Theories of Wages

• Wages are monetary compensation an employee receives for work.
• A wage refers to a payment made by an employer to an employee for work done in a specific period.
• Wages are paid based on an agreed-upon rate and the total time the employee has worked.
• Wages include total compensation paid for services, like hourly wages, salaries, commissions, and bonuses.
• This includes the cash value of remuneration paid in a form other than cash.

Theories of Wages

• Economic theory attempts to explain the determination of the payment of labor.
• These include:
  • Subsistence theory
  • Wages Fund theory
  • Residual claimant theory
  • Bargaining theory of wages
  • Marginal productivity theory

Subsistence Theory of Wages

• David Ricardo and other classical economists developed it based on Thomas Malthus's population theory.
• It is also known as the "Iron Law of Wages".
• Paying workers less than subsistence wages will decrease the number of workers due to starvation, malnutrition, disease, etc.
• Wage rates will increase to subsistence levels because of high labor demand.
• Paying workers more than subsistence level may increase their numbers, resulting in lower wages.

Wage-Fund Theory

• John Stuart Mill proposed the wage-fund theory.
• Wages depended on the relative amounts of capital available for the payment of workers and the size of the labor force.
• Wages increase when capital increases or the number of workers decreases.
• The wage fund is fixed at any given moment, though its size can change over time.
• Legislation to raise wages would fail due to the fixed fund to draw from.

Residual-Claimant Theory of Wages

• Francis A. Walker, an American economist, originated the theory.
• Wages are the remainder of total industrial revenue after rent, interest, and profit are deducted.
• Rent, interest, and profit are independently determined.

Bargaining Theory of Wages

• John Davidson proposed the bargaining theory of wages.
• No single economic principle governs wages.
• Workers, employers, and unions determine wages and working conditions through negotiation.

Marginal Productivity Theory of Wages

• Phillips Henry Wick-steed (England) and John Bates Clark (U.S.A.) developed the theory.
• Wages are determined by the production contributed by the last worker, i.e., the marginal worker.
• The marginal worker's production is called "marginal production."
• The value of the marginal net product of labor is the amount by which output increases by employing one more worker.
• This includes the appropriate addition of other production factors.

Compensation Strategies

• A compensation strategy is how a company approaches employee compensation.
• Consider how competitors compensate their employees.
• It is important to consider where you want your organization to sit in the competitive field.
• A strong compensation strategy is required to recruit, attract, and retain top talent.

Types of Compensation Strategies

• Three main compensation strategies exist when setting salary rates:
  • Leading
  • Lagging
  • Meeting the market

Leading Compensation Strategy

• A company offers higher than the market salary rates.
• It is a good way to attract good employees, promote good performance, and retain key employees.
• Sets a good reputation for the company, making it the company people aspire to work for.
• A company can only employ it when it is financially healthy and can afford the high payout.

Lagging Compensation Strategy

• It offers below-market price for salary.
• Financially unstable companies use it to regain footing.
• Non-profit companies and startups who offer benefits and non-financial rewards implement it.
• It doesn't do much for employee performance and may result in high employee turnover.
• It is rarely adopted indefinitely and is usually only used for recovery.

Meeting the Market Compensation Strategy

• It involves paying within the market range for salary price.
• It is the most commonly utilized compensation strategy.
• With employees paid fairly, companies expect them to perform well without shelling out additional cash.
• Companies can compete with those who can afford a leading compensation strategy and motivate/retain employees by adding other rewards.