External Equity and Pay Survays

UNIT 12 EXTERNAL EQUITY AND PAY

SURVEYS
Objectives
After going through this unit, you should be able to:
understand the rationale for External Equity in Pay determination,
discuss the relevance of Pay/Wage savings and the process of undertaking Pay
Savings, and
understand the total process of Pay-determination.
Structure
12.1

External Equity

12.2

Pay and its Componets

12.3

Fair Pay for Fair Work

12.4

Pay Surveys

12.5

Summary

12.6

Review Questions

12.7

Suggested Readings

12.1 EXTERNAL EQUITY

One of the major consideration in wage & salary administration is that proper wage
differentials are established and maintained within an organisation on the basis of the
relative worth of jobs what is known as Internal Equity. Another factor, which should
also be taken into account, is, that individuals performing the same job may differ in
their performance due to inherent capabilities, experience, etc. It would similarly be
unfair if wages are fixed or wage increases are granted without giving due attention
to these differences. This is where the aspect of rating and performance appraisals
come in. Yet, another important consideration is that a wage structure should be built
in such a way that would be attractive enough to retain good and efficient employees.
In other words, the structure should be built up by comparing the prevailing wages in
the area of the industry. Such comparison of internal wage-structure with the external
system is known as establishing External Equity. Also known as determining the
going rate. Ideally, the wage system should be so devised as to increase the
productive effort of the employee or productivity in general

12.2 PAY AND ITS COMPONENTS

Pay or wage is the basic means to compensate for the work performed by an
employee. Pay essentially has three components namely (i) Basic (ii) allowances
such as DA, CCA & Perks and (iii) Incentive/Bonus payments including overtime
etc. The basic pay in the consideration of the employer is the most appropriate
monetary value for the intransic worth of the job in relation to other jobs in the
organisation as well as the market value of such similar skill in the industry or the
region. Monetary allowances are expected to ameliorate the needs of the employee to
meet the extra demands that arise in his life much as increasing prices/inflation,
house rents, travel etc. The third main component is towards the premium under an
incentive scheme to reward the productive effort or in other words to improve the
productivity.
While discussing about & determining Pay and related issues; the aspects like livingwage, minimum wage, fair wage should be well understood. Further the legislation
connected with wage payment in the country have a great bearing, apart from the basic
paying capacity of the enterprise considering its market position in these days of

37

Compensation Structure
and Differentials

competition. In most countries statutory mechanisms including wage boards do

operate to advise, regulate and adjudicate the conflicts & issues that arise in salary &
wage administration.

12.3 FAIR PAY FOR FAIR

One of the cardinal principles of Taylor's Scientific Management is "Fair Pay for Fair
Work". The Fair days work which is expected is determined by scientific and
systematic approaches of Work Study, when the output expected from an employee is
estimated and norms of output are determined. Accordingly fair-pay which is
expected to compensate adequately to attract & retain as well as motivate the
employee is determined by a number of factors, which include:
(i). Paying capacity of the organisation influenced by the market forces and
productivity of work-force.
(ii). The going/prevailing compensation in the market.
(iii). The differentials between a particular job with respect to others in the same
enterprise.
(iv). Needs of an employee as stipulated by the statutary agencies.
The paying capacity of the enterprise emerges from the performance and
competitiveness, as well as the policy of the ,management vis-a-vis the bargaining
capacity of the employees or employee associations. The so-called going rate is
usually determined or assessed by Pay-surveys or compensation surveys. Jobevaluation as described earlier provides the rational basis to explain & establish the
differentials required to be maintained between jobs. The ideas or fair-days pay for a
post/job is normally arrived from the minimum wages concept etc and are generally
available from the wage-boards, labour departments and other statutory agencies.
Further industry associations and similar Institutions too dwelve on this subject and
provide advice to their members.

