Wage is the compensation paid for the services rendered by an employee to another person or entity. Simply put, all the people employed by any organization mostly work for a monetary reward. This monetary reward is termed as wages if it meets certain conditions. Usually, the term wages concerns the low-level employees or front-line workers appointed for a specific task.
Wages may be defined as,
The lump sum amount paid by an employer to his employee under a contract, as a compensation of the work done by him for a specific period.
The point to note here is the ‘specific period’. This clause makes a great difference to the definition of wages. Wage-based employees are usually those who work on an hourly basis i.e. their rate is specified per hour or sometimes per day. Ultimately, they are paid based on the number of hours or days served. As the wages are calculated by the time spent during that task, so these workers are also called hourly workers.
- ABC (Pvt.) Ltd. is a soap manufacturing company. It has more than 200 workers employed at the factory site. These workers assemble the soap making machines daily, add in raw materials in the set quantity, oversee the manufacturing process and finally pack the soaps into cartons after wrapping.
All these workers receive wages for their services. each worker works for 8 hours daily and is employed at the rate of $7/per hour. Each worker is required to log in their time of arrival and departure in the log book. At the day end, the hours worked by each worker are totaled and the workers are paid accordingly. Each worker is paid $280/week (8 hours * $7 * 40 days) , if he spends complete 8 hours at the work site and takes no leave.
Characteristics of Wages:
There exist several modes of payment to employees. An easy way to identify wages is to check for the existence of the following characteristics of payments made to employees.
- Wages are paid to front-line workers only. E.g. laborers working at a construction site or factory workers contributing in the manufacturing process at a factory. Employees serving at a higher post are usually entitled to salaries and other fixed remunerations.
- Wages are time-based. Worker entitled to wage payments are employed at a fixed rate per hour or per day. This rate is then multiplied with the hours or days worked by each employee. The resultant amount is then paid to the wage-based workers.
- Wage payments are made on a daily or weekly basis. Unlike the salary payments that are cleared monthly, wages are paid by the day end or by the week end.
Differences between Wages and Salary:
Another well-known term used for the monetary compensation paid to employees is salary. Wages differ from salary on various grounds. Let us dive deeper into the concept of wages in comparison to salaries.
- Fixed Remuneration: Wage is the remuneration that is paid to the workers for the hourly work done. Whereas, salary is the fixed amount of return that an employee gets semi-monthly or monthly. The amount of salary is decided in the light of an employment contract and doesn’t vary with the number of hours or days worked. However, deductions based on unpaid leaves or additional bonus payments for a good performance may be incorporated.
- Skills & Qualification: Wages are associated with unskilled or semi-skilled persons, whereas salary is associated with skilled and qualified employees.
- Varying Rates: The wage rate may change from task to task, whereas salary is once fixed in the beginning and remains unchanged.
- Remuneration Parameters: Wages are paid daily for the number of hours spent on a task, whereas salary is decided on the employee’s performance, qualification and skill set.
- Overtime: Wage holders get the extra working hours’ bonus, whereas salaried employees receive an overtime payment if they work for more than 40 hours per week. Salaried persons more often enjoy a bonus payment for their extra-ordinary performances.
Looking at the following example can help us understand the computation of salary and wages better.
Strong Constructors Inc. has recently won a contract to build a 15-storey building for the head office of a new company. To manage the work load, 4 teams have been formed. Within each team there are 5 laborers and a supervisor. To oversee the performance of all the teams, a deputy manager is also allocated to the project who reports to the senior management.
Each laborer is employed at the rate of $5 per hour and is supposed to work for 7 hours per day for 5 days a week. The supervisors, however, receive a semi-monthly salary of $500 and a bonus payment of $200 in case of excellent performance by their team. The deputy manager is employed at a monthly salary of $2650.
How much wages and salaries is the company obliged to pay each month?
The wages that should be paid to the workers are as follows:
Each Worker = $5 * 7 hours * 5 days * 4 weeks = $700/month
Total Wages = 4 teams * 5 workers * $700/each worker = $14000/month
Supervisor Salaries = 4 Supervisors * ($500/semi-monthly * 2) + $200 bonus to any one supervisor = $4200/month
Deputy Manager’s Salary = $2650/month
Total Salaries = $6850/month
Total Wages and Salaries to be paid each month = $14000 + $6850 = $20,850
Modes of payment for Wages:
Wages are mostly paid in a monetary form. however, depending upon the employment contract, there may also be other modes of payments. The two most common modes of wages’ payments are as follows,
- Cash Wages: The most common mode of remuneration payment is cash. Majority workers and employers prefer this mode of payment.
- Non-Monetary Wages: Sometimes wages are not paid in monetary form. Instead, these may be in the form of some goods, food, shelter or other utilities. This payment mode is pretty common in rural areas.
Different Wage Systems:
Several wage systems prevail in the world today. The following three systems are, however, the most commonly used.
1. Time system of wages:
This is the most common wage system used to pay the workers. In this system, workers are paid according to the time spent by them working on a specific task. It may be taken as hours worked or days worked or as weeks worked in some cases.
Wages under this system are calculated by multiplying the time worked by a worker, with the hourly rate offered to him.
$$Wages = Time\: spent * Rate\: of\: wages$$
For example, a worker is appointed for a specific task at a rate of $2 per hour. If the worker works for 10 hours, then the amount of wages to be paid to the worker shall be calculated as follows:
Wages earned = 10 * 2 = $20
Pros & Cons of Time System of Wages:
This system is perfect to be implement when the units of production cannot be measured of the work or when the main focus is a quality product and not speediness. The Time Wages System, despite, being the most commonly used, has some cons as well. Following are some pros and cons of this system.
