Paradigm Shift in Compensation to Workers in Indian Manufacturing-Role of LPG Policies.

AuthorSharma, Manoj Kumar
PositionLiberalization, privatization and globalization


Compensation is the reward that workers get for their service or contribution to the organization or firm. No matter how big or small the business is paying appropriate remuneration to employees and workers is equally important. Compensation is basically the payment/benefits which provide income to workers and employees and it is also an important cost or expenditure to the employer (Martocchio, 2011). Workers cannot be expected to give their efforts without assured return for their labor. As viewed by Armstrong and Murlis (1994) that reward is a means through which various needs of the workers' are satisfied. And thus unsatisfied workers normally reduce workplace morale and it may further lead to lower productivity. The classical theory says that the return for labor is reward for the efforts of workers; thus every industry engages their labor for economic rewards and incentives (Igalens & Roussel, 1999; Ciarniene & Vienazindiene, 2010). Further, employees' compensation has been generally divided into two parts or categories i.e. the extrinsic and intrinsic rewards. Intrinsic rewards are related to a psychological mindset which is experienced by workers at their workplace. On the other hand the extrinsic reward includes employees' pay along with benefits, which workers enjoy as an outcome of their efforts in the organization. Lai (2012) found that the most important tool to create value to an organization is extrinsic compensation. It has been established in several studies that job related factors such as pay, hours of work, promotion opportunities, job security influence job satisfaction (Capelli & Sherer, 1988; Clark & Oswald, 1996; Bygren, 2004; McCausland et al., 2005; Heywood & Wei, 2006; Brown et al,. 2008) .Thus compensation is a major concern for both employers and their employees. For an employee, pay is of paramount importance in meeting their basic and economic needs. The pay is so significant because when workers are satisfied with their pay, their attitude and behaviors could be influenced towards the desired objective (Onukwube, 2012). Along with workers there are certain other factors which are used for production process. These factors are generally known as the factors of production. These factors pose a direct effect on the quantum of compensation paid to workers and employees. The factors majorly discussed by economists' are land, capital and profits. The compensation to these factors of production depends on the objectives, goals, vision and mission of the firm.

In last few decades, the objectives, goals, vision and mission have witnessed a great change. They have been moving from profit maximization to revenue maximization and further towards balanced interest theory. The balanced interest theory was adopted by different business firms and all the factors of production were treated as equal partners. At the same time researchers and academicians started discussing the income distribution among factors. This change of business philosophy and policies can be attributed to government policies. As the government policies play a very crucial role in directing the growth of different sectors of the economy. It is generally found that the government's policies have the power to make or mar the growth and future of any industry or sector. Thus, analysis of any sector's data provides the reflection of the type of the policy a government has been adopting for a particular sector. From the decade initiated in 1980, the major economic policies of Government of India had been targeting for the growth of business class in general and economic growth in particular. Indian industrial sector reform majorly involved deregulation and de-licensing of different sectors of the economy. These reforms on the one hand benefited the business class but at the same time posed a negative impact on compensation to workers due to increase in contractual and daily wage jobs. On the other hand capital sector reforms have promoted the cause of easy availability of capital to the businesses. The major economic reforms have been targeting over banking sector reforms. This has resulted in promoting the easy and cheap availability of funds to the industrial sector. The financial sector reforms have promoted the simple, affordable and business-friendly tax regime in India. At the same time external sector reforms have increased the easy availability of foreign capital to the Indian business sector. This resulted into the increase in the collaborations of Indian corporate sector with the foreign corporate sector. These economic policies have given a boost to the cause of Indian manufacturing sector in particular and Indian business in general. All these changes have resulted in reasonable economic growth during the last two decades. Efficiency and productivity of the Indian manufacturing sector have also increased relatively. This in return has boosted the compensation to the entrepreneurs/businessman in the form of higher profits.

Thus this study aims at finding the empirical shreds of evidence for the same in the Indian manufacturing sector. Efforts have been made to relate the changes in compensation to workers and policy reforms. The economy of any country can mainly be segregated into three sectors such as primary sector, secondary or manufacturing sector and tertiary sector which is also known as the service sector. This paper is about the Indian manufacturing sector. The trend analysis has been done to see the changes in the compensation to workers to net value added in last 34 years. The manufacturing sector aims at converting the inputs into output using different factors. But many a time the process is not efficient. This inefficiency may be due to internal or external environmental factors. This fact sometimes requires a thorough revision of all the factor of production with regard to the overall process. The manufacturing sector has been selected as this sector employs large number of manual workers and it is the bedrock of Indian economy. In India, the manufacturing or factory data is collected in the form of Annual Survey of Industries. This ASI data has been used in this study. The study period is from 1981-2015, which makes it a 34-year analysis.

Theoretical Background

Determination of compensation to be paid to workers and other factors is not similar to product pricing. The main point of difference is that factors of production have both joined and derived demand. And they contribute to production in a combined way. The estimation of supply of the factors of production is also difficult as compared to product pricing. There are some theories of economics for determining the price to be paid for the services of a particular factor of production. Here it is important to note that it is not the price paid for the factor but only for its...

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