12.4 PAY SURVEYS

Pre-requisites
To build up a competitive wage structure, it is necessary to know what are the rates
prevailing for similar jobs in the same industry in the area. Unless the wage structure
is competitive, it will be difficult to get and retain efficient workforce. The purpose
of a pay/wage survey is to obtain the desired information (particularly, before
negotiations with the union).
Prerequisites before Pay survey: One has to decide on (a) what is the information to
be sought, (b) selection of jobs about which information should be sought, and (c) the
units which should be approached to furnish the desired information. Moreover, one
has to ensure that information sought through survey should be for jobs having
identical job content.
a Information is usually sought about basic wage rate or scale, different allowances,
admissible, incentive, mode of increment, shift working, etc.
b The important considerations which should govern the selection of jobs are that
the jobs selected must cover the range of jobs evaluated, and jobs which are to be
found in other units in the area.
c Units selected should be on the basis of similar size and be in the same locality as
the firm conducting the survey.

38

When the information is gathered from different units, a summary should be prepared
from the data so collected and comparison made with the company's existing wage
structure so that future rates are constructed accordingly.

Type of Pay Surveys

External Equity and Pay Survays

External Equity is the Comparision of both Infra & Inter-Industry pay rates. Most
frequently the payer says that they are paying as per the on-going rates For that very
need, we go for the comparision between the similar jobs in the industry and out of
the industry. There are three main types of pay surveys i.e. informal, external and
commissioned.
Informal Surveys: These are conducted in an informal way and can vary from
personal contacts to specific arrangements for exchanging information with a number
of local companies, or with companies in a particular industry, as even with a wide
cross section of fines.
The exchange ,method of obtaining data has major advantages. It can provide exactly
the type of reliable information on existing rates of pay which firms seek, as well as
giving them an indication of the likely trends in increases of pay during the year. But
real usefulness depends on the types of arrangements for exchange and on the
information obtained.
External Survey: These surveys are almost entirely confined to salary earning
groups. Few comparable surveys of wage earners are produced however, many of
them annually on every 5110 years. They fall into three main categories, first those
produced by professional bodies about their own members' pay. Secondly, those
prepared by consultants with their other activities and are mainly for a range of
management posts or on a particular area. Thirdly, published surveys of employment
agencies and career registrars based on applicants salaries. The main problems in
these kind of reports is that they give insufficient or sometimes no information on
survey methods, samples etc. which are meant for better consideration of results.
Commissioned Method: It is the most reliable method among all the three existing
methods. This is what is done either by commissioned consultant or by the company
itself. Due to their convincing nature more often pay commissions also resort to hire
consultants.
While such surveys can be enormously useful, it is crucial that they ask the right
questions in the first place. The data thus observed must clearly be expressed in
common terms.
Many other sources like newspaper advertisement etc. are also equally helpful for the
guidance on current rates of pay.
External Survey Method
Whether the pay survey is commissioned through a consultant or by the enterprises
self, the approach the same. There are three methods of wage survey: (I) by job title
(ii) by job description, and (iii) by job evaluation.
Job Title Method: In the job title method, the company collecting information gets
the pay details for similar job titles in other companies. For example, the information
with regard to wages may be collected for job titles like "turner", "fitter" and
"welder". The information obtained from various companies in respect of each job
title is tabulated and compared with the wages paid to each of these jobs in the
company in question.
This method is easy and quick, but not accurate. Many companies will have the same
job titles, but the job contents may vary considerably. For example, the job duties of
a welder in one company may be entirely different from a welder in another
company. Similarly a pattern maker's job in one foundry may be far easier than
another pattern maker in another factory. There may be variations in skill, working
conditions, and other factors. Thus a wage survey based on job titles does not provide
accurate information. The job title method may be used in those cases where the job
content and the titles are more or less standardised. Some examples are "Driver" and
"
Conductor" is a transport company.
Job Description Method: This is the most common method used in the pay survey.
The comparison is made on the basis of the job description. The wage data in other
industries are collected for these jobs which have the same job-descriptions in the
company doing the pay survey. This provides a more realistic basis since the