- Ease of Computation: In the system of time wages, the calculation of wages is pretty simple. The worker simply gets the amount of the time worked by him.
- Quality of production: In the time wage system, employees are not concerned with the quantity of production, as they would be paid by the number of hours worked and not by the number of pieces produced. The workers, thus, produce high-quality products under this system.
- Suitable for artistic works: As workers are not concerned with the quantity or the production speed, this system is great for delicate work. A worker can work better with peace of mind and complete concentration.
- Extra supervision: As it is a time-dependent system, workers are not much concerned with the quantity or the speed of the production. They are more likely to waste time in other activities than working. A supervisor needs to monitor them continuously to fetch the desired results.
- No incentives for an efficient worker: Under this system, every worker gets the payment merely for the worked hours. equal payment according to the time spent. In such circumstances, the workers are not much motivated to bring out the best results.
- High cost of production: As workers are not concerned with the quantity of production, much time is wasted which ultimately increases the cost of production. Again, for supervising the workers, you have to employ supervisors and spend more resources.
- Hard to measure efficiency: It is very difficult to measure the efficiency of each worker in a time wage system as all workers are equally paid for the time spent regardless of the quality or quantity production.
2. Wage System by Piece:
In this system of wages, workers are paid by the quantity and the quality of the units they produce. It is not a time-dependent wage system. In the beginning, the rate per piece is fixed with the workers, and they are paid as per the number of units produced.
The amount of wages earned in this system are calculated as follows:
$$Wages\: earned = Number\: of\: produced\: pieces * Rate\: fixed\: per\: piece.$$
For example, if a worker is appointed to produce stock with a fixed rate of $2 per piece, and he produces 50 pieces in a day. His wages will be as follows,
$2 * 50 pieces = $100
Pros & Cons of Piece Wage System:
A piece wage system is the perfect option when a standard production is required, and quality is the foremost priority. Also, it encourages the employees to work speedier to make more units and earn more. In addition to the above mentioned, following are some pros an cons of the piece wage system.
- Incentives for workers: In this system, workers are encouraged to do more work as they are being paid for what they are producing. It increases the production to the maximum level.
- Enhanced production: This piece wage system enhances the quantity of production as the workers will be paid for what they produce.
- Cost-effective: The maximum production in minimum time reduces the cost of production. This method is very cost-effective as you don’t need to supervise the workers for their task. They work speedily to produce more maintaining the standard quality.
- Proper efficiency measurements: In this system, the employer can better gauge the efficiency of each worker based upon the quality and speed of his production.
- Lack of unity: In the piece wage system, every worker attempts to produce more and more units. In this production race, he may feel that every co-worker is his competitor, which leads to lack of unity among workers. However, it is good for the employer to have a unified atmosphere for all.
- Bad for artistic work: This system is not good for artistic work. Workers can not focus on quality as they are running for the number of units. Setting a quality standard is necessary to fetch quality results in this system.
3. Incentive Wage System.
An incentive wage system is also known as a progressive wage system or a bonus scheme. This system encourages all the three aspects of production i.e. quality, quantity and speed. This system focuses on providing solutions for the demerits of the other two systems.
Under this system, the workers are paid based on the number of units produced by them. However, these units must be of the standard quality set. A worker shall not be paid for nay defective or inferior-quality unit produced. Here is how it is calculated:
$$Wages = Number\: of\: standard\: quality\: units\: produced * Rate\: per\: unit$$
A factory has 10 workers with an incentive wage system implemented. For each quality unit produced, $2 are paid to each worker. However, for any defective units produced, nothing is paid to the workers. A worker produced 10 units; upon inspection 3 out of those 10 units were below the set standard while the others were of the standard quality. How much did the worker earn?
7 standard units produced * $2 per unit = $14
3 defective units produced * $0 per unit = $0
Total Wages = $14
Pros & Cons of Incentives Wage System:
Within a competitive environment with a need for quality, an incentive wage system is the best. Let’s look into some pros and cons of implementing an incentive wage system.
- Payments depend upon Efforts: Under this system, an employee is directly paid for his efforts. This establishes a fair and competitive working environment.
- Increased quality of production: The payment being directly proportional to the quality and quantity of the units produced, leads to an increased production of the best quality.
- High inspection costs: The units produced by each employee need to be thoroughly checked, which requires the employment of a supervision team. This can increase the overall production cost.
To conclude the concept of wages in a few key points, let us look into the following:
- Wages refer to the remuneration paid to workers in return of services or work done. It can be in monetary forms like cash or a non-monetary form i.e. food, living space of other living necessities.
- Wages are different from salaries. Wages usually concern unskilled or semi-skilled persons; these are paid on a daily or weekly basis and are paid based on hours/days spent or the number units produced.
- The three main prevalent Wages systems include Time Wage System, Piece Wage System and Incentive Wage System.
- In the time wages system, a worker is paid for the time spent. The rate is fixed, and payment is made according to the time spent (mostly measured in hours) working. In this system, quality and quantity are usually compromised as workers get the payment as per the time spent and not the completion of production.
- In the Rate wage system, the workers are based upon the quantity of production. This system is good for both employer and the worker as the worker gets what he produces. In this system, quality is mostly compromised, as the main focus is quantity and not quality.
- An incentive wage system is the combination of rate wage system and time wage system. This system overcomes the demerits of both the systems by introducing incentives for quantity and quality of production. Workers are paid wages based upon the quality and quantity of production.