechanism of linkage, periodicity of revision and the extent of
neutralization, both inter- sectorally and intra-sectorally. Impact of DA: In the process of automatic
linkage to Consumer Price Index , the fundamental & sound principles governing wage fixation viz.
productivity of labour, prevailing rates of wages 3 in the same or similar occupations in the neighboring
localities, level of national income and its distribution, place of industry in the economy, and capacity of
the industry to pay have been completely ignored . Rationalization of DA: In the ultimate analysis, the
problem of spiralling DA is basically the problem of controlling the increase in the prices of food and
other essential consumer products. It is desirable to bring out the necessary reformation, rationalization
and reorientation in the DA system.
3. Overtime [OT] Payment:
OT working is as old as industrial revolution. But OT payment started only after legislation to restrict
working hours was brought out by the Government. The employer is using OT to supplement production
and employees to supplement their earnings. The motivation to collect a heavier pay leads to the
degenerating phenomenon wherein a tendency grows on the part of many employees to force conditions
for overtime work. OT phenomenon can be controlled by appropriate allocation of manpower, proper
scheduling of work, strict administrative control in authorization of OT & introducing incentive scheme.
4.Annual Bonus
Bonus is unique component of India’s compensation system. Bonus is regarded as an incentive for regular
attendance; as an encouragement for good work or payment for some special or additional service by
workers ; as an ex- gratia payment dependent entirely upon the goodwill of the employers which cannot
be claimed as of right ; as 4 a share in the profits which workers may claim as of legal right and also as a
deferred wage. Bonus can be demanded by workmen as of right whether there is a contract explicit or
implicit. Subsequently, the payment of bonus has assumed a statutory status with the enactment of
payment of Bonus Act in 1965. The Act is intended to enable the employees to share in the prosperity of
the establishment to which they contribute.
5. General Allowances
The employers pay various sorts of advances as custom or as a part of settlements. These include special
allowance, house rent allowance, leave travel allowance, out station allowance, travelling allowance,
washing allowance, conveyance allowance, lunch/dinner allowance, allowance for working on holiday /
weekly off, cash handling allowance, education allowance, social security allowance or factory allowance
etc etc.
Fringe Benefits:
In addition to wages, employees also receive certain supplementary benefits and services known as ‘fringe
benefits’. Fringe benefits are wage supplements. The connection between wages and employee effort,
performance, service or sacrifice is direct, measurable and immediate. Wage supplements by contrast
involve payment without any directly associated effort from workers. The tax advantage of rewarding
labour in the form of fringe benefits rather than wages has been an important consideration in explaining
their distribution. As trade unions gathered strength , they started including fringe benefits available to
senior management, in their collective bargaining.
5 Incentive Payments:
The term incentive is used to signify inducements offered to the employees to put forth their best in order
to maximize production results. The objective of incentive wage plans is to obtain an ideal combination of
high productivity, high wages and low unit costs. Incentives serve two purposes of increasing earnings of
employees and efficiency of the unit.
6. The Agricultural Wage Structure
The main difference between agricultural & industrial wage structures is while industrial wages are
completely paid in cash; agricultural wages are paid in kind also. Agricultural wages are often paid daily.
Wage differentials are more apparent in agriculture. Wages are usually low due to poverty & illiteracy,
casual nature of employment and ignorance of law. Significant disparities exist between wages paid to
male and female workers. As per Minimum Wages Act, 1948, State Governments have to fix minimum
wages for agricultural labour and revise it every five years. The machinery for the fixation and enforcement
is not uniform and implementation of the Act is inadequate
From the following Trial balance of M/s Ram & Sons, prepare Trading and Profit and loss account for the
year ending 31st March, 2002 and the Balance Sheet.
Debit Credit
Rs. Rs
Purchases 21,750
Discount allowed 1,300
Wages 6,500
Salaries 2,000
Sales 35,000
Travelling expenses 400
Commission 425
Carriage inward 275
Administration expenses 105
Trade expenses 600
Interest 250
Building 5,000
Furniture 200
Debtors 4,250
Capital 13,000
Creditors 2,100
Cash 7,045
Total 50,100 50,100