39

Compensation Structure
and Differentials

comparison is made job content-wise. The wage differences if any due to variation in
job contents can be easily traced.
Job Evaluation Method: This is an improvement over the job description method.
The descriptions are collected for the jobs selected for wage survey in other
industries. These jobs are evaluated under the same plan that was used by the
company undertaking the wage survey. If the points obtained by the similar jobs in
other industries are the same as the ones for the company, then the jobs are deemed to
be identical and a comparison of wages for these jobs would be made. Though this
may give accurate results, it is very time-consuming, and the details need to be
collected personally by the job analyst. This method is not normally used in wage
surveys.
Selection of Jobs for Wage Survey: While doing a pay survey it may not be possible
to collect information for all the jobs that have been evaluated. It is sufficient if the
information is collected for certain representative jobs from which it would be
possible to derive the wage curve. These jobs are known as key-jobs or bench-mark
jobs and that are commonly understood in the industry. However, a careful selection
of these key jobs would be necessary. Some of the considerations which need to be
given are (Smyth & Murphy):
a these jobs should be distributed over the whole range of jobs;
b jobs should have remained relatively stable in recent years;
c the jobs should exist in nearby or competing companies
d the jobs should be filled by as large a number of workers as possible;
e there should not be an unusual shortage or surplus of workers qualified to fill the
jobs.
Organisations to be included: In practice, similar units and units which have similar
jobs are selected for wage survey. As far as possible, units situated in and around the
same locality should be selected since location may have an important bearing on the
wages paid, in fact so also the size of the unit and type of ownership, etc. But this is
not always practicable since there may be only one such organisation in a locality or
a State. Hence a transport or an electricity undertaking in one State may collect
information from all the similar undertakings in other States. Competing
organisations in respect of manpower requirement are also included. For example, a
paper industry may include all the paper factories throughout the country in its wage
survey. If carefully selected, about ten organisation may be an adequate number to be
included in the survey.
Information to be collected: Collection of information is the most important aspect
in a wage survey, and requires careful planning. The informations collected through a
suitably designed questionnaire. The information gathered should include all the
fringe benefits in addition to wages. Information may be collected either by getting
the questionnaire filled up by the participating companies, or the job analyst himself
may collect the information by personal visits and record in the questionnaire, both
may be necessary in some cases.
The type of information to be collected in a pay survey is as follows:
i

ii
iii
iv
v

40

vi

General information including:

a name of the company
b products manufactured
c type of ownership
d number of employees
Number of weekly and daily working hours, lunch and tea-breaks.
Holiday- General paid holidays casual leave, earned or privilege leave, sick
leave, etc.
Basic wages, scales of pay
Allowances- Dearness allowance, house rent allowance, city allowance,
conveyance allowance, shift allowance, etc.
Incentives, bonueses, overtime payments

vii Facilities such as conveyance, housing, children's education, free services like
electricity, water, fuel, uniform, and canteen.

External Equity and Pay Survays

Wage Survey for a Process Unit: (RAYDONG Chemicals): A

Case Study
The wage survey covering motivational means, D.A. practices, basic wage, fringe
benefits etc., is carried out for large Process Unit at Faridabad. Integrated approach
was necessary to arrive at a rational wage pattern.
A detailed questionnaire covering the identification information, wage component,
D.A. practices, different allowances practices, leaves and holidays, welfare measures,
recruitment/promotion policy and motivational scheme is designed. Benchmark jobs
were selected in production and engineering jobs, on different skill levels viz.
unskilled, semi-skilled, skilled and highly skilled. The wage survey questionnaire is
first filled for the enterprise under question and the filled in questionnaire with blank
forms are sent to major industries in the Faridabad region and to leading similar
processing industries. After 3 weeks, visits were made to 2 units and 7 industries in
the region and the survey data is collected. The third unit had mailed the filled-in
survey questionnaire.
The other units are either found to be paying very high or very low wages. Hence
these thre process industries are representative for any comparison and analysis
purposes.
Literature survey on D.A. compensation methods have been collected based on the
visit to the agencies namely Punjab, Haryana, Delhi (PHD) chamber of commerce,
FICCI, CII, ICSSR, CSO, SRCIR, Ministry of Labour and Faridabad Industries
Association. Discussions were also held with various experts on this subject. The
following reports were also referred:
1.
2.
3.
4.

Wage board reports on cotton, cement, chemical fertilizer type many chemicals
etc.
National Commission on Labour
Relevant Pay Commission Report
Bhoothalingam Committee Report

The data collected regarding the D.A. practices by the various companies in the wage
survey are also used.
The data collected from the 5 industries in the Faridabad region have been averaged
out for unskilled, semiskilled, skilled and highly skilled category and then compared
with the Raydong figures. Accordingly, the three process units average figures for the
4 different skills, have been compared with the Raydong figures. Even though only 3
units average have been compared with the Raydong, this average can be taken as a
representative one, since we have not included the extremely highly paying process
industries and the lowest paying units. These analysis have been done on three
different basis viz.
i
ii
iii

Basic + D.A.
Basic + D.A. + Incentives
Basic + DA + Incentives+Cash Allowances

These analysis show the comparative figures of the companies average total take
home pay (Basic + DA + Incentives + Cash Allowances) with the Raydong figures.
The Faridabad average is lower than the Raydong by Rs. 350/ While comparing
Basic+DA, by Rs.170/- while comparing Basic+DA+Incentive and Rs. 123/- while
comparing Basic+DA+Cash Allowances. In the case of comparison of average
'process industry with the Raydong, a peculiar pattern is noticed. The indirect jobs. in
lowest level and in the highest levels are following a straight line, but, the direct jobs
are having a hump. This clearly reveals that the selected process industries are paying
more piece rate/incentives to direct workmen than the indirect workmen.

41

Compensation Structure
and Differentials

RECOMMENDATIONS
All the hourly rated and day rated workmen's job at Raydong have to be reclassified into 4 classes as mentioned, and put in graphs.
The prevant base rate of Grade VI hourly rated jobs have been revised upwards.
All the workmen's personal pay have to be merged with the present base rate and
refixed as per the grades suggested.
In case any grade I and grade II workmen in any particular job performs the same
job to the desired satisfactory levels, both workmen should be fixed in the same
base rate. In case there is a definite change in the job as a whole between grade I
and grade II, they must be fixed in different base rates.
Pay Surveys: Supreme Court Ruling
The court is concerned with both intra and inter industry comparisions. The
importance attached with surveys is in line with international practice. According to
apex court, the surveys specifically should consider similar concerns in the same
region as well as the concern as whole". "Similar concerns" would be "those in the
same type of business as. the concern in question, but even in the same line of
business, it would not be proper to compare a small struggling concern with a large
flourishing concern. Even when the other concern is in the same type of business.
The tribunals have to take note of several relevant factors before they can justifiably
come to the conclusion that the other concern which is put-up for comparision is in
fact a comparable one.
These factors are the extent of business carried on, the capital invested, the profits
made, their market standing, strength of labour force, extent of reserves, declared in
immediate past, future prospects and such other factors."

12.5 SUMMARY
To get the idea of "Fair wage to fair work," the components of Pay such as incentive,
bonus and basic wage are considered. There are three methods of surveys based on
job title, job description and job evaluation. These are the bases on which variegating
jobs, both intra/inter industry nature are studied. Even though the information to be
collected for the purpose should be distributed over a large range, other data such as
the name of company, data related to fringe benefits/incentive holidays etc. are also
important to carry out a survey in the predetermined correct direction. No pay
fixation process how so ever simple it may be, can't be completed in absence of a
complete pay/wage survey.

12.6 REVIEW QUESTIONS

1.
2.
3.
4.
5.

What is wage survey? Explain its rationality.

"Wage Surveys are essential part in Pay Fixation." Explain.
What are different methods for conducting wage surveys? Explain any two.
"Comparision of two different industry doesn't help in wage fixation any way".
Are you justified. If yes then, why? If no, then why not?
Mention various prerequisites and considerations in wage survey.

12.7 SUGGESTED READINGS

1.
2.
3.
4.
5.

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Dynamics of wages by A.N. Mathur.

Wages and work allocation.
Wages in India by Subramanian.
Methods of wage payment concept & principles by Suri.
Hand Book of Wage & Salary Adm. By Rock.